Externalities - Economics and Ecology: United for a Sustainable World - page 83

In the real world of our assumed paper mill, however, this is clearly not
the case. Other individuals or groups are affected. Residents of the town and
its immediate environs experience the bad odor from the smokestacks, and
perhaps even become ill from chemical sensitivity. Anyone who uses or rec-
reationally enjoys the waterways, whether near the town or further down-
stream, can experience a lack of satisfaction or enjoyment as a result of the
water pollution. This could include the inability to fish, swim, and boat; to
use the water for agriculture and industry; or perhaps even to use it directly
for municipal use. Many externalities are present.
Here, a personal experience is apropos. I (CM) was once on a citizens' advi-
sory council for a large pulp and paper company that discharged its chemi-
cal effluence into the river from which my hometown draws its drinking
water downriver from the mill. When I asked the mill foreman what would
happen if I took the mill's intake pipe and placed it below the effluent pipe,
he replied as follows:
Mill Foreman: We'd have to close the mill.
CM: Why is that?
Mill Foreman: Because the water's too polluted to run the machinery.
CM: And you expect me and the other people of my hometown to drink it.
At first, my only reply from the foreman was a blank stare.
Mill Foreman: The answer to pollution is dilution.
This was a patently ridiculous response, however, because the
ocean has no outlets through which to flush itself, so dilution is
impossible. Moreover, all the fresh water on Earth originates from
evaporation of the ocean, thereby further concentrating pollution
in a continual, self-reinforcing feedback loop, which affects every-
one worldwide who relies on the ocean for such things as food.
In short, many parties experience a cost, even though they are not one
of the “economic actors” identified above. Here, the terminology becomes
important. They bear a cost, even though they receive no compensating ben-
efit. On the other side of the coin, the market participants enjoy a benefit
for which they bear no cost. In the antiseptic language of the economist,
resources are misallocated . Making sure that paper production does not foul
the air or that noxious chemicals do not pollute the waterways is a task that
should properly fall to the industry—including bearing the costs of accom-
plishing that, whatever they might be.
For example, suppose there exists a (moderately expensive) technology
that would render the air completely clean and leave the water unchanged
from the original condition. The options for bearing the responsibility of
paying for these include suppliers of inputs receiving less (including lower