When producing goods and services, firms take certain measures to avoid damaging or harming the environment they operate in. There are many ways in which this can be done, improving pollution control mechanisms, retrofitting inefficient equipment, increased compliance monitoring etc. When firms invest funds into these measures, it is a cost to the firm as they have to pay for new equipment or programs. The cost of reducing the degree of pollution or emissions that can produce harmful effects is called the cost of avoidance or avoidance cost.
One way to look at avoidance cost is the total amount paid to avoid doing damage to the environment. For example, many cities have street-side recycling that is collected by a recycling company, a household pays to buy a blue bin to deposit their recycling in and then pays a monthly fee for the company to collect the bin. The monthly fee and bin cost are examples of avoidance costs as recycling reduces solid waste pollution in landfills and reduces the need for new raw materials.
If a coal fired power plant buys and installs a new electrostatic precipitator (figure 1) to reduce the amount of particulate matter the amount of money the firm pays to buy and install the unit is considered an avoidance cost.
An avoidance cost can also be considered an opportunity cost. The money that the firm spends on new measures could be spent on other investments in the firm. The firm could put the money toward increasing production. Because the firm does not use its funds to expand production and instead uses it to buy a unit that wont increase profits (expanded production would increase profits), there is a lost opportunity to make more money.
This makes the product more expensive, the higher price reflects the true cost of production. The cost of avoidance accounts for the negative effects of pollution, because of this it is a socially efficient activity. The high cost reflects both the private cost of production that the firm pays and the social cost created by the pollution. One example of the social cost of pollution is the higher cost to healthcare systems from increased respiratory illnesses.