The true cost of things

When you buy a sheet of paper for 25 paise - what does this 25 paise go towards? When you hire a gardener and pay him Rs 100 for a day - what does this 100 Rupees go towards? When you buy electricity at Rs 8 a unit - what does this 8 Rupees go towards? When you buy a pot for Rs 10 - what does the Rs 10 go towards?

Simple questions that we normally don't pay any attention to. Profound when you think about these in detail. Coming back to economics, each of the above examples is a market transaction where a seller sells a product or service to a buyer. The buyer pays a price that will cover the seller's cost plus his profit. The transaction goes through only with the mutual consent of all parties involved. The seller could represent a chain of sellers with intermediate transactions between each of them and all of their costs and profits taken care of.

The seller incurs several types of cost for the product. These could include cost of raw materials, cost of labour involved, transportation cost, marketing cost, inventory cost and capital cost. Each of these costs could further be broken down. For example marketing cost would just be labour, materials,capital and energy involved in marketing, cost of raw materials would be cost of production and procurement of raw materials, cost of energy, cost of capital and the cost of labour involved in doing that. Ultimately all of the costs could just be factored into cost of labour involved in different processes, cost of the raw materials, cost of energy used, cost of capital involved.

Cost of labour and cost of capital are pretty straightforward as only two specific parties are involved in the transaction, set of labourers and set of capitalists. In the case of the cost of raw materials, it is not so. Raw materials are procured from nature and the cost involves only the cost of procuring and processing it. The cost incurred by Nature is discounted in the process. The cost incurred by nature would include the cost in the production of the raw materials and the cost incurred because of the removal of the resource. These costs are not easily calculated as our economists are yet to figure out a way to convert the value of the cost to a gold-equivalent. There is however an even worser aspect. If the raw material is not replaceable then there is a cost of the resulting instability in the system.

A similar explanation can be given for the cost of energy. Cost of fuels (like petrol, diesel, natural gas, coal etc) and the cost of the energy generation mechanisms (like dams, wind mills) only include the cost of creation of the mechanism to get the fuel or tap into the system. The actual cost of production of the fuel by nature, the cost incurred because of the discharge of the byproducts and the cost incurred because of the instability created are completely discounted. Burning of fuels release a lot of greenhouse gases into the atmosphere. This could result in an increase in the global temperatures and in turn lead to collapse of different types of ecosystems further leading to a decreased capability by the system to absorb the greenhouse gases.

A crucial aspect of drawing resources from the nature is that, some resources, like forests, are renewable while others are not. For those resources that are renewable, there is a maximum limit at which they can be renewed. Any rate of consumption above the maximum limit is going to draw in on the renewal capacity and the resources are going to be depleted exponentially. Once that happens there is a cost of irreversibility incurred by the system.

The above three aspects of the cost of the product can be unified and considered as an environmental cost. A lot of products in the market are as cheap as they are because the environmental cost involved is totally discounted. Now if that too is included in the cost of the product then a market based solution is created that can counter-act against the environmental issues created by over consumption, exploitation of nature etc. As the severity of the environmental issues caused by a product increases the cost of the product should also go up there by limiting the consumption of the product and thus reducing the total impact of the system.

But how do we pay mother nature. Simple... Institute an environmental tax and charge it against different products in the market at different rates. The rates should be proportional to the environmental cost incurred by the system during the production of the product. Use the environmental tax income for reversal and cancellation of the effect of the products on the environment.

The above thesis looks at the problem from a purely economical perspective with out any humane considerations. There will be limitations in the above strategy but at least this would offer a possible solution to the endless environmental problems created by a system that totally ignores the true cost of things. Even if such a system does not come into place rational people should change their patterns of consumption based on the true cost of things. A clay pot at Rs 100 could possibly be truly cheaper than a plastic pot at Rs 10.