Full Cost Pricing

1
Full Cost Pricing

• Including External Costs

2
External and Internal Costs

• Internal cost Included in the price. Raw
  materials, labor, shipping, profits
• External costs hidden costs paid by other
  people such as poorer health, taxes for pollution
  control, land use.

3

EARTH
Sun
Economic Systems
Heat
Depletion of nonrenewable resources
Production
Natural Capital
Air, water, land, soil, biodiversity, minerals,
raw materials, energy resources dilution,
decomposition, recycling services
Degradation depletion of renewable resources
used faster than replenished
Consumption
Pollution, waste from overloading natures waste
disposal recycling systems
Recycling and reuse
Fig. 24-4, p. 573
4
ESTIMATING THE VALUE OF ECOLOGICAL SERVICES AND
MONITORING ENVIRONMENTAL PROGRESS

• Economists have developed several ways to
  estimate nonmarket values of the earths
  ecological services based using
• Mitigation cost how much it takes to offset any
  environmental damage.
• Willingness to pay determine how much people are
  willing to pay to keep the environment in tact
  (e.g. protect an endangered species).

5
ECONOMIC TOOLS FOR IMPROVING ENVIRONMENTAL QUALITY

• Including external costs in market prices informs
  consumers about the harmful impact of their
  purchases the earths life-support systems and on
  human health.

6
Eco-Labeling Informing Consumers So They can
Vote with Their Wallets

• Certifying and labeling environmentally
  beneficial goods and resources extracted by more
  sustainable methods can help consumers decide
  what goods and services to buy.

Figure 24-9
7
Subsidy Shifting

• Taxes on pollution and resource use can move us
  closer to full-costing pricing.
• Shifting taxes from wages and profits to
  pollution and waste (green taxes) helps make this
  feasible.
• We can improve environmental quality and human
  health by replacing environmentally harmful
  government subsidies with environmentally
  beneficial ones.

8

Trade-Offs
Environmental Taxes and Fees
Advantages
Disadvantages
Helps bring about full-cost pricing
Penalizes low income groups unless safety nets
are provided
Provides incentive for businesses to do better to
save money
Hard to determine optimal level for taxes and fees
Need to frequently readjust levels, which is
technically and politically difficult
Can change behavior of polluters and consumers if
taxes fees are set at a high enough level
Govts may see this as a way of increasing
general revenue instead of using funds to improve
environmental quality and reduce taxes on income,
payroll, profits
Easily administered by existing tax agencies
Fairly easy to detect cheaters
Fig. 24-10, p. 580
9

Trade-Offs
Tradable Environmental Permits
Advantages
Disadvantages
Big polluters and resource wasters can buy their
way out
Flexible
May not reduce pollution at dirtiest plants
Easy to administer
Can exclude small companies from buying permits
Encourages pollution prevention and waste
reduction
Caps can be too low
Caps must be gradually reduced to encourage
innovation
Can promote achievement of caps
Determining caps is difficult
Permit prices determined by market transactions
Must decide who gets permits and why
Administrative costs high with many participants
Confronts ethical problem of how much pollution
or resource waste is acceptable
Emissions and resource wastes must be monitored
Self-monitoring can promote cheating
Confronts problem of how permits should be fairly
distributed
Sets bad example by selling legal rights to
pollute or waste resources
Fig. 24-12, p. 582
10
Consumption Patterns

• Underconsumption LDC
• Overconsumption MDC
• Affluenza unsustainable addiction to
  overconsumption and materialism.