Think about your neighbour and the environment – the concept of externalities

People often find that the activities of others – whether individuals, businesses or other organisations impacts them, usually negatively.  For example noise pollution, congestion, pesticide use.  Some people dismiss such concerns as being trivial and that people should be more tolerant. Such expressions ignore the harmful effects involved.

 

In economic parlance such impacts are referred to as externalities, examples of market failure.  These are often negative although positive externalities exist.  So what is a good definition of externalities?  This is a concise definition.

 

Externality: Externalities arise whenever the actions of one economic agent make another economic agent worse or better off, yet the first agent neither bears the costs nor receives the benefits of doing so. [UC Berkeley].

 

There are lots of examples. Lets look at a few.

 

Some externalities are probably recognized by most people as a problem such as fly-tipping but there are other significant ones.

 

Properties bought for second homes or holiday lets.

Impact – reducing supply for local residents.

 

SUVs.

Impact – higher fossil fuel emissions; extra wear and tear on roads, lower safety for other road users.

 

Fertiliser run-off from farming.

Impact – pollution of rivers leading to loss of wildlife.

 

Events and festivals.

Impact – noise pollution, congestion, higher emissions due to travel.

 

Some of these activities impose health costs for example – noise including traffic.

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Solutions

The two approaches to externalities are the use of taxes and regulation.  Yet in practice such methods are not pursued properly.  For example, owners of SUVs do not pay for the costs they impose.  Organisers of events such as music festivals gain the benefits but do not incur the costs of their actions on others.  Action to restrict the use of properties for second homes or holiday lets are limited.

 

In effect any individual or business is operating without bearing the full costs of their activities.  Potential remedies could include additional charges for SUV owners and for event organizers. Regulation could be dramatically improved – noise regulations are to say the least feeble allowing event organizers to negatively impact others with impunity. In reality there is no justification for owning an SUV while changes to planning rules and taxation could resolve the problem of second homes and holiday lets.

 

Options include stricter controls and the replacement of conventional fireworks with ‘silent fireworks’ or laser displays.

 

References

Saez E., ’Externalities: Problems and Solutions’, 131 Undergraduate Public Economics, UC Berkeley.