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Costs
Maurizio Aragrande and Massimo Canali, University of Bologna (I)
Florence Beaugrand, ONIRIS, Nantes (F)
This presentation was developed within the frame of the NEAT project, funded with support from the
European Commission under the Lifelong Learning Programme (Grant no. 527 855). Please attribute the
NEAT network with a link to www.neat-network.eu. Except where otherwise noted, this presentation is
licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.
Learning objectives
 Cost identification, cost justification, cost definition (Section 1)
 Identify how costs play in the animal health context (Section 2)
 Identify the way inputs generate costs (Section 3)
 Describe how individual behaviors may determine social cost
(Section 4)
2
Section 1: Costs in general
1.1 - Cost: what is this?
1.2 - Opportunity cost
1.3 - Resources, inputs, costs
3
1.1 – Cost : what is it?
4
1.1 - Cost : what is this?
Chapter 4
A lexical approach
 Cost is a term commonly used by people:
 By families or individuals, when they purchase something
 By farmers, when they purchase feed, machinery or build a cowshed in order to produce farm
staples
 By professional veterinarians, when they purchase e.g. laboratory hardware, hire a secretary or a
colleague in order to perform their profession
 The term cost is often associated to other terms or adjectives which identify
particular aspects of the cost concept.
Some examples:
 Total cost and average cost
Can you associate a meaning to these terms?
 Fixed cost and variable cost
Can you define the difference, for example,
between a fixed cost and a variable cost?
 Monetary cost and non monetary cost
 Individual and social cost
Or: can you provide some examples?
5
1.1 - Cost : what is this?
Chapter 4
An exercise in cost identification
 In the table below we listed some examples of real costs. Try to identify what
kind of cost they are and to develop a reasoning to justify your choice
Identifying costs categories
Cost examples
Cost identification
The money I spend for the fuel
(Fixed or variable? Social or individual?
Average or total?)
The cost of the car insurance
(Fixed or variable? Social or individual?
Average or total?)
The vaccination cost for my business
travel abroad
(Fixed or variable? Social or individual?
Average or total?)
The cost of a public vaccination plan
against brucellosis
(Fixed or variable? Social or individual?
Average or total?)
...
...
6
1.1 - Cost : what is this?
Chapter 4
Identifying costs
 Fixed and variable costs identify two different ways through which inputs
generate costs
 This distinction is relevant when we want to analyze the relationship between the
production volume and the use (the cost) of some resources in any activity
For example: purchasing a milking machine costs once and lasts many years; a vet
medicine costs each time we use it.
 Monetary and non-monetary costs refer to costs that are easy to be
quantified in monetary terms or not.
 This distinction is relevant when we face situations related to marketable or nonmarketable goods.
For example: the purchase of an ultrasound machine in a vet lab is a monetary cost;
the pain we feel for our sick cat can be hardly quantified and monetized
Cost analysis is applied in different situations.
The various specifications applied to costs
identify concepts which are useful to different analytical aims
7
1.1 - Cost : what is this?
Chapter 4
Finally, what is it?
 Cost is the economic value of the resources we use to do
something
 Distinguishing among costs helps economists to develop
cost analysis
 The distinction among costs is based on some criteria
which allow for the identification of cost categories
 Cost categories are relevant to develop the cost analysis
in a defined context and for a specific aim.
8
1.2 – Opportunity cost
9
1.2 - Opportunity cost
Chapter 4
The economic justification for cost
 Scarce resources make costs
 Resource scarcity means that an individual or a society are constantly
faced to choose among alternative uses of the resources.
 This immanent condition of the human beings is a basic assumption of the
economics. The scarcity problem concerns relevant economic issues as
well as daily life:
Should a state produce more bread or more guns?
Should I use my time to work (and get more money) or to go on
holidays?
 One day more spent for holidays reduces my worktime.
(2)
Any choice implies a renounce.
This renounce is a cost.
10
1.2 - Opportunity cost
Chapter 4
An exercise, to visualize the concept
 Imagine that:
 You have a fixed amount of a resource (a stock of time)
 You can choose to allocate this resource to two alternative uses
X= time for holidays; and: Y= time for work
 How can you visualize the alternatives (by a graph) ... and the
consequences (in economic terms)?
11
1.2 - Opportunity cost
Chapter 4
A more formal definition of opportunity cost
 If I chose to have a little bit more of X (+dX)…
… I will get a little bit less of Y (- dY)
 - dY is the Opportunity Cost of +dX
Opportunity Cost
“The loss of other alternatives
when one alternative is chosen.”
