What they are Not

The external costs are always connected to an activity managed by someone (a single person, a company, an institution, etc.). They are part of the costs generated by that activity, but they shouldn’t be mistaken with the internal costs paid by the responsible of the activity.

The external costs are not the costs of intermediate products or services given by a certain company in outsourcing to third parties.

The social costs are not the same of external costs, because the social costs are given by the sum of the internal and of the external costs. Moreover, the external costs refer to a certain activity, while the social costs usually refer to all the activities of a society and not only to the activity that generates the external costs. In Cost-Benefit Analysis the framework for the valuation is at a social macro level, while External costs valuation is at a more micro and context specific level.

The insurance premiums payed by car owners are not external costs because they are costs already payed by the responsible of the transport activity (in order to reduce and compensate for accident risks).

Presently, the fuel taxes (excise duties) are not external costs; in fact they are payed by transport users in order to contribute to the State general income and not to mitigate or compensate any external costs due to transport activity. Indeed they are fixed and not variable according to the damage measure. The excise duties could be considered as environmental taxes only if they were correlated to the external costs of transport (for example by paying times more excise duties in an urban drive and times less excise duties in rural drive) .

© 2006 - Andrea Molocchi