No, this time we are not being sarcastic. Externalities are indeed an evil process if evil indeed exists.
DEFINITION
The term externality comes from the Latin prefix exter which means “outside of”. In economic terms, the word means:
a cost or benefit affecting somebody which is outside of (as in not being part of) an economic transaction.
An example of a positive externality is when there is good student in a class and through example leads other students to better themselves.
An example of a negative externality when somebody dumps used motor oil in the sewer; massively contaminating sewer water and forcing treatment plants to use more resources and time to clean it up.
Normally, positive externalities (those conferring benefits) are not a problem. The negative ones (those creating expenses) on the other hand, are. In this piece we will use the term externality in it negative connotation.
BROADER VIEW
In general terms, externalities are associated with ecology because it is most frequent use. Typically, companies would dump solid, liquid or gas residues and waste into the environment beyond their properties, hence affecting other people’s properties.
In this context, the externality problem can be summarized with the following picture:
The Company XYZ dumps pollution into property A. Pollution then seeps from property A into properties B, C, D, E and F.
The key question is who pays for the clean-up?
WAR - THE ULTIMATE EXTERNALITY
War is the ultimate externality because it externalizes not only money but lives. Politicians take the risk that you may die in order for them to profit and benefit.
Consider it for a second. In a war (of aggression of defense) politicians send other people to die in order to either protect their jobs or obtain a gain. Although it is true that in a war of defense, the defenders are also protecting other peoples’ properties, the whole story is not that simple.
The fact that politicians can externalize almost all risks (your money and your lives) is what makes wars possible. If politicians would not be able to externalize them and would be forced to take arms and fight with their hands, they would not do it. It is their zero cost that makes them possible. If they would to have to pay full price for wars, they would not do it.
Politicians would not start wars if they would be forced to fight themselves, in which case there would not be any need for defensive wars!
CURRENT SYSTEM
In the current system this is possible because of the existence of two types of properties:
- International
- Public
International properties
What we mean by “international” are properties that are in either no-man’s land (such as oceans beyond national border or Exclusive Economic Zones) or the atmosphere or under dispute (such as Antarctica).
Companies overfish or dump toxic waste in the bottom of the ocean (governments did this a lot with radioactive refuse). These types of properties are common targets for externalities simply because there are no rules.
The so-called “international law” is more of a best effort set of formulaic conventions than an actual, enforceable law. In addition, it deals mostly with relationships between countries or with people when outside of country boundaries and in no-man’s land. It is not designed to deal with property issues (whit a few minor exceptions such as salvage operations).
In this case, property A (from the graph above) is an international property for which nobody is responsible. Therefore there is an insulation layer between the Company XYZ and Properties B, C, D, E and F. For example, it is exceedingly difficult (if not impossible) to sue Company XYZ for dumping in international waters. In any case, there is zero expense for the company.
Public properties
These are properties belonging to governments. Some are dedicated to public use such as parks and recreation facilities, and some are dedicated to defense (such as military bases) or civilian use (such as airports).
Although government laws technically apply, their enforcement varies widely. For example, if a person would try to dump toxic waste in an airport, it would be arrested immediately. On the other hand, if this very same person would perform the dump in the middle of a regional park, many kilometers from nowhere, chances are very good this person won’t be caught.
Furthermore, there is yet another type of externality on public property. Planned ecologic devastation. Consider this example. Many governments allow for timber harvesting in public properties through a license and a gigantic fee. These harvesting rights usually come with re-seeding an re-planting conditions. However, these conditions are mostly ignored or performed with deliberate inferior quality. Why? Because it is a vast expense; not to mention that it is in the harvesting company best interest not to leave anything useful for their competitors. These companies can get away with it because of lack of enforcement of loose contractual conditions or plain old bribery.
In this case, Property A is public property. If the Company XYZ dumps illegally and it is not caught, there are no repercussions and the company does not have to pay for the clean-up. If the Company XYZ dumps legally, then the government takes over the toxic waste and the government (i.e. you, us, and every other taxpayer) pays for the clean-up. In any case, there is zero expense for the company.
In summary
Externalities exist in the current system because there are no clear rules and when they exist, they are not enforced, and when they are enforced, they are so shoddily or bribed away.
This is the root cause of most ecological issues. It costs a company zero or near-zero expenses to pollute other people and other peoples’ properties.
Note: please see the Glossary if you are unfamiliar with certain words.
Continue to Evil externalities - Part 2