(2)
12
1.2 - Opportunity cost
Chapter 4
From opportunity cost to real cost (I)
 How does the opportunity cost concept works in reality?
 Imagine a situation where two “economic agents” (Mr Worker and Mr Farmer) have
to decide how allocate their resources (time, competences) to perform their job and
get a revenue:
Mr. Farmer breeds cows to produce
milk.
Mr. Worker is a worker specialized in cow
milking. He offers his job on the market.
He identifies the opportunity cost between
employment time and non-employment
time.
Then he translates in money the sacrifice
of 1 day of non-employment time (assumed
to be the preferred alternative).
This is the price he requires for 1 work unit
(say 40€/day)
He has to milk his cows and
organize the financial plan of the
farm.
Budgeting is a strategic activity. One
day employed in this operation may
save much money to the farm (say
100 €/day)
Milking, operated by Mr Farmer,
would just save 40€/day (the
amount Mr Farmer spends if he hires
Mr Worker)
13
1.2 - Opportunity cost
Chapter 4
From opportunity cost to real cost (II)
 How will Mr Farmer allocate his time between budgeting and
milking?
 He compares the opportunity cost of the alternatives:
Milking has an opportunity cost of 100 €/day
Budgeting has an opportunity cost of 40
Operation
Mr Farmer
(€/day)
Opportunity cost
(€/day)
Budgeting
100
40
Milking
40
100
 He decides for the alternative whit the lower opportunity cost (budgeting in
this case)
14
1.3 – Resources, value, costs
15
1.3 - Resources, value, cost
Chapter 4
Let’s combine some basic concepts
 Opportunity cost outlines resource scarcity
 Resource scarcity stimulates people to
value resources
 We use resources as inputs to
implement an action or a process,
that will produce benefits
The value of an input
used in a process
is a cost
16
1.3 - Resources, value, cost
Chapter 4
How can we analyse the cost of a process?
 Resources and inputs are of many kinds and contribute to the
production in many ways
 The development of a cost analysis requires that we describe the
mechanisms that generate costs
 Before doing this, let’s spend a some time to have an insight of the
animal health system in relation to cost
 Costs are faced to get benefits
•
Who pays (and faces costs) in change of what (what benefits, goods,
services)?
•
How this works when animal health is the focus of the social and
economic relationships among people?
17
Section 2: Costs in relation to animal health
18
2 – Costs in relation to animal health
Chapter 4
Who is concerned by costs in relation
to animal health?
 Many actors deal with animals for different reasons or motivations
Who? (actors)
Which economic reason?
(Producers) revenue, profit
Private owners of animals
(Households) utility from good feelings for pets
Improve economy and welfare through animal
production
Public institutions
Reduce health risks related to animals, animal
production and consumption of animal products
Veterinarians
Revenue, profit
Society as a whole
Life standards (avoid welfare losses), avoid
sickness while using animals to satisfy different
kinds of needs
19
2 – Costs in relation to animal health
Chapter 4
Why do actors face cost for animal health?
 Motivations determine the reasons for each actor to support costs for
animal health
Who
Why
Individual
owners
Producers: suffer losses because of animal sickness
→They accept to support monetary costs to defend the health of their animals, because these
are a source of revenue
Families: suffer for animal sickness, a loss of utility difficult to translate into money (non-monetary
cost)
→ They are willing to spend money to restore puppies’ health because they care
Public
institutions
They spend money by trying to reduce the social risk related to animal disease on a large scale
(loss of animal production, food scare, transmission of diseases among animal and to humans,
etc.)
→ They spend money to safeguard health standards, prevent (or intervene in) animal health
outbreaks, avoid social damages, etc.
The
veterinarians
Veterinarians employ their time and competence for interventions in clinic or in the field. This is
their profession;
→ They spend money to move around, to manage vet office or hospital, update or improve their
scientific knowledge.
Society as a
whole
Society cares to avoid disease transmission, food scare and similar events that may cause
losses of social welfare (in term of health, revenue, insecurity)
→ Individuals may face costs to restore welfare.
20
2 – Costs in relation to animal health
Chapter 4
Which role does each actor play in
animal health?
 Different actors play different roles in animal health
o Any role comes with some functions to be developed
o To develop a function, actors must use resources and face costs
21
2 – Costs in relation to animal health
Chapter 4
Which costs are related to each
actor/role/function?
 When actors spend money for animal health, what do they materially buy?
