Hidden Costs

23:00 Tue 17 Apr 2007
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As I’ve been reading The Omnivore’s Dilemma and also thinking about pollution and global warming, the concept of hidden costs keeps coming up.

Pollution is an obvious “hidden cost” in typical capitalist systems: it’s very difficult to measure how much harm it does, and no cost is associated with that harm (except punitively, which is different from its showing up on a balance sheet).

So a company that on balance shows profit across the board might be, for example, destroying a publicly-owned lake with its output. The lake might be worth a colossal amount, and the cost of not polluting it may be marginal. But that cost is external to the company (i.e. someone else pays it), so it has no real incentive to change its behavior.

It might be forced to by legislation, but that’s different. That’s also the kind of legislation that companies tend to spend money either undermining or preventing from passing in the first place.

Air pollution is even harder to figure out, in terms of what of it harmed what people. Similar situations apply to other areas of public health, e.g. obesity. Cigarettes would be another classic example, the companies externalizing the massive health costs of their products to society as a whole.

Altering the system to track these externalities seems very difficult. The incentive for cheating would be significant (as it is already, amply demonstrates by Enron and its fellow travelling companies). In addition, political resistance would be intense, as altering the system in this way would mean a shift in resources towards “the public” and away from business interests.

It “feels” like it should be possible to do something like that. After all, the so-called “free market” has many rules itself, and these are usually rules that end up benefitting a small group. But I’m not sure if changing the rules on pollution and other externalized costs would be a evolution of capitalism, or a revolutionary breach.

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