What is 'True Cost Economics'

True cost economics is an economic model that seeks to include the cost of negative externalities into the pricing of goods and services. Proponents of this type of economic system feel products and activities that directly or indirectly cause harmful consequences to living beings and/or the environment should be taxed accordingly to reflect their hidden costs.

Breaking Down 'True Cost Economics'

True cost economics are often applied to the production of commodities and represents the difference between the market price of a commodity and total societal cost of that commodity, such as how it may negatively affect the environment or public health (negative externalities). The concept also may be applied to unseen benefits — otherwise known as positive externalities —  such as how the pollination of plants by bees has an overall positive effect on the environment at no cost.

True Cost Economics Theory

The school of thought behind true cost economics comes as a result of the perceived need for ethical consideration in neoclassical economic theory. The thinking behind true cost economics is based on the belief that the societal cost of producing a product or rendering a service may not be accurately reflected in its price. For an example of a societal cost, consider the extra burden to taxpayers, consumers and the government of providing health care for smokers — a cost not at all borne by cigarette manufacturers.

When the price of something fails to reflect all the total costs associated with its production, rendering or impact, then under true cost economics a third-party (a regulator or government) may have the obligation to step in to impose a tariff or tax to influence consumer behavior and/or provide the means for future remediation. Such an action would involve forcing companies to "internalize" the negative externalities. This would invariably cause market prices to increase. An example of such a practice is when a government regulates the amount of pollution a company is allowed to create and release, such as with the coal industry and mercury and sulfur emissions. Negative externalities may also be taxed, such as carbon dioxide emissions. Such a tax is known as a Pigovian tax, which is defined as any tax that seeks to correct an inefficient market outcome.

True Cost Economics and Consumers

For consumers, the cost of many goods and services that are currently affordable, and often taken for granted, could see an extreme rise in costs if their "true costs" are accounted for. For example, if the environmental cost of extracting and refining the rare earth elements that are essential for many modern electrical products were factored in their price it might push that price to an unreachable sum. And if one accounted for air, noise and other types of pollution caused by the manufacturing and the use of a new car, then the price of the new car would, by estimates, raise by over $40,000.

RELATED TERMS
  1. Externality

    An externality is a consequence experienced by unrelated third ...
  2. Production Externality

    Production externality refers to a side effect from an industrial ...
  3. Pigovian Tax

    A Pigovian tax is a strategic effluent fee assessed against businesses ...
  4. True Interest Cost - TIC

    True interest cost is the real cost of taking out a loan including ...
  5. Marginal Social Cost - MSC

    The total cost to society as a whole for producing one further ...
  6. Cost Accounting

    Cost accounting is an accounting method that aims to capture ...
Related Articles
  1. Investing

    Calculating Economic Profit

    Economic profit is the difference between the revenue a firm earns from sales and the firm’s total opportunity costs.
  2. Insights

    Economics Basics

    Learn economics principles such as the relationship of supply and demand, elasticity, utility, and more!
  3. Personal Finance

    Can You Afford Not to Hire a Financial Advisor?

    People often worry about how much a financial advisor costs instead of what it costs not to have one.
  4. Tech

    True Link Debuts Robo-Advisor for Retirees

    True Link has launched a robo-advisor designed to meet the needs of retirees.
  5. Financial Advisor

    Why Positive Economic Data Pushes the Market Down

    Unemployment comes in higher than analysts’ expectations, and the market rallies 1% instead of dropping. GDP growth exceeds expectations slightly, and markets drop. Why could this be happening?
  6. Investing

    The difference between finance and economics

    Learn the differences between these closely related disciplines and how they inform and influence each other.
  7. Trading

    Sizing A Futures Trade Using Average True Range

    Futures trading is risky business, so it's crucial that traders' positions match the level of risk they are willing to bear.
  8. Insights

    What Are Economies Of Scale?

    Is bigger always better? Read up on the important and often misunderstood concept of economies of scale.
  9. Trading

    Measure Volatility With Average True Range

    Find more profitable entry and exit locations with this standard indicator.
RELATED FAQS
  1. How do externalities affect equilibrium and create market failure?

    Discover the ways that externalities lead to market failure. Externalities are costs or benefits that go to a third party, ... Read Answer >>
  2. How can companies reduce internal and external business risk?

    How Companies Can Reduce Internal and External Business Risk. Learn How a Company Can Reduce Each Type of Operational Risk. Read Answer >>
  3. How is absorption costing treated under GAAP?

    Read about the required use of the absorption costing method for all external reports under generally accepted accounting ... Read Answer >>
  4. How are fixed costs treated in cost accounting?

    Learn how fixed costs and variable costs are used in cost accounting to help a company's management in budgeting and controlling ... Read Answer >>
  5. What impact does economics have on government policy?

    Learn about the impact of economic conditions on government policy and understand how governments engineer economic conditions ... Read Answer >>
Hot Definitions
  1. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  2. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  3. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  4. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  5. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  6. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
Trading Center