Externalities

Description

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/)