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The Greening of Industrial Ecosystems
It is sometimes assumed that in business, as in other endeavors, more information is better than less. If so, then we should expect to find that managers routinely request and receive finely detailed cost accounting data, including breakdowns by product line of "overhead," or pooled, costs that are not direct costs of manufacturing. However, detailed breakdowns of manufacturing total cost are relatively rare. Common reasons given for the lack of such detailed cost information include difficulties in attributing so-called joint costs, costs that are shared by a variety of product lines, for example, heating costs for a large manufacturing facility; the expense of tracking and collecting numerous such costs on an individual product line basis; and, in some cases, the technical difficulty of measuring product-specific material flows and emissions. Another reason, however, relates to responsibility for costs and the use of such accountable costs in management compensation contracts as well as in cost-based product pricing formulas.
We will first consider the issue of detailed costs and management compensation. If manufacturing costs can be individually attributed to products, then managers may be held responsible for controlling the costs, and such controllable costs may well be used in profitability calculations used in management incentive compensation formulas. Thus, managers may have an incentive not to request and use the most detailed information that could be made available to them. The unrequested information may well include costs of environmental wastes, recycling and reprocessing, site remediation, and contingent liabilities.
The second problem, cost-based market pricing formulas for products, leads to the possibility that at least some of the firm's products may be found to be unprofitable to produce if all of the costs associated with their manufacture are properly attributed to the product. This would seem a simple problem with a straightforward solution: just discontinue the product. Such products may, however, account for a relatively large portion of the revenues of the firm and their discontinuance would mean loss of "market power" for the firm as well as prestige for the managers of products.
Another difficulty that managers of firms face, particularly senior management, is the confidentiality of highly sensitive information, especially that related to potentially costly contingent liabilities and regulatory constraints. That is to say, managers would have an incentive to discourage broad dissemination, even within the firm, of information deemed to have a potential negative effect on the fortunes of the firm and, consequently, the managers. In this case, the perceived risks to the firm and the managers would outweigh the possible long-term benefits from accumulating the information and attempting to control the costs. Thus, managers who may, in general, strongly support efforts to improve the quality of the environment may find that the short-term costs to themselves and their firms may outweigh the benefits.
It is thus apparent that firms, the environmental regulatory authorities, and