■ The cost of disposing of the product at the end of its useful life
■ The environmental degradation caused by the emissions, pollutants, and
wastes from production
■ The cost of health problems caused by harmful materials and ingredients
■ Social costs associated with increasing unemployment due to increasing
automationEven though external costs are not included in the price of the product, they
still have to be paid. Society ends up paying them through taxes, accident
compensation, medical payments, insurance payments, and through losses in
environmental quality and natural capital.
Products and services that include external costs (e.g., organic produce, clean
technology, natural products, and renewables) are usually more expensive than
those that don’t. Consumers will tend to buy the least expensive goods so
“clean” products are at a price disadvantage.
One way to include external costs is to add a tax directly to those products or
activities that have them (i.e., external costs should be directed at the users). The
restructuring of taxes, which is often called “tax shifting,” would mean that
“environmentally friendly” products (e.g., recycled metals) are not taxed while
items that harm the environment or human health (e.g., coal and cigarettes) are.
Figure 10.4 True pricing