What are Externalized Costs? Explanation, 9 Facts

In today’s society we spend so much time working, and yet many of us don’t really know what our external costs are.

We rarely have a good idea of how much money it actually costs to live a modern lifestyle. The article below will tell you all the information about it in the most specific way.

What are Externalized Costs?

Externalized costs are unfavorable effects linked with economic transactions that affect parties outside of the transaction, indicating that neither the buyer nor the seller suffers the majority of the costs.

Factory pollution is a well-known example of this sort of expenditure, as it may have a severe impact on the surrounding community.

What are Externalized Costs?

Numerous activists have highlighted concerns about these expenses, indicating that some economic institutions may need to be modified in order to solve them, and some consumers have joined the chorus calling for a reform of the way that individuals and businesses do business.

What Is An Externality?

An externality is something that has an effect on someone outside of a transaction. Externalities can be positive or negative and are immensely diverse.

In general, the word “externalized costs” is used to characterize negative externalities, whereas “externalized benefits” refers to positive externalities. Frequently, externalities are both bad and favorable, which can create a tangled web of problems.

Examples of externalized costs

In addition to pollution, examples of externalized costs include resource depletion, climate change, and health issues, to name a few.

Some externalized costs are somewhat difficult to control; resource depletion, for example, can be tricky to battle when a corporation wishes to fulfill demand for a product, and pollution is an undesirable byproduct of most industrialized manufacturing, even in very “clean” plants.

Others may be intentional on the side of the parent firm, like in the instance of corporations that do not pay benefits to their employees, instead depending on society to sustain them.

Object of Externalized Costs

A common victim of externalized costs is the environment. In the case of externalized costs, such as health problems caused by pollution or the use of various products, individuals or groups may choose to seek redress from the company that sold the product or the individuals who purchased it, and the majority of legal systems provide recourse in such situations.

However, because the environment is a silent entity, bringing suit on its behalf is problematic.

Many nations have institutions in place to safeguard the environment, and many of these agencies aim to limit the impact of externalized costs on the environment in the purpose of preserving current and future inhabitants of the planet.

Business to society

Fundamentally, cost externalization happens when a firm transmits a portion of its moral obligations as direct expenses to the society or as environmental deterioration. For example, trains and airplanes transmit to the community the expense of fuel, noise, and terminal infrastructure.

The expense of deteriorating air quality is shifted to the community and the environment by airlines and automobile manufacturers.

By externalizing to the community or the environment, many true costs are lost in the analysis because the true cost is unquantifiable and neither the community nor the environment has effective advocates to recover the damages.

The ability (or inability) of society to resist this type of externalization is a major contemporary theme in the business-society relationship. In its most severe form, society dissolves while businesses reap profits.

Business to market

A corporation may externalize costs in order to “shape up” or cut expenses by downsizing an underperforming cost center or department.

Using a worldwide courier service (such as FedEx or UPS) to handle all or the majority of a company’s shipping and logistics operations is an example of cost externalization.

It would be too expensive for a firm to assume sole responsibility for international shipping. It would be more prudent to use a third party that specializes in shipping and pay them to handle the operation.

Back-to-Business (B2B) cost externalization

Cost externalization should in no way be viewed as a fast remedy. Simply compelling suppliers and service providers to assume more obligations and expenses is not a healthy method of cost externalization.

What are Externalized Costs?

Before moving further with cost externalization, it is necessary to do thorough operational forecasts. Aside from this, it is impossible to determine if cost externalization would genuinely reduce the company’s operational costs.

Budgeting is also required for cost externalization. Due to the fact that the corporation will be paying a third party, the cost will be more transparent than when the procedure was performed internally.

Consequently, suppliers and service providers would have the opportunity to compete for business, which might lead to additional cost savings. However, in other instances, the reduction in cost may result in a decline in quality.

Because quality is not clearly quantifiable, it may be difficult to assess and compare, particularly if the quality of all parties begins to decline and company managers fail to detect the shift. When a firm externalizes costs, it loses this type of control.

Back-to-Customer (B2C) cost externalization

A corporation may also pass a portion of its expenses to its consumers. Reducing employees in a customer service department that takes inbound phone calls, for instance, will often result in longer wait times for clients seeking help.

The corporation saves its expenses by laying off employees, while the client must suffer the extra cost of being placed on hold.

Consequently, a cost has been passed from the business to the client. This can decrease customer satisfaction to the point that some consumers are encouraged to transfer to a competitor.

However, if the corporation is able to obtain a legal monopoly (for instance, through intellectual property rules), the customer has no alternative but to purchase from the company.

Customers can absorb a portion of a business’s expenditures by completing services that the business once offered.

Self-service petrol stations were an early example, followed more recently by self-checkout kiosks in supermarkets. This can have less of an adverse effect on customer satisfaction because some consumers prefer to assist themselves.