Actors
Individual
owners
Public
institutions
Costs
Producers: animals, buildings, feed, drugs, machinery, management,
consultancy, workers, ....
Families: feed, drugs, recovery, consultancy
Veterinarians, supporting staff, labs’ materials, ....
Veterinarians
Vet’s time, staff, office, medical facilities and equipments, surgery
room, microscope, ....
Society as a
whole
Life quality (safe food, health insurance, wild animals preservation, ...)
22
2 – Costs in relation to animal health
Chapter 4
A simple exercise
 Could you find out similarity and differences among the resources mentioned
in the previous table?
 Which criteria do you use to determine similarity and differences?
 Are these criteria relevant on an economic perspective?
Economics looks at how inputs generate costs
and classify costs according to
cost generating mechanisms
23
Section 3: Cost generating mechanisms
3.1 - Costs and production
3.2 - Investments
3.3 - Costs over time
3.4 - Economic and financial aspects of costs
3.5 - Cost functions
3.6 - Average cost and economies of scale
3.7 - Organizational options
24
Chapter 4
3.1 Costs and production
25
3.1 - Costs and production
Chapter 4
Input use and production
One of the most relevant mechanism of cost generation
is the relationship between input use and production increase
 Two situations can be exemplified
 Mr. Farmer buys feed for his cow
 More feed > More cost > More milk
 Mr. Farmer buys a tractor for 100.000 €, to be used during the next 10
years
 The value of the tractor decreases along this period at the rate of 10.000
€/year: this amount is related to machine availability for Mr. Farmer, and does
not depend if Mr Farmer uses the machine 3 or 15 hours/day
What is the difference between these two types of cost?
26
3.1 - Costs and production
Chapter 4
Variable and fixed costs (I)
 Variable costs
 Variable costs are costs that change depending on variations in
the size of the activity: they increase with the increase of
production and decrease when production is reduced;
 Common examples of variable costs are given by the use of
inputs entirely consumed in one production cycle; e.g. in milk
production variable costs may consist in expenses for:
•
Feed
•
Veterinary assistance
•
Fuel
•
Hired labour paid per hour, day, or
unit of product
•
Electricity (only the elements related •
to consumption)
•
Drugs
•
Rent of machinery
•
Fertilizers, seeds, and pesticides for
forage crops
etc…
27
3.1 - Costs and production
Chapter 4
Variable and fixed costs (II)
 Fixed costs
 Fixed costs are costs that do not vary in the short term, even
though the business’ activity, production volume and sales are
significantly reduced;
 Some common examples of fixed costs are:
•
Depreciation of tangible assets
(machinery, buildings, tools, office
equipment, etc.)
•
Salaries paid to permanent
employees of a company
•
Amortization of intangible assets
(patents, trademarks, etc.);
•
Rents paid to landlords for the use
of real estates
•
Interests paid on loans used to buy
assets
•
Premiums paid for insurance on
assets
•
Property taxes
•
etc...
28
3.1 - Costs and production
Chapter 4
Similarity among production processes
 Fixed and variable inputs are used in any production context
 Mr. Vet spends 0.50 € for each cat vaccination kit
 More vaccinations > More cost > More client served
 Mr. Vet obtains a loan to buy the equipment of a surgery room
 He will pay 1,000 €/month for 8 years
 Either he uses the room for 7 or 15 surgeries per month, the bank will ask him
1,000 € every month over 8 years
A relevant aspect of cost analysis is the ability to distinguish between
variable and fixed cost in any context
and understand the consequences for management
29
Chapter 4
3.2 Investments
30
3.2 - Investments
Chapter 4
Fixed costs and investments
 An investment is time, energy, matter,
money... resources spent once on
expectation of future benefits.
money
revenue
 Some example:
Your training: you spend money and time
learning a lot during 6 years; your hope is
that you will have a job and revenues
during the next 40 years.
1-6
7-47
time
time & money
spent for
training
money
Revenues from farmers
As a vet, you buy a car on year 1 to visit
farmers. You get money from your work
for several years thanks to your car.
1
2
3
4
time
money spent
for the car
31
3.2 - Investments
Chapter 4
Investment and uncertainty
 An investment is made on the basis of a subjective evaluation on future
activities, but nobody can exactly know what level of activity there will be in
the future. Suppose that:
You stop working to take care of your
children (and you didn’t plan it!)
A new vet recently installed in the area and he is
very strong with bovines. This reduces your
revenue from farmers ... but you didn’t know
when you bought a new car to visit farmers
abroad
Investment is sunk, you cannot get money/time
back easily. Investment is always affected by
uncertainty on the return on investment.
