True Cost Economics - Explained
What are True Cost Economics?
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Table of ContentsWhat are True Cost Economics?How does True Cost Economics Work? The Theory of True Cost EconomicsEffect of True Cost Economics on BuyersAcademic Research for True Cost Economics
What are True Cost Economics?
This refers to an economic model which aims to add the cost of negative factors into the price of products and services. True cost economists actually propose that products should be taxed according to the harm that they cause the environment and living beings both in a direct and indirect manner.
How does True Cost Economics Work?
This model is mostly applied to the manufacturing of goods and services, and it refers to the difference between the price of a product and the societal cost of the production of that particular product. The societal cost is mostly negative and in the form of harmful and toxic wastes.
Societal cost also implies the negative effect which a product might have on a community or the public health, as in the case of cigarettes. On the other hand, true cost economics can refer to the positive effects of an action, such as pollination by bees, which incurs zero cost. Another example is the provision of oxygen by trees at zero cost.
The Theory of True Cost Economics
The concept of true cost economics is derived from the believed need for ethical and moral consideration in the neoclassical economic theory, which suggests that competition in an economy leads to the efficient allocation of production resources. The thinking behind this economic model is that the price of a market commodity might to fully represent all forms of cost, as the effect of production on society is not really calculated by firms when fixing prices.
An example is the cost which taxpayers and government health care facilities pay for taking care of drug consumers (drug addicts). The companies which create such drugs are not required to pay for the damages dealt, and so the societal cost is not implemented into the market price.
In the true cost economics model, the government or any other regulating body is required to impose an additional tax (otherwise known as tariffs) on any product which doesn't reflect the full cost of production, as well as the impact on society. This tariff is aimed at influencing consumers behaviour and present opportunities for abstinence in the future. This will make firms add up the cost of negative effects in the market value of their products.
We can easily see something like this from large manufacturing firms, especially those that make use of pollutive chemicals. In a case like this, the government can impose a limit on the amount of emissions which these firms are allowed to carry out. In a case of default, the firm in question is required to pay an agreed sum which will be used to protect the citizens from these toxic wastes. Other types of emissions can also be taxed by the government; a tax generally referred to as a Pigovian tax (a tax aimed at regulating negative market outcomes and inconsistencies).
Effect of True Cost Economics on Buyers
Many market commodities which are cheaply sold in the market would see an increase in price if true cost economics were to be applied. This might lead to skepticism on the part of consumers. A situation where the environmental cost of the manufacturing and use of electrical components is factored into the price of each product, there is a tendency of reduction in sales as the price of each product will soar unbelievably high to the point that most consumers wont be able to afford them. Also, the pollution that comes with the manufacturing and use of vehicles can lead to an unimaginable increase in price and insurance.