As with every corporate process, there are benefits and downsides to externalizing costs. It is up to corporate managers to take advantage of cost externalization and make the necessary decisions.

Externalized Costs: A Capitalism Crisis

Capitalism on a global scale has allowed multinational corporations to control the global economy. Globalization has enabled firms to grow to many regions of the world. As a result of globalization, American enterprises are now able to produce their goods abroad at lower prices.

It has made it less expensive for companies to develop, produce, and sell things at a profit-maximizing price.

Have you ever purchased an item at an extremely low price, only to discover that it originated from a faraway country on the opposite side of the globe? How can it be so inexpensive if it was shipped from China?

Global capitalism and externalized expenses have enabled corporations to sell their products at low prices while maximizing profits. The trademark Big Mac from McDonald’s is a prime illustration of this. How does McDonald’s get the lowest feasible retail pricing for their products? Externalized costs is the answer.

Externalized expenses are the means via which businesses generate a profit. They reduce expenditures by externalizing expenses, which is a fancy phrase for shifting “indirect costs” to society or the environment.

The easiest approach to understand externalized costs is to view them as the results of “cutting corners” by enterprises.

Generally, externalized costs of capitalism are concealed from public view. Companies conceal their externalized expenses because, in most cases, the truth would be bad to their reputation.

What are Externalized Costs?

Pollution, taking advantage of people and terrible working conditions in other nations, cruelty, and health care are among the key externalized costs of global capitalism.

Food is Cheaper Because Costs are “Externalized” is an essay written by Marion Nestle for the journal Food Politics. The article by Nestle describes the externalized costs associated with bringing food from the farm to the dinner table.

Nestle classifies external expenses as people costs, environmental costs, safety costs, and health care costs. The article describes how expenses are externalized in each category and the negative effects that this has on various parts of life.

Pollution is a significant example of an externalized cost. Pollution is an externalized cost because firms dispose of their garbage in the most cost-effective manner feasible, rather than in an ecologically friendly and sustainable manner, in order to increase profits.

An example of this would be a corporation that dumps its garbage into a local river instead of paying to have it properly disposed of.

This topic is addressed in the article Talk About Externalized Costs. According to the article, “[Businesses] are imposing a variety of costs on communities throughout the globe, including pollution, climate change, and water depletion.”

It is estimated that the world’s largest firms are responsible for $2.2 trillion in environmental harm.

Other kinds of pollution, such as waste from shipping packing, the consumption of petroleum, and airplane emissions, etc., are other examples of externalized costs and are immensely damaging to the environment.

Taking advantage of individuals and substandard working conditions in other nations is another example of an externalized cost. Businesses relocate their manufacturing abroad to take advantage of the lower minimum salaries in other nations.

This is exemplified by the article I Lost My Hands Making Unaffordable Flatscreens. In the essay, Rosa Moreno describes how a work-related mishap required her to have both hands amputated.

She was exposed to hazardous equipment six days a week for $400 a month. She had no option; she needed to provide for her family.

Could you picture working six days a week for $400 per month? It was not possible. It’s not livable, which is why the United States government sets minimum wages and other measures.

However, similar regulations are not applied in other nations, therefore employees in these nations earn only a few dollars each day. Due to the absence of a minimum wage, American corporations go overseas to exploit foreign laborers.

Why would American corporations operate factories in the United States, where the minimum wage in some states is as high as $11 per hour, when they could move abroad and pay their employees less than a dollar per hour?

“Sweat and blood” are among the externalized expenses mentioned on the T-tag, shirt’s highlighting the cruelty of sweatshops. The bottom of the tag indicates that the t-shirt was created in Pakistan, which supports the article’s claim that the t-shirt was manufactured in a sweatshop.

American Businesses Taking Advantage of Sweatshop Labor is another item on The Channels that discusses these sweatshop circumstances.

What are Externalized Costs?

The essay discusses in detail the difficult and inhumane working conditions in foreign factories, as well as how much American companies profit from sweatshop labor.

Certainly, there are others who disagree that externalized costs are negative. Externalized expenses are supported by the notion that they keep the economy afloat.

It is suggested that without externalized costs lowering prices, individuals would not be able to purchase all of the items they require and would therefore cease spending.

Theoretically, the minimum wage would raise so that customers can buy the items if firms were less international and resumed manufacturing goods only in their place of origin.

Conclusion

Externalized costs are an essential part of any project. They are a very real, hidden cost. Most people think of the externalized costs as: overhead (overhead is something that happens to you, not something you have to pay), depreciation, taxes, etc.

Externalized costs are costs that are imposed by others on the business for a service they have provided. A good example is a bank fee or any kind of payment processing fee.

These fees are added by the bank or the credit card company, which has nothing to do with the business and its revenue.

An example of an externalized cost would be when a business is paying someone else to make sure their product or service meets the standards. This could include any number of people from engineers to accountants to lawyers.

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Pat Moriarty
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