Externality

Description

0. Andrea Farias:

"Externality = cost outside of the balance sheet = stealing from the commons.

• Physical externality: damage to human or planetary bodies

• Psychosocial externality: incentivize humans to act differently to get the advantages of using the tech. Changing behavior changes the human mind."

(https://diome.xyz/2+%F0%9F%8C%BF+Leaves/Externalities)

1.

From the Wikipedia at http://en.wikipedia.org/wiki/Externality

"In economics, an externality is a side effect from one activity which has consequences for another activity but is not reflected in market prices. Externalities can be either positive, when an external benefit is generated, or negative, when an external cost is generated from a market transaction.

An externality occurs when a decision causes costs or benefits to stakeholders other than the person making the decision, often, though not necessarily, from the use of common goods (for example, a decision which results in pollution of the atmosphere would involve an externality). In other words, the decision-maker does not bear all of the costs or reap all of the gains from his or her action. As a result, in a competitive market too much or too little of the good will be consumed from the point of view of society. "

2.

"An external economy (diseconomy) is an event which confers an appreciable benefit (inflicts an appreciable damage) on some person or persons who were not fully consenting parties in reaching the decision or decisions which led directly or indirectly to the event in question.' Mead (1973)

An externality exists when one individual's production (or consumption) affects the production process (or well-being) of another, in the absence of any market transaction between them.

Externalities may be positive (conferring benefits) or negative (imposing costs). They may also be either uni-directional (where A imposes an externality on B, but B does not on A), or bi-directional (where A imposes an externality on B, and B likewise on A)."

(http://appropriatesoftware.net/wiki?PositiveExternality)

3. Joshua Nelson:

"An externality is a unintended by-product that occurs in a market from another process. These side effects could be negative or positive. For instance, say I am a bee-keeper and I come to your neighbor’s property to pollinate his orchard. There is a good chance that some of my bees will pollinate your plants as well. You didn’t pay for my service, but you are inadvertently receiving benefit of it. That is a positive externality.

On the flip side, say there is a city water plant and upstream a new coal power plant is built. When that coal power plant starts leeching mercury into the river the city water planet takes it in (coal accounts for most of the mercury in our waterways). The coal power plant is not paying to filter this mercury out, nor is it paying for all the damage that could occur from the toxin leeching into the ecosystems. Unchecked, this could be a very negative externality.

Unfortunately, because the producer does not pay for the negative, or receive funds for the positive, externalities these are often left out of the decision of whether or not to pursue the activity in question. If these externalities are eliminated by charging or compensating for activities, then they become factors in the decision making process. This is especially important for the negative externalities – all too often these become costs placed upon the society instead of the producer (e.g. the city water plant in the above example has to filter out the mercury from its water source). If these prices were quantified in some way they would eventually make coal production to costly to be worthwhile." (http://www.steadystateblog.org/externalities-and-valuing-non-market-goods/)

Discussion

David Bollier:

"“Economic externalities” are another set of costs that are not borne by buyers and sellers, but instead shifted to the commons. It is typically cheaper for a company to dump pollution into the atmosphere and to dump radioactive wastes in the ground than to clean them up (or “internalize” the costs). These economic externalities are unacknowledged costs of market activity – costs that are typically borne by the commons.

A commons-based economics, then, would take proper account of the full costs of market activity by recognizing its hidden subsidies and unacknowledged (social, environmental and moral) externalities."

(http://www.boell.org/downloads/Bollier_Commons.pdf)

Funding and costing externalities

Peter Barnes:

"EXTERNALITIES are a better-known concept than common wealth. They’re the costs businesses impose on others—workers, communities, nature and fu­ture generations—but don’t pay themselves. The classic example is pollution.

Almost all economists accept the need to “internalize externalities,” by which they mean making businesses pay the full costs of their activities. What they don’t often discuss are the cash flows that would arise if we actually did this. If businesses pay more money, how much more, and to whom should the checks be made out?

These aren’t trivial questions. In fact, they’re among the most momentous questions we must address in the twenty-first century. The sums involved can, and indeed should, be very large—after all, to diminish harms to nature and society, we must internalize as many unpaid costs as possible. But how should we collect the money, and whose money is it?

One way to collect the money was proposed nearly a century ago by British economist Arthur Pigou, a colleague of Keynes’ at Cam­bridge. When the price of a piece of nature is too low, Pigou said, government should impose a tax on using it. Such a tax would reduce our usage while raising revenue for government.

In theory Pigou’s idea makes sense; the trouble with it lies in imple­mentation. No western government wants to get into the business of price-setting; that’s a job best left to markets. And even if politicians tried to adjust prices with taxes, there’s little chance they’d get them “right” from nature’s perspective. Far more likely would be tax rates driven by the very corporations that domi­nate government and overuse nature now.

An alternative is to bring some non-governmental entities into play; after all, the reason we have externalities in the first place is that no one represents stakeholders harmed by shifted costs. But if those stakeholders were repre­sent­ed by legally accountable agents, that problem could be fixed. The void into which externalities now flow would be filled by trustees of common wealth. And those trustees would charge rent.

As for whose money it is, it follows from the above that payments for most externalities—and in particular, for costs imposed on living creatures present and future—should flow to all of us together as beneficiaries of common wealth. They certainly shouldn’t flow to the companies that impose the exter­nalities; that would defeat the purpose of internalizing them. But neither should they flow to government, as Pigou suggested.

