Externalities Essay ⋆ Environment Essay Examples ⋆ EssayEmpire

This Externalities Essay example is published for educational and informational purposes only. If you need a custom essay or research paper on this topic, please use our writing services. EssayEmpire.com offers reliable custom essay writing services that can help you to receive high grades and impress your professors with the quality of each essay or research paper you hand in.

An externality, according to economic theory, is a negative or positive impact of a market transaction on people not involved in that transaction (i.e., neither the buyer nor the seller). An example of a positive externality is the construction of a beautiful building that adds to the attractiveness of a city. Environmental issues usually involve negative externalities, however, including air and water pollution, waste disposal, degradation of ecosystems, depletion of natural resources, and adverse impacts on human health. The main impact of externalities may occur at the time of the transaction, or later, such as acid mine drainage from abandoned coal mines.

Many economists regard externalities as an exception in economic activity. However, environmentalists disagree, because virtually every economic transaction involves the manipulation of natural resources, which are eventually returned to nature as waste, with an increase in entropy. The primary response by economists to this problem has been the call for “internalizing externalities.” If every resource is owned by someone, then all costs of economic production will be internalized. For example, if people own clean air, then polluters must pay them for polluting the air, the costs of air pollution will be internalized by the polluters, and passed on to consumers of the products they manufacture.

Furthermore, according to Ronald Coase, it does not matter whether people have the right to a clean environment or polluters have the right to pollute and must be compensated for not polluting-as long as such rights are assigned, negotiations between polluters and the polluted will lead to an economically optimum amount of pollution. This optimum exists when further reduction of pollution would cost more than the benefits (e.g., the dollar value of better health). According to this theory, the government should assign property rights in all natural resources and could then allow the market to determine the amount of pollution. However, a critical caveat is that transaction costs (such as costs of enforcing property rights) must be minimal for this theory to apply.

In the case of nonexcludable resources such as air and water, this is rarely, if ever, the case. Furthermore, Coase’s theory assumes that willingness to pay is an accurate measure of the value of resources to people. This assumption is open to challenge both because poor people cannot pay much even for a resource they value highly, and because, as David Bolliers points out, few people are willing to pay anything for something they regard as stolen property.

Nevertheless, Coase’s ideas have been used in efforts to control air pollution where tradable rights to pollute are given away or auctioned off by the government, leading to more cost-effective pollution control. The government still sets the total amount of pollution to be allowed and enforces compliance, while the market determines which companies invest in pollution control and which methods they choose, allowing costs of pollution reduction to be minimized.

Peter Barnes has proposed that internalizing externalities is a good idea, but that it is important who owns assets such as clean air. He has proposed that such resources be made into the common property of a nation’s citizens and administered by a trust that charges polluters and pays out the proceeds equally to all citizens. An institutional model is provided by a trust in the state of Alaska that distributes some of the state’s oil wealth to its residents. Such a solution would internalize at least some of the externalities associated with resource depletion or degradation, with reasonably low transaction costs.

The notion of internalizing externalities can also be criticized because many if not most externalities can not be quantified in dollar terms because they affect goods that are not traded (e.g., human health and biodiversity), because the magnitude of the impacts is unknown (e.g., how many cancers a toxic chemical may cause), or because the most serious impacts may occur only in the distant future. Furthermore, many externalities involve irreversible effects, such as species extinctions, which cannot be internalized by market mechanisms, and require the involvement of collective institutions such as the state.

Bibliography:

Peter Barnes, Who Owns the Sky? Our Common Assets and the Future of Capitalism (Island Press, 2001);
David Bollier, Silent Theft: The Private Plunder of Our Common Wealth (Routledge, 2003);
Ronald Coase, “The Problem of Social Cost,” Journal of Law and Economics (v.3, 1960);
Herman Daly and Joshua Farley, Ecological Economics: Principles and Applications (Island Press, 2004);
Tom Tietenberg, “Lessons from Using Transferable Permits to Control Air Pollution in the United States,” in Jeroen J.M. van den Bergh, ed., Handbook of Environmental and Resource Economics (Edward Elgar, 1999).