32
Chapter 4
3.3 Costs over time
33
3.3 - Costs over time
Chapter 4
Depreciation
 The vet’s car of the previous example maintains its functionality for several
years, which define the useful life period of the asset, but it losses value
because of consumption
 As a consequence, the value of the car gradually declines along its useful life period
 This gradual loss of value is the cost related to the availability of the car. It is
called depreciation and corresponds to the purchase value of the car distributed
along its useful life period.
 The accounting of the depreciation cost does not necessarily implies a corresponding
cash outflow in the reporting year (see section 3.4)
34
Chapter 4
3.4 Economic and financial aspects of costs
35
3.4 - Economic and financial aspects of costs
Chapter 4
Costs and cash flows (I)
The economic aspect of cost is related to the consumption of resources for
production activities.
The financial aspect of cost is related to the flows of money generated along time
by production activities.
 In the example of section 3.3, the vet may have two options for buying the car:
 1) He may buy the car with its own money
-
in this case the vet has a cash outflow (area bordered by the red dashed line) for the
whole price of the car at purchase ;
-
if after four years the car needs to be changed and has lost all its value, the cost of the
car depreciation corresponds to the value of the car at purchase, but it is distributed
along the four years of car utilization (grey dashed areas);
-
the vet has a cash outflow when he
purchases the car, but he does not have
any cash outflows when he accounts the
yearly cost of use of the car
money
Revenues
1
2
3
4
time
yearly cost of depreciation
(4 years)
money spent for the car (cash outflow)
36
3.4 - Economic and financial aspects of costs
Chapter 4
Costs and cash flows (II)
 2) A second option is that the vet may borrow a loan from a bank and repay
it in four years:
-
in this case the vet makes use of the bank’s money to buy the car;
-
each year the vet supports the cost of car’s depreciation and also a
corresponding outflow of money which pays back the loan received from the
bank. Moreover the vet also pays the interest due to the bank as price of the
loan;
-
the vet does not have a cash outflow when he purchases the car, but he does
have yearly cash outflows corresponding to the yearly cost of use of the car
money
Revenues
1
2
interest on the
loan (cash
outflow)
3
4
time
yearly costs of depreciation
corresponding to the cash outflow
for loan repayment
37
3.4 - Economic and financial aspects of costs
Chapter 4
Use of inputs, time and payments
The two situations seem to be similar, but have very different implications.
If we suppose that in year 3, for some reason, it happens that the vet’s
customers do not pay the vet services:
 in the second case (the vet has to repay a loan), the vet could be in the
situation that he cannot afford his obligations with the bank …
 … and the consequences may be significantly worse for his future
activity than in the first case (in which he does not have a loan to pay
back).
38
3.4 - Economic and financial aspects of costs
Chapter 4
Economic and financial balances
For any business activity, it is necessary that the value generated by
production (income) be greater than the value of all the inputs consumed
along the production process (costs).
But this is not enough to determine the sustainability of a business.
In fact, it is also necessary that the business activity be always able to satisfy
its obligations to payments in due time.
A correct economic balance implies that a business activity create an income
greater than costs (i.e. the value of production created should be greater than
the value of inputs consumed).
A correct financial balance implies that a business activity be always able to
satisfy its obligations to payments in due time.
Both conditions are necessary to define the sustainability of any business.
39
Chapter 4
3.5 Cost functions
40
3.5 - Cost functions
Chapter 4
Variable and fixed cost functions
 As seen, feed (variable inputs) and tractors (fixed inputs) have
different cost generating mechanisms with production increase;
 The type of fixed assets may limit the production volume
 For example a small tractor may constrain the production. If a farmer wants to
increase the production above a given level, he needs a bigger tractor, which
probably implies higher fixed costs for depreciation.
41
3.5 - Cost functions
Chapter 4
Cost functions, sales and profit
 A consequence of the difference between variable and fixed cost
functions is that, in general:
 a production process characterised by a high proportion of variable costs
may generate a profit with relatively low levels of sales;
 a production process characterised by a high proportion of fixed costs
requires certain levels of sales to generate profit.
But a good endowment of fixed assets may provide other advantages …
42
Chapter 4
3.6 Average cost and economies of scale
43
3.6 - Average cost and economies of scale
Chapter 4
Total cost, average cost, production volume
 The analysis of production costs may provide information on how costs
change in relation to production volume
 Think to a surgery room: how does cost change with utilization? And why?
