Ranking Production Facilities

The concept of potential gains can be used to rank production facilities, since it is unlikely to be the case that all facilities capable of producing an output at a specific quantity will do so with the same results for value and cost.

A particular manufacturing plant may have superior production methods and stricter quality controls than others in its industry, resulting in above-average potential value. A specific farm might be extremely careless with pesticides and herbicides, resulting in above-average natural cost.

Because of differences such as these, ENL needs a method for determining which production facilities should be preferred to others. The production of final outputs is considered first. See the two graphs in the follwoing figure.

Ranking two production facilities
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Facilities are ranked according to the potential gains they achieve in producing the assigned quantity of an output.

Facility A and B produce the same output, and both are able to produce quantity Q in a specified period of time. At facility A, however, potential value is higher and input cost is lower than at facility B. This is evident from the larger potential gains area for facility A.

If these are the only two facilities producing this output, production should initially take place at facility A. Only “initially”, because potential gains decrease at the margin, as is evident by the shrinking distance between potential value and input cost in both cases. Once these marginal gains are lower for facility B than for facility A, incremental production should shift to facility B.

If facility A is located at a greater distance from consumers than facility B, more of its output may be spoiled or destroyed en route, and more natural cost may be incurred through pollution from trains and trucks. The additional output loss would decrease the potential value of A's outputs, and the additional natural cost would increase A's input cost.

ENL considers transportation to be part of the production process. This means that the effects of distance and transportation are already captured by the two graphs and do not alter the ranking.1

Facilities that produce intermediate outputs must also be ranked. Examples include the production of coal, trucks, and fuel for ships. Because potential value is absent in such cases, potential gains cannot be used, and the ranking must be based entirely on input cost.

For example, an iron mine that produces a specific quantity of iron with the lowest number of worker injuries and deaths, and with the least habitat destruction and other environmental damage, will have the lowest input cost. This mine will thus contribute least to the life-cycle input cost of the associated final outputs.

On the assumption that this mine uses the same input quantities as other mines, it would initially be the preferred iron producer in an ENL-driven economy.


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