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Externalities

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The dismal science
Economics
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Economic Systems

  $ Capitalism
  $ Communism
  $ Socialism

Major Concepts
People

An externality is a cost or benefit not borne by or given to the one who should rightly have to deal with it.[1]

Mainstream economists often urge governments adopt policies that internalize externalities, e.g. regulation of pollution and adopting penalties for causing harm to innocent bystanders.[2] Methods used by governments to control externalities include:

  • Taxation
  • Regulations including penalties
  • Allowing redress for parties affected by externalities via tort cases including class action lawsuits

The problem[edit]

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. Corporations — and entire industries — have worked diligently to avoid internalization of externalities because of the large profits that can be made. Methods of avoidance include:

This is one instance where all mainstream 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.

Based on Ronald Coase's 1960 paper "The Problem of Social Cost",[3] libertarian-style anarcho-capitalists such as the Ludwig von Mises Institute have argued that "as long as property rights are clearly defined and transaction costs are low, the individuals involved in these situations can always negotiate a solution that internalizes any externality."[4] This however assumes that information about externalities are shared equally among negotiators, which is often unlikely because a corporation will have both a larger financial ability and preexisting expertise to obtain more information by research, as well as a vested interest to keep that information secret.

Some anti-environmentalists, such as Christopher Horner of the Competitive Enterprise Institute, turn this whole concept on its head, basically arguing that if environmentalists want clean air, etc., they should pay for it.

Environmental policies come with a cost, often to the society as a whole, decreasing wealth, and so harming health. The average environmentalist, however, ignores this danger by assuming the policies' costs will fall on someone else's shoulders (multinational corporations, wealthier people, or if the environmentalist is a European: Americans)… American green activists confront a public that nonetheless remains more skeptical of government and state interventionism than the subjects of the European Union, who readily turn to the state once they are convinced a problem exists. This European faith in interventionism also yields a lower threshold of skepticism to alarmism. That is not to say that Americans are broadly disposed against calling on government to fix something believed to be a problem… Consider the response, or rather lack thereof, of some communities as Hurricane Katrina approached, and the apparent expectation that Washington would take care of it (and then the post-Katrina response of seeking a government-funded rebuild in the same storm-prone, sub-sea level location). If you expect the government to keep you safe from hurricanes while you live on the coast below sea level, you are probably willing to give the government whatever powers it claims to need to control the weather.
—Christopher Horner[5]

Negative examples[edit]

  • 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.
  • Clearcutting 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.
  • Second-hand smoke
  • Global warming — countries and people will be affected disproportionately to the amount that they contributed to global warming
  • Government subsidized healthcare for industry-caused problems, such as from cancer caused by tobacco smoking, asbestos, and coal mining
  • Antibiotic resistance
  • The Holocene extinction,Wikipedia's W.svg an Extinction level event, that will primarily affect people that did not cause it
  • Various Banking crises, caused primarily by subgroups of investors but widely affecting non-investors

Positive examples[edit]

  • Vaccinations that reduce the number of infected carriers of certain diseases, so even fewer people are exposed (herd immunity).
  • Businesses around a popular shop/restaurant that see an increase in business as well.
  • Buying a fuel efficient or electric vehicle, which reduces the demand for (and therefore the price of) gasoline for everyone else.
  • Beekeepers who raise bees for honey will also pollinate nearby crops
  • Educating employees to improve their on-the-job performance will also improve their performance when they move to new employers, and may have other social benefits

See also[edit]

  • Coase theorem — a method of dealing with externalities when certain conditions are met

External links[edit]

References[edit]

  1. Externality by James Buchanan & Wm. Craig Stubblebine (1962) Economica 29(116):371–84. doi:10.2307/2551386.
  2. Environmental Economics for Tree Huggers and Other Skeptics by William K. Jaeger (2005) Island Press. p. 80. ISBN 1559636688.
  3. The Problem of Social Cost by R. H. Coase (1960) The Journal of Law & Economics 3:1-44.
  4. What is an Externality? by Gene Callahan (08/01/2001) Mises Institute.
  5. The Politically Incorrect GuideTM to Global Warming (and Environmentalism) by Christopher Horner (2007) Regnery Publishing. p. 12. ISBN 1596985011.