Problem

Hidden environmental costs of economic production

Other Names:
Externalized costs of industry
Externalization of environmental costs
Nature:

Many of the costs of production of goods and services are ignored in the process of calculating the price to the user. Generally only the direct costs to the producer are factored in and other costs to society or the user "externalized": for example, the air pollution costs of motor cars, or the safe disposal of indestructible or toxic consumer goods; the operating cost of a gravel pit used not to take into account the downstream damage to the river and restoration of the land once mining was completed. Disregard of overall environmental and social costs is being remedied to some degree by the introduction of concepts such as the "user pays principle", "full cost accounting" and "end of pipe" costing, but much remains to be considered at the level of subtle and indirect effects.

Incidence:

In industrialized countries, subject to more stringent environmental controls, the environmental costs are reflected to a greater degree in the prices of export products than in developing countries. Thus the costs tend to be paid by the importing nations, whether developed or developing. In the case of developing country production, the environmental costs tend to be borne domestically, in the form of damage to health, property and ecosystems, and are not reflected in the prices of the products exported. It has been estimated that in 1980 developing countries exporting to the OECD industrialized countries would have had to pay an extra $5.5 billion if their products had been processed according to the environmental standards prevailing in the USA, rising to $14.2 billion if the pollution control expenditures associated with the materials were also taken into account. Such estimates do not take account of the economic damages associated with resource depletion.

Counter Claim:

Developing countries are able to attract more investment to export manufactured goods because these costs are hidden and absorbed domestically. This would tend not to be the case if they were subjected to a more vigorous systems of global environmental control. Developing countries thus have a comparative advantage in pollution-intensive goods.

Problem Type:
F: Fuzzy exceptional problems
Related UN Sustainable Development Goals:
GOAL 8: Decent Work and Economic GrowthGOAL 12: Responsible Consumption and ProductionGOAL 15: Life on Land
Date of last update
16.01.2018 – 17:34 CET