The second is the external cost in pollution, use of natural resources and energy that went into making the pencil. These costs can be to the environment, or to peoples health, but are extremely difficult to put in direct money terms. It might be possible to reduce the external costs of making the pencil by fitting pollution abatement equipment, using vegetable based paints or cutting down the timber by hand. But many of these changes will involve additional costs. Put crudely, reducing the external cost usually means increasing the internal cost , making the pencil more expensive.
Environmental regulation is one way of making sure that some of the external costs are internalised.
But there is a balance to be struck that allows the environment and public health to be protected whilst still allowing industry to produce goods that people can afford. The process is one of increasingly tight waste controls and increasingly internalised costs. And today we have some of the tightest environmental legislation in the world which should help to give us one of the cleanest environments. And environmental management has become an increasingly important issue for industry. Environmental Management Systems are a useful tool.