Calculating True Costs in Economics

updated Sep 02, 2009 by Maria Mergel

What works in the short run oftentimes costs society infinitely more in the long run. This is true with numerous environmental policies, most notably the management of forests and fisheries in the past hundred years. It is also true with the use of certain toxic chemicals like Pesticides (DDT) and PCBs.

Pesticides are used to kill predators to crops, thus allowing the crops to have a greater yield. Using pesticides, therefore, makes the farmer more money in the short term and provides a stimulus to the economy in the short run by generating a greater yield. However, the importance of ecological considerations arises when one looks into the long term impacts on the environment. What becomes obvious is that certain things that make economic sense in the short run cause exponentially more damage, both economically and ecologically, in the long run. For instance, say the use of pesticides caused a gain of $100 for the farmer for the first year and $50 for the second (the amount will be decreasing because pests build up immunity to pesticides). But if the pesticides, as is common, run off the land and contaminate bodies of water or cause an Algal Bloom (potentially killing fish and other aquatic life), that $150 that the farmer and economy gained in the short run would pale in comparison to the damage the Pesticides have done to the economy and environment.

The long-term economic impacts of environmental decision making are becoming an increasingly popular topic of discussion. In 1998, the Chinese government realized that increased logging around rivers was not economically sound. As rampant erosion led to dirty rivers and treeless banks led to increased flooding, the government realized that the trees were worth much more money standing than they were as lumber, and logging was stopped.

A similar situation is arising in the wake of Hurricane Katrina. The development of the coastal communities had removed the natural barriers, marshes and wetlands, that had protected inland communities for centuries. The developed coastline, no matter how expensive the property, is not valued anywhere near the estimated $200 billion that the Katrina cleanup will cost. That cost, though it would not be zero, would be substantially less if Katrina had landed as a substantially weaker storm, possibly a category one or two, rather than a category five storm that traveled through the newly developed coastline. The short term prospects of certain policies are not reflective of the true costs to society.
Sean Foley

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[Sean Foley]
{authors}
What works in the short run oftentimes costs society infinitely more in the long run. This is true with numerous environmental policies, most notably the management of forests and fisheries in the past hundred years. It is also true with the use of certain toxic chemicals like [pesticides] ([DDT]) and [PCBs].

[Pesticides] are used to kill predators to crops, thus allowing the crops to have a greater yield. Using pesticides, therefore, makes the farmer more money in the short term and provides a stimulus to the economy in the short run by generating a greater yield. However, the importance of ecological considerations arises when one looks into the long term impacts on the environment. What becomes obvious is that certain things that make economic sense in the short run cause exponentially more damage, both economically and ecologically, in the long run. For instance, say the use of pesticides caused a gain of $100 for the farmer for the first year and $50 for the second (the amount will be decreasing because pests build up immunity to pesticides). But if the pesticides, as is common, run off the land and contaminate bodies of water or cause an [algal bloom] (potentially killing fish and other aquatic life), that $150 that the farmer and economy gained in the short run would pale in comparison to the damage the [pesticides] have done to the economy and environment.
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The long-term economic impacts of environmental decision making are becoming an increasingly popular topic of discussion. In 1998, the Chinese government realized that increased logging around rivers was not economically sound. As rampant erosion led to dirty rivers and treeless banks led to increased flooding, the government realized that the trees were worth much more money standing than they were as lumber, and logging was stopped.

A similar situation is arising in the wake of Hurricane Katrina. The development of the coastal communities had removed the natural barriers, marshes and wetlands, that had protected inland communities for centuries. The developed coastline, no matter how expensive the property, is not valued anywhere near the estimated $200 billion that the Katrina cleanup will cost. That cost, though it would not be zero, would be substantially less if Katrina had landed as a substantially weaker storm, possibly a category one or two, rather than a category five storm that traveled through the newly developed coastline. The short term prospects of certain policies are not reflective of the true costs to society.&nbsp;
Sean Foley
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