Inputs
Cost of
inputs
Production
cost for
50 h/year
Production
cost for
1,000 h/year
Vet staff work and
other variable
inputs
130 €/hour
6,500 €
130,000 €
Use of surgery
room (fixed input)
7,500 €/year
The cost per unit of product
7,500 €
7,500 €
(average cost) can be reduced if
Total cost
14,000 €
137,500 €
the use of the equipment is
Cost of surgery (€/hour)
280 €/hour
137.5 €/hour
optimized.
These are called
ECONOMIES OF SCALE
44
3.6 - Average cost and economiesChapter
of scale
4
Economies of scale
 Economies of scale may abate the average production cost of goods and
services and may be specially effective in large production units;
45
Chapter 4
3.7 Organizational options
46
3.7 - Organizational options
Chapter 4
Different options for the use of a machine
 Mr. Farmer owns the machine he uses at farm
 He did an investment years ago and repays a loan (fixed cost)
 Mr. Vet bought an ultrasound machine
 As in the case of Mr. Farmer, he has to repay a loan
 Both of them are in trouble
 They realized that their investments are oversized with respect to the
use they actually do. They want to get rid of them, but they also want to
use machine when they have need.
How can they do? What are the consequences?
 In term of cost, this problem has two faces.
47
3.7 - Organizational options
Chapter 4
Turning a fixed cost into a variable cost is
possible
 Investments can be dismantled and machinery and equipment can
be rented
 In this case, the cost generation mechanism changes
 The purchase of machinery and equipment generates fixed costs
 The renting of machinery or equipment generates variable costs
The choices related to the use of a fixed input
may actually turn a fixed cost into to a variable cost
48
3.7 - Organizational options
Chapter 4
The mechanism generating cost changes
For a production level corresponding to Y the renting of the asset allows
a profit, while the cost of an owned asset generate losses (it would be
rentable only for a Y’ production level)
But... you must consider
that some costs are not
reversible...
49
3.7 - Organizational options
Chapter 4
Sunk costs related to investments
 The shifting from owning to renting the machinery implies that Mr Farmer
and Mr Vet dismantle their investments;
 The dismantling of investments generates losses: there are costs which
cannot be recovered:
 For the investment, they borrowed a 10,000 € loan from the bank, they have to pay
back 2,000 €/year in 5 years;
 At year 2 they dismantle the investment, they sell the equipment for 4,000 € cash;
 The net loss of dismantling is 2,000 € (at the least!), resulting from:
- Cash from equipment sale = + 4,000 €;
- Remaining loan payments (3 years x 2,000) = - 6,000 €
Dismantling investments may generate costs that
cannot be recovered or SUNK COSTS
50
3.7 - Organizational options
Chapter 4
Many costs are difficult to be attributed to
specific activities
 Direct vs indirect costs
 When the use of an input is clearly related to a specific activity/product, it
generates a Direct Cost;
 Common examples of direct costs are the materials consumed
exclusively for a specific process
•
feed, drugs, and veterinary assistance used for diary cows are direct costs of
milk production
•
kits used for vaccination are direct costs of vaccination, etc.
 However it is difficult to attribute every input to a specific process,
especially when the activity of the business is diversified
 The costs that cannot be associated to a specific process or activity are
Indirect Costs. The aggregate of a business’ indirect costs is commonly
indicated as Overheads
51
3.7 - Organizational options
Chapter 4
Overheads
 Common examples of overheads
are the costs related to business
administration, use of fixed assets,
utilities, taxation of assets, etc.:
 Salary of management and
administration employees
 Office supplies and consumables
 Depreciation of office equipment;
 Rent of facilities
 Telephone and other utilities
 The possibility of identifying direct
costs or attributing overheads to a
specific activity depends largely
from the accuracy of the
accountancy system
 The identification of direct costs is
important (e.g.) to evaluate the
economic feasibility of a given
activity and in general for decision
making within a business
 Equipment maintenance
 Property tax
 etc…
52
Chapter 4
Section 4: From private costs to social costs
53
4. From private costs to social costs
Chapter 4
Individual behaviour and social costs
 Mr Farmer breeds pigs. Consumers are happy with pig meat. But Mr
Farmer’s neighbours are not happy with other “by-products” of Mr Farmer’s
activity: air pollution, water pollution, noise, pig smell, etc.:
 They should keep the windows closed even during summertime;
 They should install air conditioning and water filtering at home;
 Their kids cannot use the garden.
