The Theory of Externalities
Externalities are those things we think about before buying something; were animals harmed, what will the impact on our environment be, was anyone exploited when making this product, etc.
They are the unintended consequences to a third party – the environment or society – created by the production or consumption of some thing, and they can be either positive or negative.
Wait. Don’t leave. Let us explain.
Think about the hippest neighborhood in your city—the one with all the cute boutiques, and restaurants with al fresco dining.
Now think about the real estate in that neighborhood. It’s more desirable than in the less walkable neighborhoods, which results in an increase in move-ins, which results in more businesses in that area, which means more jobs –importantly, more walkable jobs (positive societal externalities) – which means less cars, pollution and congestion (positive environmental externalities). These are all positive externalities from the environment created from those businesses.
Negative societal externalities
Now think about a clothing store in that same neighborhood. The store fills its racks with increasingly high-quality goods that the residents in the neighborhood want (the demand).
As the real estate value of the neighborhood rises, the store owner must either set the price of their goods higher, or increase the demand – and therefore supply – of goods to pay their rising rent bill.
If prices of goods consistently increase, residents of the neighborhood may become priced-out (a negative societal externality).
Negative environmental externalities
If the goal of increased demand isn’t met, the owner could start cutting corners by buying goods from less reputable sources, or goods with large ecological footprints. (cheaper products that create a higher profit margin for the store owner)
Perhaps the store simply ends its reusable bag policy and opts for a cheaper plastic alternative. (a negative environmental externality)
These are all negative externalities created from rising demand.
This happens in large and small ways all across the world every single day.
About the example
*In this scenario, the thing being ‘produced’ was a transitioning upscale neighborhood, the thing being ‘consumed’ were the perks that come along with the neighborhood. Though, this could be anything; the production of a car and the consumption of gasoline when driving it, the production of a cigarette and the consumption via smoking that cigarette, etc.
Orange Slice Break
That was a lot to take in, let’s take a step back and let NBC’s The Good Place explain the world of externalities & sustainable living with hilarious simplicity.
This is Season 3, Episode 10 of The Good Place – The Book of Dougs
*spoiler alert: this clip is about 75% through the show. skip it if you plan on watching the show*
Regulating the Regulators
As a conscious consumer, you are making informed choices every day about where your money goes. You know why you prefer small, local businesses over big box stores, and you know why you’re buying organic grass-fed beef over the alternatives.
You’re voting with your dollar and influencing consumer demand.
But then Clorox buys Burt’s Bees and Kraft Foods buys Boca Burgers, and our representatives continue to support big business over sustainable progress.
Your ‘dollar vote’ for the little guy, Burt, ends up going into Clorox’s pocket (which, who could blame Burt for accepting the outrages sum of $925 million from Clorox), and the government continues to subsidize harmful Big Ag practices. The system can start to feel a little rigged, a bit out of your control.
So who’s the regulator of the regulators and the legislator of the legislators?
Non-profits & NGOs, our way in
Who are the regulator of the regulators and legislator of the legislators?
Enter non-profit and non-governmental organizations (NGOs).
From arts and culture to research and education, environment and animals to international law. These are groups that function independently of any government and typically serve a social or political goal.
They give a regulatory power to the people. They do it by lobbying for the carrots and sticks we want to see in government, and by directly engaging with the unintended consequences of our consumption.
*e.g. the Plastic Pollution Coalition’s cleanup efforts. 350.org’s fight against the rise of co2. the National Sustainable Agriculture Coalition’s (NASC) advocacy for policy reform in our food systems in the halls of congress.
With these doors available, we now just have to walk through, easy as that, right?
Unfortunately, walking through these doors and affecting systems, like big agriculture, requires funding…a massive amount of funding.
Crossing the hurdles
We now have two hurdles to cross:
1) Making your conscious consumption achieve its intended effect.
*when you buy that Boca Burger, let’s make sure Kraft Foods uses the funds to invest further in environmentally beneficial systems, not just to bamboozle you with a ‘green is clean’ marketing gimmick to sell more burgers*
2) Funding impact organizations without giving an arm and leg.
*the average consumer doesn’t have thousands of dollars to throw at a campaign*
What’s the quickest way to cross two hurdles? You may say running faster. We say stack the hurdles on top of each other and cross them in one go.
How do we plan to do this? Let’s get back to that econ theory, the theory of externalities.
External costs, the sustainable living nemesis
Nestled between the price tag of the goods you’re purchasing and these externalities is the root issue behind consumption, external costs.
Imagine a bag of cheap Chicken. What is it that makes it so much cheaper than the other options?
We’re all aware of the externalities that come with these products; we see them in pictures of overcrowded factory farms, massive deforestation projects to make way for the cattle, or as the discharging of untreated waste into our waterways.
Costs included in a bag of chicken’s price tag would include things like the animal feed, the land for the factory, the equipment for slaughter, packaging, transportation, etc.
But what about the cost of high quality feed over subsidized corn, the cost of carbon offsets (the carbon that would have been sequestered by these trees), or the cost of proper treatment and disposal of the animal waste?
These are the external costs of production. They are costs avoided by the producer, and as a result, not included in the price tag, but instead passed on to an unwitting third party.
It looks like this ↓
The current “stick” for making companies pay for their external costs is called a Pigouvian Tax.
It’s a tax on anything that creates a negative externality, like a carbon tax, but for all unintended consequences of production. It’s purpose is to raise the price of the good to a level where smaller, or more purpose driven companies, could compete. And while Pigouvian Taxes are great in theory, they are rarely ever implemented effectively.
But who can blame them? It’s hard to determine the exact cost society will eventually pay by chopping down a few thousand trees.
*remember, externalities are costs to a third party, a third party being someone (or thing) that has nothing to do with the production or consumption of the good. (in this case, everyone (or thing) who isn’t using or making money selling the wood/paper)*
It’s even harder to determine this exact cost when the company chopping down the trees gives you a pocket full of money to say the cost is less than it is.
Crossing both hurdles
So here we are. We know that conscious consumption works (so long as you have the time and money to deeply research the products you’re buying), and we know that there are carrots and sticks in place to watchdog over companies.
So how is it that an individual consumer with limited time and money can influence a political system run by the almighty dollar?
It’s time to cross both of those hurdles at the same time and tie this sustainable living thing together.
Imagine a world in which the spare change from the things you bought acted as payment for these avoided external costs. The change automatically went to the non-profit & non-governmental organizations mitigating these unintended consequences. It was used to either clean up, or fund initiatives making sure that we aren’t getting bamboozled by green marketing gimmicks and making it difficult for companies to avoid their external costs.