What it is:
An abatement cost refers to the cost associated with the voluntary or compulsory removal of an undesirable result of a production process.
How it works (Example):
In many instances, companies produce goods or services that directly or indirectly result in a byproduct that may be medically or environmentally dangerous. This can be an indirect result of a cost-cutting measure to increase productive efficiency. Should governmental or regulatory authorities determine that a production process has hazardous side effects for the community at large, these authorities may require a company to eliminate or, at least reduce the incidence thereof. The cost to a company associated with reengineering the production process (whatever that may entail) for this purpose would be the abatement cost. For instance, if a company must begin using a more expensive raw material in order to reduce the amount of mercury released into the local environment, the additional cost would be the abatement cost.
Why it Matters:
Abatement costs are often an indirect outcome of government-imposed regulations intended to benefit the greater community and environment. To this end, they represent, albeit by necessity, a source of economic inefficiency similar to a tax.