Internal cost is synonymous with Private cost, representing the cost paid by an economic actor in order to produce or obtain a specified amount of a product. These are the costs that are directly borne by the entity undertaking an activity, as opposed to external costs that are experienced by other parties.
In Life Cycle Assessment and economic analysis, internal costs encompass all expenses that appear in the conventional accounting of the economic actor. This includes expenditures on raw materials, labour, energy, equipment, and other production factors that are paid for directly by the organisation conducting the activity. These costs are reflected in market prices and form the basis of traditional financial accounting.
The distinction between internal and external costs is fundamental to understanding the full economic and environmental impacts of activities. Whilst internal costs are captured through market transactions and appear in financial statements, external costs represent burdens imposed on others without compensation through market prices. Together, internal costs and external costs comprise the social cost of an economic activity.
In the context of Environmental Life Cycle Costing (LCC), internal costs represent the monetary flows that are directly covered by actors within the product life cycle. The LCC methodology focuses on these internal costs whilst maintaining consistency with the system boundaries of environmental LCA as prescribed by the ISO 14040 series. When externalities are anticipated to be internalised in the decision-relevant future, they may be included in the LCC analysis, though care must be taken to avoid double-counting when combining LCC with monetised Life Cycle Impact Assessment results.
Understanding internal costs is essential for comprehensive sustainability assessment, as it provides the foundation for comparing private economic incentives against broader social and environmental considerations.
