Costs – What Really Costs Us and What Doesn’t?

A new definition of costs is also required. The term at present is muddled and confused in general usage.

Wealth loss versus Throughput Reduction

Any outlay of money in a national economy is regarded as a “cost” to the nation in the sense of some loss of wealth. This can lead to the absurd idea that if a larger amount of money changes hands when some environmental protection measure is put into effect, than would do so if it were not put into effect, then greater economic benefit and wealth can result from not undertaking the measure.

This misconception is illustrated first in an article on acid rain and emission controls in a scientific journal a few years ago, where it was said that proven damage estimates [from NOx and SOx emissions] were in the millions of dollars per year, while present control costs were in the billions or tighter controls would cost further billions.

This statement was made in support of the argument that measures to reduce or prevent the emission of oxides of sulphur and nitrogen, from fossil fuel power stations, industry and vehicles, would be a loss to the economy and should not be proceeded with for that reason.

The flaw in the thinking is that the costs being compared are not in fact comparable. The latter one is not a cost at all in the sense of the definition which will be presented later on.

The damage from the noxious emissions is a real cost because resources (wealth) are thereby depleted. Forests suffer from acid rain, through its effect on their soil. Fish and their food die off in acidified lakes. Nitrogen and sulphur oxides can add plant nourishment to topsoil up to a point, but continuous emission will eventually raise the topsoil acidity to the point where other nutrients are leached out and toxic ions such as aluminium are mobilised. Thus the topsoil resource is depleted.

The leisure and recreational value of land and water are important though less concrete economic resources. These are reduced by continuous NOx and SOx immissions. Indirect bad economic effects will follow from this because people will perceive a drop in their living standard and will tend to react as described in the post “Living Standard and Quality of Life”.

Natural regeneration and cleansing processes that operate through soil, water, and vegetation are another important resource depleted by acid emissions.

Against all this, what is the “cost” of preventing or reducing acid emissions?

Extra resources besides the fuel must be throughput to remove the sulphur from the fuel, and/or the oxides of sulphur and nitrogen from the smoke. Extra plant must be installed and run to accomplish this. The extra resource throughput is a cost in terms of the definition presented later.

The extra plant and processes add to the price of a unit of electricity, with the following results:

Consumers use less electricity and have less to spend on other goods and services. This is described as a “cost” to the economy because of the reduced throughput.

Actually the deficiency in throughput is a gain rather than a cost. The resources that would have been put through are still there; their throughput is delayed, postponed, not irretrievably lost. The fact that less electricity, thus less fossil or nuclear fuel, is consumed and less resources are structured into goods and services as a result of lower demand, means that resources are less depleted than they would otherwise have been.

The money value of the throughput which didn’t take place could be many times greater than the money value of the extra materials and processes required to clean the fuel and its combustion products. It is also apparently much greater than the money value of the damage done by acid-forming material in the fuel and its smoke. Thus the argument goes that it is better to allow the damage than to reduce the throughput.

A more thoughtful analysis would make it clear that it is nonsense to compare the loss of wealth resulting from acid emissions with the lowering of throughput, one of wealth’s first derivatives. These two things being compared can somehow be expressed in cash terms, but this does not make them comparable in a simple sense of A can be expressed as more dollars than B, so throw out B to keep A.

This simple comparison is false because the monetary expression for wealth describes a quantity possessed, whereas the monetary expression for throughput describes the rate of consumption of that possession.

The fallacy is another error that stems from the wrong assumption that economic activity creates wealth; throughput is called “production” or “national income” as though it were adding to an ever growing store of wealth. This has been discussed in other posts.

Another example of misuse of the term “cost” is to be found in a United Nations report in which the money spent on the arms race is compared with the money supposedly required to achieve various environmental benefits. The report says that $50 billion a year are spent on the arms race, whereas safe water for all developing countries within nine years from that date would cost $7 billion, a worldwide clean air programme would cost $5 billion, and so on.

First, clean air and water are not costs, but gains. Two resources would have had their quantity increased. It may be that in the process other resources would be depleted, but this need not be the case. A lot of money changing hands in the process of achieving clean air and water doesn’t necessarily mean that there was any cost. If the throughput rate of no other resource was raised above its renewal rate, then the whole process has been a net economic gain.

Definition of Cost

To summarise the point, and provide a basic definition of cost: when deciding whether an episode of economic activity has been a cost, and if so how much, it is no guide to measure the amount of money that changed hands. One must look at the following three criteria:
(i) Has a resource been depleted? Or
(ii) has the depletion rate of a resource been increased because its throughput rate now exceeds its renewal rate by a greater amount than it did before the episode of economic activity? Or
(iii) is a resource being throughput now at a rate greater than its renewal rate, when before it was being renewed faster than it was being throughput? Is the resource being depleted now when it wasn’t before?

Further points will be made about that UN report in the following digression.

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