The prices of consumer products generally are based on the costs required to produce them, plus some margin so that the actors in the supply chain all can earn sufficient profits to survive. That’s a basic economic premise. But these costs generally exclude a range of externalities—that is, external forces that also represent costs that are indirect and thus not charged to any particular member of the supply chain.
Common examples of externalities include damage to the environment; if a producer drains the water table, it represents a cost to consumers, the land, and future potential uses, but that company does not have to include such costs in its accounting, nor does it usually pay directly for them. In turn, consumers rarely see evidence of externalities in the prices they pay and even may remain ignorant of them in general. Other environmental outcomes resulting from manufacturing processes include climate change and rising sea levels, but externalities also might be social in nature, such as threats to people’s safety, as created by production methods that rely on child or slave labor.
Due to these externalities, the prices that consumers pay for the products they buy everyday, especially at their grocery stores, arguably do not reflect their true costs. If, for example, the market price of apples actually accounted for the costs associated with land and water use to maintain orchards, the labor exploitation of migrant pickers, and the carbon emissions created by the trucks that transport the fruit, consumers would be paying much more than they do currently.
In an effort to raise awareness of these costs, as well as encourage retailers and consumers to accept higher prices for more responsibly sourced products (because doing so would mean lower costs, from a wider or global perspective), one nonprofit organization called True Price has developed an algorithm to calculate more realistic versions of the costs for producing consumer goods. With these calculations, it has approached various retailers to ask them to post true prices alongside their regular prices, and then let consumers choose what to pay.
This strategy gives consumers more information; if the difference between the true price and the regular price is quite small, it implies that the production process is less detrimental. For example, a responsible, fair trade company does not incur the same labor cost externalities as an exploitive manufacturer. Thus, the price gap between its true price and the regular, market price for its products is smaller, compared with the gap for products sourced less responsibly. Consumers then can use this information to engage in more responsible purchasing.
The algorithm also promises to help producers that seek to achieve more sustainable methods. For example, a Dutch chocolatier that sought a truly sustainable approach to sourcing cocoa from the Ivory Coast and Ghana applied True Price’s algorithm to determine how well it was addressing 14 different externalities in its supply chain, including different forms of pollution, low wages, and child labor. As the analysis showed, the labor concerns were pressing; the two countries from which it obtained cocoa employed an estimated half a million children in cocoa fields. In response, it actively worked to build out and expand its labor monitoring systems, such that within four years, the chocolatier was able to reduce the true price gap substantially, on its way to achieving a null gap.
A key challenge for this approach is finding the best way to calculate the costs of externalities that are often vague and undefined. How much is the cost of subjecting children to backbreaking labor? How can anyone put a price on rising sea levels? These questions have prompted international efforts, with lots of estimates available that might be combined to reach some consensus. For example, one collaborative effort determined that, after adding in social and environmental externalities, the U.S. food system represents costs of $3.2 trillion, even though consumers only spend $1.1 trillion on food each year.
Furthermore, defining absolutely precise costs might not be necessary. If the initiative and algorithm can help retailers and consumers recognize the difference between what they pay and the actual costs involved in producing the items they buy, they gain a more accurate sense of what constitutes a reasonable price. They also have more choice; for many people who want to engage in sustainable consumption, a lack of clear evidence about which option is more responsible makes this effort exceedingly difficult. Offering more sustainability information, as well as detailed suggestions for how to make supply chains less costly from environmental and social perspectives, has substantial value too.
- List some externalities that increase the true costs of one particular supply chain for a product you buy regularly.
- If faced with a regular price and a true price in a store, which one would you choose to pay?
- Should governments and retailers embrace the True Price initiative? Why or why not?
Source: Nick Romeo, “How Much Do Things Really Cost?” The New Yorker, April 2, 2022; True Price, https://trueprice.org