Getting Prices Right: Only a Partial Answer

PCDForum Column #56,  Release Date June 25, 1993

by Kristin Dawkins and Chirag Mehta

Many environmentalists have joined theoretical economists in holding up "full cost accounting" as the way to achieve the sustainable use of natural resources through the use of market mechanisms. They argue that adding the full costs of resource depletion, pollution and waste to the price of products would reduce consumption and encourage conservation. Indeed, adding to the costs of a dam in India or to logging in the Amazon could dampen many a developer's zeal. President Clinton's proposed tax on the British Thermal Unit (BTU) content of fuels would have raised energy costs and discouraged some consumption. But what are the full environmental costs of any product, and is the accurate valuing of products and services adequate to redress the skewed results of current free market practices?

  • The determination of which costs to include and at what price is necessarily a political choice. Do we count the costs to society of unemployment and black lung disease among West Virginia's mine workers? Of petrochemical contamination along the various "cancer corridors" including New Jersey, New Orleans, and the Mexican border? What is the full cost of leukemia among Navajo Indians where uranium is mined, in communities where nuclear waste is stored? What is the full cost of war in the Middle East?
  • Pricing and values are not absolutely comparable and monetization is a new and inexact art. Who would decide what to include? Who would calculate their monetary value? Who would decide the full value of each lost tree and its contribution to the ecosystem?
  • The oft-cited "polluter-pays-principle," which postulates that international policy should ensure that producers bear the economic responsibility for ecological damage, is based on a fallacy. If producers are allowed to pass the full costs of production on to the consumer, what will motivate them to alter their production behavior? If consumers with little purchasing power are excluded from the market by full cost prices, how will they meet their needs? Even if raw materials are more highly valued, how can pricing alone correct the exploitation and loss to a community's or region's ecological resource base?

The problem with the current discussion of full cost accounting is that it is too limited to market-oriented financial tinkering and seeks to convey an impression that such tinkering is a substitute for regulation. It neglects the extent of public intervention required to internalize otherwise externalized costs in "market" prices.

It presents itself as consistent with the political thrust toward "free markets," i.e., freed from government intervention. It is important that those who advocate full cost pricing face up to the fact that their solutions are a form of governmental intervention, not a substitute for it. It is a simple truth that governmental intervention is absolutely essential in addressing issues such as the environmental crisis where the costs involved will never be internalized in market prices in the normal course of business. Furthermore, governmental intervention is almost impossible when national borders are completely open to the free flow of goods and capital as presently advocated by free traders.

Contrary to the current thrust of international negotiations, international trade agreements should be demanding the environmental accountability of business, wherever it operates, by prohibiting firms from moving their production to countries with low social and environmental standards and then competing for markets against firms observing high standards elsewhere. At the same time, international agreements should ensure the necessary resource and technology transfers to help low income countries upgrade their standards.

Some advocates suggest dealing with the open border problem by taxing goods that are not produced according to acceptable ecological or social standards. Aside from the strong likelihood that "compensatory tariffs" would be challenged as barriers to trade under GATT, most of these proposals would capture the revenues of compensatory tariffs for the treasury of the country with more stringent standards. This would penalize countries that cannot afford stronger regulations. As yet there are no multilateral institutional mechanisms to capture such revenues and invest them in ways that raise standards elsewhere.

Given geopolitical trends, economists and international planners need to broaden their approach to environmental issues. Full cost accounting should be viewed only as one tool among the variety of essential regulatory mechanisms for reorienting market choices to the larger community interest. Dealing with global scale issues of ecological exhaustion and economic injustice will require a good deal more than simply getting the prices right.

Kristin Dawkins and Chirag Mehta are respectively Senior Fellow and Research Coordinator, Institute for Agriculture and Trade Policy, 1313 Fifth Street S.E., Suite 303, Minneapolis, Minnesota 55414-1546, U.S.A., Fax (612) 379-5982. This column was produced and distributed by the PCDForum based on their article "Reflections on Full Cost Accounting," Economy and Environment, Spring 1993.

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