Externalities are economic costs not borne by the producer or the consumer. They are external to the entire costing process, from creation through sale. Most often, not paying for externalities benefits private corporations (and their direct customers), whereas costs of the externalities are typically borne by the public. There are externalities that are “positive externalities” where there are external benefits rather than costs (the classical example of a positive externality is a community with an excellent public education system in place that provides a high-quality labor force for any employer who might want to headquarter there; the community pays for the education, the new employer gets a high-quality labor force free of charge). But we are going to focus on negative externalities here.
Here are a few examples of externalities.
The production of greenhouse gases, for example by automobiles’ exhaust, causes global warming. No one pays to prevent the production of the greenhouse gases, and no one pays to clean it up; but mankind is paying – and will continue to pay – for the consequences of global warming: droughts, storms, flooding, displaced populations, etc.
Most manufacturing produces waste products and those waste products are often dumped in the nearest river. The river becomes toxic, the water turns unclean, fish sicken and die, and children lose their watering hole. No one pays to prevent the creation of waste products or to dump them where they won’t affect us or the planet, and no one pays to clean up the river. The children pay by their loss of their water hole, and we all pay for the loss (or higher prices) of the fish we love to eat. And the toxic river eventually poisons the soil where we grow our food.
Smoking tobacco and drinking alcohol produce all sorts of external costs: locally polluted air, lung disease (for the smoker and for those in his environment), alcoholism and its unintended consequences. None of these human costs are borne by the tobacco and alcohol manufacturers or even by the consumer of these products, until much later. Not to mention that neither alcoholism nor cancer affects only those who are directly affected.
Hunting and fishing with no artificially imposed legal limit causes the inevitable depletion of the “resources” being gathered and consumed. As the resource gets depleted, its prices go up and up, putting increased pressure to hunt and fish even more, and eventually the resource is no more.
“Moral Hazard” (that condition within the world of Finance where a gamble that goes well profits the trader and his firm, while a gamble that goes poorly gets paid by the American taxpayer) is an example of a negative externality that you and I will continue to pay for decades after it ever becomes illegal. See To My Countrymen for a fuller discussion of Moral Hazard.
Externalities are typically invisible costs. No one sees them coming until much damage has been done; and then it costs more to “clean up” after the mess than if it had been dealt with from the beginning (by having a cost imposed to prevent the externality to begin with).
Finally, the cost of many externalities are borne by the environment, or by Mother Nature herself. As we humans “develop” undeveloped land – “habitat” for wild creatures – we rob these creatures of their home and they die, they go extinct. Some of us care; some of us don’t. Some of us see externalities everywhere; some of us chose to remain blind to them.
Externalities are a class of what is called "market failure" (a problem within unfettered free markets). While we do not pay for externalities now, we always pay for them eventually.
In the end, human survival will depend on our paying for our externalities now, and not treating them as unintended consequences with no consequences.
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