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The dismal "science"

Economics

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An externality is a cost or benefit not borne by or given to the one who should rightly have to deal with it.

Contents

[edit] Negative examples

  • Air pollution emitted by a factory that the local residents must suffer as increases in respiratory illnesses.
  • Water pollution from cruise ships damaging stocks of fish in the waters they frequent.
  • Clear cutting a forest, resulting in a landslide without roots or vegetation to support the soil.
  • A neighbor whose house/yard looks like a trash dump, lowering value and attractiveness of the neighborhood.

Just as economists refer to a manufactured item as a "good," they refer to pollution or another negative externality as a "bad."

[edit] Positive examples

  • Vaccinations that reduce the number of infected carriers of certain diseases, so fewer people are even exposed.
  • Businesses around a popular shop/restaurant that see an increase in business as well.

[edit] The problem

The negative examples are the most common, usually dealing with pollution on neighboring populations. The clearest example of this is air pollution. A power plant that emits filthy, sooty smoke is imposing a cost unfairly on its neighbors, instead of bearing it itself. This causes overproduction and overuse of resources that could be more efficiently used elsewhere (such as clean air), since the one making the product does not suffer the costs of dirtying the air.

No business wants to bear the costs of its externalities, even if they could calculate an objective cost, as they increase the cost of production and the price of their product. This is one reason many companies move their factories outside of the US to countries with less stringent environmental laws and regulations. That way they can dump anything they wish into the environment and not give a hoot.

This is one instance where all economists, even the strongest pro-capitalism ones, will agree that government should step in and redistribute the costs in order to keep the economy running at maximum efficiency. This concept is very easy to understand if you're not a libertarian and think everyone should just stop whining.

[edit] External links

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