Externalities - Economics and Ecology: United for a Sustainable World - page 77

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Externalitie s
In this chapter, we address the area of economic theory known as externalities ,
which can be thought of as a subset of economic theory. Externalities, in these
cases in a competitive market, are those unaccounted-for costs or benefits that
accrue to society as a result of producing or using a product or service. To illus-
trate, manufacturing that causes air pollution exacts costs on the whole of society
for generations but is not accounted for in the economic formulation of how the
product is priced, so the product may be overproduced in terms of its benefit. On
the other hand, too little economic attention may be afforded education because
the wide-ranging, long-term, societal benefits of the educational process are not
taken into account by those involved in the educational process as a whole. 1
Politics, Economics, and Externalities
In point of fact, externalities are often treated as an irritant, an unwelcome
relative, because they necessarily lead to awkward, embarrassing qualifica-
tions and exceptions to the major elegant results of the core features and con-
clusions of economics as a discipline. On the surface, therefore, the notion of
externalities may not seem to hold the same importance as more central areas
of economics, such as consumption, production, distribution, and macroeco-
nomics. We disagree wholeheartedly.
There are important, practical, and controversial real-world issues, many
of which affect us every day, such as global warming, where the role of
externalities is central to the controversy. A sampling of some of these issues
begins to look like the evening news—or perhaps a good political campaign.
Internationally, global economic crises are exacerbated by the practice of
ignoring externalities. The immediate result is to underprice valuable natu-
ral resources, which leads to waste, overexploitation, and even the subjuga-
tion of indigenous and poverty stricken populations. Certainly, this lack of
systemic attention increases worldwide tensions by widening the rich-poor
gap within and among peoples of the world and, thus, nations. The rich and
powerful have always had the ability to control the market through the cor-
porate form of organization, thereby largely avoiding unpleasant personal
effects of economic activity by shifting the negative burden of cost to those
who do not benefit directly from the market transactions in question.
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