New Bottom Line Volume 3.4 – Price and Cost: The Next Environmental Frontier

March 8, 1994

There is an aspect of economics that has nothing to do with the prime rate, M1, COLAs, or any of that, yet may be more important than any of them: the disjunction of market prices and real costs. It may sound arcane, but it affects us daily, and it’s a part of the business landscape facing major change in coming decades.

Consider a can of paint. You shop wisely, and buy one gallon of premium paint for $11.95. You finally get around to repainting the den, and it looks great. There’s about an inch of paint left in the can, which you have no use for. Do you a) pour it down the drain? b) store it in the garage? or c) dispose of it properly?

You probably know you shouldn’t do “a”, since you’d be contributing to water pollution and the burden on your community’s treatment facilities. You’re not sure about “b”, although that’s probably what most of us do. And you probably can’t do “c”, since most cities haven’t established and convenient mechanisms for proper disposal of the household hazardous wastes (HHW)–paints, oil, pesticides–that shouldn’t go to the dump.

Even cities that have established programs, from special HHW collection facilities to periodic HHW pick-up days, haven’t solved the problem, since the real cost to the city of collecting and properly disposing of that $11.95 can of paint could run from $5 to $50 dollars or more. This adds up to a substantial hidden liability that doesn’t show on the city’s balance sheet. Consider a city of 100,000 with perhaps 30,000 households, and assume that each has just one partly used gallon can of paint gathering dust in a closet or basement. Assume the actual disposal cost is $10–probably low. You’ve just added a phantom $300,000 to your city’s budget. Now check your garage or basement, and decide if “just one partly used gallon can” is a reasonable estimate.

With such market distorting pricing, the true cost of disposal is invisible at point of purchase, and is shifted to another party, another place, or another time. This is not only unfair; it is bad policy. It suboptimizes efficient allocation of resources, since purchase decisions are driven by how well a product can duck true costs, not how well it functions. A cleaner, greener product that might cost less to dispose of but cost more at retail is at a disadvantage.

Each individual consumer makes rational decisions with the information available. Yet that rational decision, from the perspective of the “social corporation” that we all own, is irrational, since it costs us more money at the back end than we intend to pay at the front end. The catch, of course, is that the person who makes the purchase and the person who pays the real costs — whether in taxes or polluted ground water — is the same person. We seem to save money, but we’re picking our own pockets.

It is as difficult for a business enterprise to find rationality with distorted signals as it is for the economy as a whole. Imagine buying a piece of capital equipment — or a building — by considering only purchase price, while ignoring operating costs, maintenance costs, and other elements of “life-cycle” costs. That’s what we are forced to do–as companies, individuals, and communities–when we’re unable to get the information needed to make that evaluation.

Unfortunately, neither perfect markets nor perfect information exist. Fortunately, there is a wealth of experimentation under way to address the environmental price/cost disjunction. Some of these innovations can be made locally, such as point of sale information that reminds purchasers of the environmental implications of their decisions. Some, like refundable deposits on HHW modeled on refundable deposits on beverage containers, demand a larger jurisdictions or cross-border coordination. Some, like green fees to internalize environmental costs, require national action and ultimately trading bloc and then international adoption to be truly effective.

A far more provocative approach, but one perhaps simpler, more elegant and more effective in the long run, is the “intelligent product system” proposed by Drs. Michael Braungart and Julius Englefried in Germany. The proposal, outlined in Paul Hawken’s excellent The Ecology of Commerce, classifies products into those that will biodegrade completely and harmlessly, and those which the manufacturer “owns” forever, and in effect “leases” to customers. Permanent responsibility may become a powerful incentive for responsible design, and for bringing price and cost into harmony.

Extreme? Perhaps. But this is the country that introduced the packaging “take-back” law, and that is moving forward on product take-back legislation. When a market the size of Germany talks, exporters listen.

(c) 1994 Gil Friend. All rights reserved.

New Bottom Line is published periodically by Natural Logic, offering decision support software and strategic consulting that help companies and communities prosper by embedding the laws of nature at the heart of enterprise.

Gil Friend, systems ecologist and business strategist, is President and CEO of Natural Logic, Inc.

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