K, so I am gearing up to take a natural resource test and I've been pondering one of the fundamental arguments about pollution that they present in the book and would love to hear your guys input:
What is your stand on the National income accounts and how we achieve these figures via the GDP and NDP (Gross and Net Domestic Product) in the US considering the GDP and NDP do not take into account the external costs of the depletion of natural capitol and the environmental cost of economic activities?
My book gives the following example:
"If an industry makes a product and, in so doing, also releases a pollutant into the environment, the product is bought at a price that reflects the cost of making it but not the cost of the pollutant's damage to the environment. This damage is the external cost of the product. (One common external cost of many products is air pollution released when fossil fuels are burned to transport manufacturing components or finished goods) Because this damage is not included in the product's price and because the consumer may not know that the pollution exists or that it harms the environment, the cost of the pollution has no impact on the consumer's decision to buy the product. As a result, consumers of the product may buy more of it that they would if its true cost, including the cost of pollution, were known or reflected in the selling price."
I am no economist by any means and would like to know if the question I presented at the top is a sound one. Are the terms I used depicted in a correct way? As Tim has shown me with my last post, it is hard for me to portray a question on such a topic that I am not well versed in. JAKE and HAKE, I am also curious to see if they teach these types of "external" costs in economics at IU. since I haven't taken an econ course at BSU I don't know if this is econ 101 material or not.
TIM, I thought this idea of adding on an "external" environmental cost was a good application to your comment about how we will need to start using resources more sparingly because it forces us to think about how much buying materials will effect our pockets.
I Know it is a long post but I would love to hear anyone's thoughts on the matter.
Javier
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I believe that the idea of an external, or environmental cost should be an inherent cost of production and therefore, inculded in the MSRP. However, in our capitalistic society I have a hard time believing this policy could ever be implemented. I can only hypothesize three ways of achieving this: private sectors taking a cut to keep current prices the same, inflating prices to cover the environmental cost where consumers take the hit, or additional taxation. As we are all congenitally greedy and glutinous I can't imagine corporations or consumers would be willing to fork over the extra cheese. I'm pretty sure we are already being taxed for items relating to climate change; primarily for the R & D for alternate power sources. So....taxation likely isn't the answer either. Much like you JAVIER I am no economist, so I may be flat out missing another possibility of implementation. So JAVI your saying that these external costs would be treated as a depreciation factor? I feel like people could easily get around that in the civil court. While the attenuation of earth ultimately effects everyone, there isn't necessarily any cost to the supplier (the refinery etc.). Calculating the NDP suggests a dollar amount spent in order to maintain the capitol. We cannot replenish the lost natural resources. Therefore, the dollar amount allocated for "environmental depletion" would be totally arbitrary.
I have a very basic understanding of GDP and NDP so if that is incorrect please enlighten me.
I think Tim is spot on when it comes to pricing. Its unrealistic to believe that non-financial costs such as pollution could be easily added to the price of goods, especially in any kind of competitive industry. However these external costs can and are calculated. The Netherlands takes a company's environmental impact very seriously requiring them to disclose certain measures in there financial reports. These measures include figures such as their total carbon footprint. Presently, the International Financial Reporting Standards (IFRS) have been trying to find a way to make these more of a requirement. Many U.S. companies already have sustainability reports which disclose a lot of information and a few even have them professionally audited. This is all a push to create a so-called "Triple Bottom Line" that focuses not only on profits but also on the social and environmental impact companies have. The idea is the market will take action towards companies that are not environmentally and socially responsible reflected in their stock price. The U.S. does not have a set of standards for sustainability reporting so everyones is different to focus on their own industry. Johnson & Johnson and Southwest Airlines are both leaders in this area but their reports look very different. The Global Reporting Initiative (GRI) is trying to create a set of standards but its still pretty far away from having something that is more beneficial than costly to companies and investors.
These reports obviously open companies up to criticism. Non-governmental groups (NGO's) have used this information for years to hurt environmentally unfriendly companies financially. Apple used to be the most ecologically unfriendly tech company on the planet until greenpeace took out full page ads in the New York Times and had people send their unrecyclable Macs to Steve Job's house. Apple uncured a shit ton of financial costs from this whole ordeal, spurring them to completely change their business goals. Now Apple is one of the most environmentally conscious companies in the U.S. So I guess in this way the market regulated a company.
I hope this helped a little. Sorry for the long tangent.
I didn't think there was a tangent at all. Pretty informational actually, it's cool to see that Netherlands is doing something about this issue. But I agree with you both and that adding on these "external costs" to products is wishful thinking. Tim brought up a good point about taxation, and it seems almost impossible with our technology now to really "know" how much impact business ecological footprints are. To continue on the solutions topic my book says this:
The two most common incentive-based regulatory approaches are environmental taxes and tradable permits. Environmental taxes are designed to be equal to the externality caused by the polluter. Unfortunely, this amount can be highly uncertain and so is often very difficult to set. Tradable permit approaches, also known as cap and trade, set an allowable amount of pollution and then let different companies buy and sell the right to release that pollution. Companies or individuals who can easily reduce their emissions sell some of their pollution rights to those who cannot.
Maybe the Tradable Permit approach might be the way to go, and if I interpreted Tenerence correctly, it is probably true that in a competitive industry regulation of the cap on total pollution from an area would be be hard to enforce if companies were cutting corners. But in an ideal competitive industry the Tradable Permit approach could create a healthy competition amongst businesses.
Who decides what is an acceptable amount of pollution. What the EPA says is acceptable would likely differ heavily from that of a random elected official.
My. Brain. Hurts.
Trying to critically evaluate and find the fundamental reasoning of any issue in one's daily life has to burn an enormous amount of calories. and if it does not, then that is very unfortunate. Philosophy is the shit. But that shit takes an enormous amount of energy to stay focused on.
Javier
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