Thursday, October 18, 2007

The Economics of Wastefulness

The price you pay for everything is too cheap. Gas should be $10 per gallon, homes should be constructed to last 100 years, and Happy Meals should provide kids with food only, not with a plastic toy.

I’ve had this reoccurring thought for the past several years about how the basic commodities that make up our stuff are too cheap for the benefits they provide. Land, wood, oil and gas, milk, etc. Imagine 300 years from now, when oil is as rare as a Chupacabra, how much they would be willing to pay for a gallon of gas that today costs $3. Likely they would pay upwards of $100 or even $500 a gallon (adjusted for inflation). How annoyed would they be, knowing that we wasted millions of gallons of high-quality gasoline on NASCAR.

I believe managers and policy makers diminish the importance of resources in their financial analyses. Perhaps they should add an additional discount for a factor I call “what would people 300 years from now pay for this.” When performing NPVs and cost-benefit calculations, analysts should be concerned not only about the current market’s supply and demand curve, but future generations’ as well.

The wastefulness of resources is especially a problem in the housing industry. Since post WW-II, new homes last for only about 20 years before they become unfashionable and torn down for more fashionable 20-year house. Isn’t it a waste that all of those materials were mined, chopped down, or chemically composed for a 20-year house? But the problem of wasteful economics is prevalent in all industries. Pizza companies, oil companies, car companies, you name it. The main concern with business leaders is providing the cheapest product at the highest margin the current market will accept. Little concern is given to future generations and how they would much rather use that barrel of chemicals not to create Happy Meal toys, but to create a future power turbine (or maybe a Star Trek phaser).

This is a topic that could easily be developed into a doctoral thesis. So many areas of this theory to explore. Here’s another tangent: Saudi Aramco (biggest, scariest oil company of them all) has reached a point of inflection in its oil extraction rates. Saudi oil production is decreasing, not increasing (as our population and demand is increasing)…

1 comment:

Andrew & Joanne said...

Talk about wastefullness - I've got a story for you!
I just learned yesterday that one of the reasons people rarely recycle around here is because it costs Waste Services and Hillsborough County more money if we recycle. Waste Services (and Waste Management in other areas) is under contract and legally bound to offer recycle bins, but you have to ask.
One of Tampa's biggest sources of energy is a power plant that burns trash and coal. The County also works with the TECO (Tampa Electric Company) in providing the trash to burn. Therefore recycling will drop the amount of trash going to the TECO and in turn raise expenses.
So you can make the assumption that any attempt to make Tampa more Green and inclined to recycle is going to be met with great opposition primarily from TECO and Hillsborough County!