an entire species. No one intends to cause, or even contribute to, global climate change.
Likewise, no one plans to contribute to a huge patch of plastic in the middle of the Pacific Ocean; people are simply seeking a way to carry groceries home or drink iced tea. The plastic bags or cups that may be given out for free allow people to accomplish those goals but, eventually, create a set of harms the user did not intend and may not even be aware of. The pollution caused from generating the energy people use is not something anyone plans or even wants to create; we simply want to be able to heat our homes, transport our family members, or see at night.
Externalities are experienced primarily by people other than the ones who get the benefit of the activity that caused them. That means the people doing an activity rarely take its externalities into consideration. If every time someone drank coffee in a disposable cup another tree in her yard disappeared and her drinking water became more contaminated with chemical pollution, she would quickly decide not to use disposable cups. Instead, those effects are most likely felt by people far away, in both space and time, from the coffee drinker. She is probably unaware of them and doesn’t directly experience any of the downsides of her cup use.
Externalities can be either positive or negative. You can create unintended consequences from your activities that are beneficial to others; they are externalities because they are not intended when you choose to undertake the activity, and they do not affect the cost of your actions. Someone who plants flowers for her own enjoyment may create positive externalities in the neighborhood; those who pass by may enjoy seeing or smelling the flowers, and the flowers may create beneficial habitat for butterflies or bees.
The flower example illustrates another concept: whether an externality is positive or negative depends on the perspective of those who experience it. The same flowers that give one neighbor pleasure may contribute to the allergies of a different neighbor. When we discuss the role of externalities in creating environmental problems, we are concerned primarily about negative externalities, so those are the ones that are discussed in this book.
The “unpriced” aspect of externalities has several important implications. First, it means that the person causing the externality doesn’t bear a cost for doing it. The sulfur dioxide pollution from coal burned to create electricity doesn’t factor into the price paid by the electricity generator or the consumer. That doesn’t mean that there isn’t a cost from that pollution. People get asthma and generate costs for doctors and drugs; employers lose money when their employees take sick days. The acid rain that results causes buildings to disintegrate and plants to die, among many other effects. Someone bears that cost, but it is not the generator of the electricity or (primarily) the people who use it.
In other words, it doesn’t cost any more to do what you’re doing in a way that causes pollution than in a way that doesn’t. For that reason, most people don’t even notice that they’re causing externalities (which is different from how they might notice if they left a water faucet on and would therefore get a much higher water bill). In fact, precisely because of the unpriced nature of externalities, it would almost always cost more to stop creating externalities than to continue to create them, at least initially, for whoever is creating them.
People don’t experience much, if any, of the harm from the externalities to which they contribute; that’s part of why they are considered to be external. There are several reasons that those who create them are unlikely to suffer from these externalities. The first is that there’s usually a disconnect in time and space from where an action takes place and where the results are felt. The sulfur dioxide emissions from a coal-fired power plant travel hundreds of miles in the air from where they are emitted, so the people experiencing their effects are rarely the same people using the electricity. (Even if the effects are felt locally, they are felt by many people, regardless of how much electricity each uses.) Other environmental issues take a while to be felt. Ozone depletion was caused by chemicals (used in refrigeration and electronics production) that had to make their way a long distance into the stratosphere, and to accumulate in significant enough quantities, to make a difference that we would notice on earth. Some of those chemicals, like some of the substances that cause global climate change, can persist for hundreds of years or more in the atmosphere, causing environmental problems generations after they were initially released.
Some externalities are more removed than others from the activities that create them. Someone who fishes does not intend to cause the depletion of a fishery but does intend to take fish. Someone using nitrogen fertilizers in the Midwest of the United States is simply trying to grow crops more successfully, conceptually unrelated to the dead zones in the Gulf of Mexico that result when too much nitrogen or phosphorus in the water causes algal blooms that use the available oxygen and make areas of the ocean unable to support life. How closely connected an activity is to the externality it creates can influence the likelihood of causing it in several ways, which are discussed further below.
Figuring out how to prevent externalities is key to avoiding or addressing environmental problems. Because of the nature of environmental problems as externalities, finding ways to accomplish the same underlying goal without creating the externality is likely, at least initially, to cost more. That is because of the “unpriced” aspect of externalities. If there is no cost to putting sulfur dioxide into the air, then burning coal to produce electricity gets all the benefits of the electricity for those who produce or use the electricity without their having to pay for the downsides of that coal burning. Generating electricity in a way that doesn’t create sulfur dioxide emissions requires either using a different, more costly, input in areas where coal may be cheap or installing “scrubbers” to take the sulfur dioxide out of the emissions; those scrubbers have a cost and also make the electricity generation less efficient. Producing electricity in a different way is therefore likely to be more costly; if that were not the case, the change would have likely already been made. (That’s the upside of the unintended aspect of externalities: because you’re not trying to create them, if it were possible to do the thing you’re trying to do just as easily without creating them, you’d be happy to do it.)
That additional cost means that people or businesses are not likely to change their behavior to avoid creating externalities of their own accord. Policy can therefore play a central role in making that change happen; in many countries power plants are required by law to remove the sulfur dioxide from their emissions. But in the same way that people or businesses resist deciding on their own to stop creating externalities, they are likely to oppose policy action to prevent them from creating externalities. That’s where politics comes in – the struggle among different people with differing opinions on what should be done. The question of what businesses or people should be required to do, or prohibited from doing, is a political decision.
The economist Ronald Coase argued that externalities can sometimes be addressed without policy intervention. His logic rests on the important observation that externalities are reciprocal. They connect at least two different actors: the one creating the externality and the one it affects. One of the examples he uses is the effect of a cattle ranch next to a farm; the straying cattle can trample the crops and cause damage to the farm. That damage is an externality; it is unintended and the rancher doesn’t suffer any cost from the straying cattle unless someone creates a rule that requires the herder to compensate for, or prevent, the damage. As is obvious, there would be no damage to the crops without the straying cattle. But, as Coase also points out, it is also true that “there would be no crop damage without the crops.”1 In other words, the rancher is affected by the presence of the farmer as well as the other way around.
This reciprocal relationship means that, in the same way that the farmer is negatively affected by the behavior of the rancher, the rancher would be negatively affected by having to change her behavior to avoid the damage her cows are doing to the crops. If there is value in ranching, to the rancher or to the community, then simply requiring the rancher to stop creating the externality may not be the best collective solution.
The most common way to address problems created from
