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. Production Externality

    Production externality refers to a side effect from an industrial ...
  2. Marginal Social Cost - MSC

    Marginal social cost (MSC) is the total cost to society as a ...
  3. Cost Accounting

    Cost accounting is an accounting method that aims to capture ...
  4. External Debt

    External debt is a form of financing borrowed by a country from ...
  5. Carbon Trade

    Carbon trade is an exchange of credits between nations designed ...
  6. Cost Test

    A cost test is an analysis applied to a process to determine ...
Related Articles
  1. Insights

    Could a Carbon Tax a Work?

    Nobel laureate and Clinton adviser is pushing for a national tax on carbon dioxide emissions. Could a carbon tax work?
  2. Investing

    Understanding Marginal Cost of Production

    Marginal cost of production is an economics term that refers to the change in production costs resulting from producing one more unit.
  3. Tech

    True Link Debuts Robo-Advisor for Retirees

    True Link has launched a robo-advisor designed to meet the needs of retirees.
  4. Taxes

    How Tax Cuts Stimulate the Economy

    Learn the logic behind the belief that reducing government income benefits everyone.
  5. Investing

    5 Ways To Reduce Your Carbon Footprint

    We list some simple says of reducing your CO2 emission.
  6. 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.
  7. Insights

    Introduction to Supply and Demand

    Learn about one of the most fundamental concepts of economics - supply and demand - and how it relates to your daily purchases.
  8. Small Business

    Explaining Cost Of Capital

    Cost of capital is the cost of funds used to finance a business.
  9. Investing

    The Importance of Commodity Pricing in Understanding Inflation

    Commodity prices are believed to be a leading indicator of inflation, but does it always hold?
RELATED FAQS
  1. What are the types of costs in cost accounting?

    Cost accounting aids in decision-making by helping a company's management evaluate its costs. There are various types of ... Read Answer >>
  2. What would happen to a company's external fund requirements if it reduces the payout ...

    In short, the stronger the company's internal cash flow, and in turn cash position, the less the need to draw on an external ... Read Answer >>
  3. How can companies reduce internal and external business risk?

    Understand the difference between two types of operational risk – internal risk and external risk – and how companies can ... Read Answer >>
  4. What are the differences between internal and external economies of scale?

    Take a deeper look at the differences between internal and external economies of scale, and learn why internal economies ... Read Answer >>
  5. 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 with budgeting and controlling ... Read Answer >>
  6. 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 >>
Trading Center