In my mind, there’s nothing wrong with government taxing our individual shares of common wealth rent, just as it taxes other personal income, but government shouldn’t get first dibs on it. The proper first claimants are we, the people. One could even argue, as economist Dallas Burtraw has, that government capture of this income may be an unconstitutional taking of pri­vate property."

(http://evonomics.com/dont-ditch-capitalism-tax-extractive-side-effects-fuel-growth-barnes/)

On the necessity to internalize costs

From chapter 10 of Sacred Economics:

Charles Eistenstein:

"Externalized costs are costs of production that someone else pays. For example, one reason vegetables from California's Central Valley are cheaper to buy in Pennsylvania than local produce is that they don't reflect their full cost. Since producers are not liable to pay the current and future costs of aquifer depletion, pesticide poisoning, soil salinization, and other effects of their farming methods, these costs do not contribute to the price of a head of lettuce. Moreover, the cost of trucking produce across the continent is also highly subsidized. The price of a tank of fuel doesn't include the cost of the pollution it generates, nor the cost of the wars fought to secure it, nor the cost of oil spills. Transport costs don't reflect the construction and maintenance of highways. If all these costs were embodied in a head of lettuce, California lettuce would be prohibitively expensive in Pennsylvania. We would buy only very special things from faraway places.

Many industries today can only operate because their costs are externalized. For example, statutory caps on liability for oil spills and nuclear meltdowns make offshore drilling and nuclear power profitable for their operators, even as the net effect on society is negative. Even if BP goes bankrupt trying, there is no way the company will, or can, pay the full costs of the spill in the Gulf of Mexico. Society will pay the costs, in effect transferring wealth from the public to the company's investors.2 Any industry with the potential for catastrophic losses is essentially enacting a transfer of wealth from public to private hands, from the many to the few. Those industries operate with free insurance. They get the profits, we assume the risks. It is also so in the financial industry, where the largest operators can take huge risks knowing that they will be bailed out if those risks fail. Externalized costs render economical things that are actually uneconomical, such as deep-sea oil drilling and nuclear power.

The elimination of externalities thwarts the business plan of the ages: "I keep the income and someone else pays the costs." I fertilize my field with nitrogen fertilizer, and the shrimp fishermen pay the cost of eutrophication downriver. I burn coal to make electricity, and society pays the medical costs of mercury emissions and the environmental costs of acid rain. All of these strategies are variations on a theme I've already described: the monetization of the commons. The capacity of the earth to absorb various kinds of waste is a form of commonwealth, as is the richness of the soil, the seas, and the aquifers. The collective leisure time of society might be considered a commons as well, which is depleted when polluters make messes for everyone else to clean up.

"I keep the income, and someone else pays the costs" reflects the mind-set of the separate self, in which your well-being is fundamentally disconnected from mine. What does it matter what happens to you? If you are poor, or sick, or in prison, what does that matter to me, as long as I sufficiently insulate myself from the social and environmental toxicity out there? What does it matter to me if the Gulf of Mexico is dying under an oil slick? I'll just live somewhere else. What does it matter to me that there is a thousand-mile-wide gyre of plastic in the Pacific Ocean? From the perspective of separation, it doesn't matter -- in principle we can insulate ourselves from the effects of our actions. Profiting by externalizing costs is part and parcel of that perspective. But from the perspective of the connected self, connected to other people and to the earth, your well-being is inseparable from my own because you and I are not fundamentally separate. The internalization of all costs is simply the economic embodiment of that principle of interbeingness: "As I do unto others, so I do unto myself."

Internalizing costs also reflects the perceptions of a gift culture. In the circle of the gift, your good fortune is my good fortune, and your loss is my loss, because you will have correspondingly more or less to give. From that worldview, it is a matter of common sense to include damage to society or nature on the balance sheet. If I depend on you for the gifts you give me, then it is illogical to enrich myself by impoverishing you. In such a world, the best business decision is the one that enriches everybody: society and the planet. A sacred economy must embody this principle, aligning profit with the common weal.

Understanding this principle, some visionary businesspeople have attempted to realize it voluntarily through concepts like the "triple bottom line" and "full-cost accounting." The idea is that their company will act to maximize not just its own profits, but the aggregate of people, planet, and profit -- the three bottom lines. The problem is that these companies must compete with others who do the opposite: export their costs onto people and the planet. The triple bottom line and full-cost accounting are useful as a way to evaluate public policy (because they include more than just economic benefits) but when it comes to private enterprise, the first two Ps often run counter to the third. If I am a fisherman trying to fish sustainably, competing with industrial trawlers with hundred-mile-long nets, my higher costs will render me unable to compete. That is why some means is needed to force the internalization of costs and integrate the triple bottom line into a single bottom line that includes all three. We cannot merely hope that people "get it." We must create a system that aligns self-interest with the good of all.

One way to bring externalized costs (and externalized benefits) onto the balance sheet is through cap-and-trade systems and other tradable emissions allowances.3 Although such systems have borne mixed results in practice (sulfur dioxide ceilings have been relatively successful, while the EU's carbon credits have been a disaster), in principle they allow us to implement a collective agreement on how much is enough. "Enough" depends on the capacity of the planet or the bioregion to assimilate the substance in question. For sulfur dioxide, Europe and America might have separate ceilings to control acid rain; Los Angeles might have its own ozone or nitrous oxide ceiling; the planet might have a single CO2 and CFC ceiling. Enforcing aggregate ceilings circumvents Jevon's paradox, which says that improvements in efficiency don't necessarily lead to less consumption but can even lead to greater consumption by reducing prices and freeing capital for yet more production."

(http://www.realitysandwich.com/sacred_economics_chapter_10)