Which are the economic consequences of Mr Farmer’s behaviour? How
far and in which ways people and society may be damaged by Mr
Farmer’s behaviour?
 Mr Farmers neighbours should support unwanted costs due to Mr Farmer’s
activity, they are limited in the use of their facilities and their houses lose
value … but they do not receive any kind of compensation for that!!!
They suffer the externalities of Mr Farmer activity.
54
4. From private costs to social costs
Chapter 4
Externalities may generate benefits and costs
 Any production activity generates externalities.
 Externalities can be positive or negative
 Pig meat satisfies consumer’s need (it contributes to food security)
This is a positive externality
 Pigs breeding creates pollution and other problems (it deteriorates
neighbours’ quality life)
This is a negative externality. To restore their quality of life,
neighbours must afford additional costs
Negative externalities from any production activity
impose unwanted costs to some social categories
55
4. From private costs to social costs
Chapter 4
Dealing with (negative) externalities
 Externalities (especially the negative ones) challenge economists
because they are difficult to evaluate
 Pig meat produced by Mr Framers is sold to consumers. Its value is easily
identified by a market mechanism (there is a demand and there is a supply: the
market establishes the price). Unfortunately, this is not always the case...
 Some externalities are not valued through a market mechanism. This
makes difficult to assess the value in monetary terms
No market means no price. But no price doesn’t mean no VALUE!
 Some externalities are far reaching, their effects are not immediately
visible or tangible. They may hit the socio-economic system in different
ways and far away from the origin of the problem.
A careful understanding of the cause-to-effect chain
within the socio-economic system is required
56
4. From private costs to social costs
Chapter 4
The case of Aflatoxins
 Aflatoxins are Mycotoxins found, among others, in maize. When this
enters the food chain, it may endanger animals and, more seriously,
human health.
 Aflatoxins are dangerous for humans and animals when contaminated maize is
consumed directly as food or feed.
 By-products of Aflatoxins digestion in animals are found in animal food (meat, milk,
eggs) and affect humans increasing the exposure to cancer risk in the long run.
 Damages of minor entity (general pain, production reduction) are also found in
animals, depending on the species.
 What are the consequences of an Aflatoxins contamination when it
affects the food chain?
Are consequences readily assessed? How do they flow in the socio-economic
system? Are they easily valuable?
57
4. From private costs to social costs
Chapter 4
Cause-to-effect chain in the Aflatoxins case
58
4. From private costs to social costs
Chapter 4
The Aflatoxins case in few words
 Depending on the specific transmission chain of the contaminant
agent...
 Direct ingestion of contaminated food
 Use of contaminated feed by animals, and transmission of digestion by-products into
food
 ... the effects flow from the producers...
 Producers may suffer marginal production and revenue losses
 ... to

consumers, ...
Consumers are more seriously exposed to health risk, which translate in food
insecurity, increased medical expenses,
 ... to the whole society
 More public money will be allocated to food controls, public health services, public
information, preventative measures
 Production and revenue losses will reduce the social welfare.
59
4. From private costs to social costs
Chapter 4
Lessons learnt about externalities and costs
 In economic terms, production makes sense because it creates benefits not
only for producer but also for the society (food availability, social welfare).
These are positive externalities
 On the others side, production can also create bad outcomes (e.g.
unexpected health risk) or negative externalities
 Externalities are costs that are not taken into account by producers but are
suffered by other categories or the whole society (unless corrective devices
are applied)
 In this sense, externalities are often cross-sectional cost as they are
transmitted from one social category to another (producers vs. consumers)
 Externalities may reduce resources availability for the next generations (like
in the case of pollution). In this sense they are time-sectional costs
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Chapter 4
Now you know about cost concepts and tools…
…How can this help?
 As a professional vet, your are advising Mr. Farmer about the way to solve
mastitis diffusion among his cows. Two solutions are possible:
 Improve the milking practices, or change milking devices
How will Mr. Farmer take a decision?
 A resilience of avian flu in the River Po Plane is a credible risk. Two solutions
are possible:
 Preventive vaccination of all hens, or accept the risk and prepare the stamping
out of infected animals
How will national health authority decide?
These are management problems. Cost concept is a good
basis to approach them but you need to know more.
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Contacts
Maurizio Aragrande, Massimo Canali
DISTAL, University of Bologna
Florence Beaugrand
ONIRIS, Nantes
[email protected]
[email protected]
http://www.neat-network.eu
[email protected]
http://www.neat-network.eu
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