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.

  1. Externality

    A consequence of an economic activity that is experienced by ...
  2. Pigovian Tax

    A special tax that is often levied on companies that pollute ...
  3. Marginal Social Cost - MSC

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

    Cost accounting is an accounting method that aims to capture ...
  5. Applied Economics

    The application of economic theories and principles to real world ...
  6. Unit Cost

    The cost incurred by a company to produce, store and sell one ...
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. 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.
  3. 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?
  4. Investing

    The Difference Between Finance And Economics

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

    5 Ways To Reduce Your Carbon Footprint

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

    Free Markets: What's The Cost?

    Some argue that when the free market fails to protect consumers, government regulation is required.
  7. Insights

    What Are Economies Of Scale?

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

    Avoid The Monthly Payment Trap

    Low monthly payments are easy on the wallet. However, interest and other fees lurk just below the surface.
  1. How do I decide whether a credit card offer is a good deal or not?

    Discover the ways that externalities lead to market failure. Externalities are costs or benefits that go to a third party, ... Read Answer >>
  2. How do property rights affect externalities and market failure?

    Most economic externalities can be efficiently solved through a system of private property rights, where costs and benefits ... Read Answer >>
  3. How can companies reduce internal and external business risk?

    Understand the difference between internal business risk and external business risk. Learn how a company can reduce each ... 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 are the differences between period costs and product costs?

    Find out why GAAP separates all company expenses into either period or production costs and how this impacts the way expenses ... Read Answer >>
  6. What are some common features of a mixed economic system?

    Look at a brief overview of the defining features of mixed economies and its perceived advantages and disadvantages Read Answer >>
Hot Definitions
  1. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  2. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  3. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
  4. Income Statement

    A financial statement that measures a company's financial performance over a specific accounting period. Financial performance ...
  5. Leverage Ratio

    A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt, or ...
  6. Annuity

    An annuity is a financial product that pays out a fixed stream of payments to an individual, primarily used as an income ...
Trading Center