Today's profits, tomorrow's losses

Ecological economics attempts to evaluate the environmental and other external costs that a society pays to produce a commodity

-- WHILE it has become fashionable to talk of ecological economics, minus the jargon, the subject simply attempts to calculate the full cost, which includes environmental costs, that the society should pay for producing a commodity. And that is where it differs from everyday market economics -- it takes into account all external costs (including intangibles) that go into producing a commodity, and tries to internalise these costs.

For instance, producing books requires cutting down of trees, which deprives the society of benefits such as firewood, fruit, or medicines. Production of paper requires the setting up of a factory, which not only means balding of more land, but also results in smoke and other chemical pollutants that affect water and the ecological balance and therefore, the health of people.

According to ecological economics, the cost of the book must include the cost of the firewood that the villagers would have procured from the forest but now have to buy from the market, the cost they have to bear in terms of reduced soil fertility and subsequent use of fertilisers, the medical costs residents in the factory area incur due to exposure to pollutants and, therefore, a reduced life span. These are the external costs that are incurred while producing a book and ecological economics says these must be included in their price because it is the consumer who must bear these costs, not the unwitting victims.

However, the market price of a commodity almost never includes such costs. This is because market prices are determined by the simple rules of demand and supply. If demand is more than supply, prices will increase and if demand is less than supply, prices will fall.

But economics assumes that the selling price of an object should at least be equal to its production cost because a lower price would result in a loss to the producer. In the same way, ecological economics assumes the price of a commodity should be equal to the cost borne by the society for otherwise the society stands to lose. And ecological economics makes possible a social cost and benefit analysis of goods by including externalities. Phenomenal cost However, if all externalities were taken into account, the cost of goods would be much higher. For example, the cost of transporting cargo by road would be phenomenal if it included the cost of ensuring that trucks were not routinely overloaded, were kept in perfect condition, checking drivers for intoxication and visual impairment, carrying safety equipment and parking only at designated sites instead of wherever the driver pleased on the highway.

Paints and other industrial products are cheaper because their prices do not include industrial safety and pollution control equipment. Carpets, matches and fireworks are cheaper because child labour is used to make them. Houses are cheaper because they do not adhere to the requisite fire, earthquake and electrical safety regulations.

Ecological economists try to include these costs, which are also known as shadow costs, to some extent. They seek to first identify the externalities, attach money value to them and then arrive at the net benefit accruing from the production of the commodity. Externalities can be negative or positive. While the externalities listed so far in this article are all negative, people growing roses will be a positive externality for a bee-keeper in the000 same locality.

But the task of ecological economists is made tougher by the fact that the full cost of goods doesn't just accrue to the present generation. According to John M Keynes, considered the father of traditional economics, "In the long run, we are all dead", by which statement he absolved many generations of many responsibilities. But to ignore the effect our actions will have on future generations would reek of hard-headed callousness.

Cutting down forests today means we deprive future generations of clean air. But the tragedy is that today, there is no one to lobby for these future generations. Given that in the future, the global area under forests will be less and the population more than it is today, the forests will hold more value for our future generations than they bear today. So, the price of cutting a forest today would be understated if it did not include its value to future generations. This is where ecological economics plays its part: It acts as an activist, calculating for the government and other agencies the total costs of destroying the biosphere.

Ecological economics also raises some interesting questions. When its environmental cost is included, the cost of a book will obviously be substantially higher. In such a case, should the government raise the cost of books? And if it does so, would not the problem of illiteracy be aggravated? What should be done then? Should the government intervene and subsidise books even more than it already does? At this point, we enter the debate on what is more important: efficiency (which will decrease in indirect proportion to subsidies) or equity (which will decrease in direct proportion to subsidies)? There are no clear answers yet to these questions.

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