Tuesday, March 25, 2008

The Way to Go: Resolving or Addressing Externalities.

The typical view of politicians and economists in the UK, backed by many who influence policy, is that climate change is the greatest market failure ever and that we need to internalise the price of carbon. For those of you unfamiliar with the economics jargon the we say a cost is interalised when the negative environmental damage suffered by broader society is borne by a company not the broader public, and the price of the product reflects this. Throughout most of the world carbon emissions place a cost on the public but not on the company doing the polluting, or the consumer of the relevant product; the cost is external to the transaction.

Internalisation of the cost of carbon is an obvious minimum requirement to be placed on business, broader society should not bare the burden of polluting practices. However, there is a more serious critique of externalities, namely that externalities are numerous and that they are placed on the public by private enterprise. We can address many of these issues as they become politically prominent but should we not aim to resolve the problem of externalities rather than addressing them as they arise? There clearly seems to be a problem in broader economic functioning when externalities can arise. If we compare the situation to that of insurance we can consider externalities to represent damage to communal property and businesses the vandals. If the vandals are caught then they will tagged and forced to pay for any future damage. But we aren't very observant and every day that these externalities build up society is subsidising those who own business. There is a risk involved in having a society where externalities can exist, and this risk favors the wealthy.

I am concerned with questioning the narrow conversation about externalities, not with arguing for an overthrow of capitalism whatever that may be. In fact, my conviction that externalities are more than a problem to be addressed one by one stems from the failure of state socialism.

Stalin may have asked for a quantity of carpet. A million square meters at first. He would in all likelihood have then been informed that a million square meters of carpet as thin as a cloth had been produced. Perhaps a request for carpet by the tone wold have then been given, of course now the exact opposite would be likely, a carpet so thick that the best palaces would envy its luxuriance . Perhaps a thickness would have then been defined, only to result in a perfect thickness with the poorest thread, did anyone ask for good thread? This kind of story is often told as an explanation for why markets are preferable for allocating economic resources. If the weaver had to sell the product people would simply pick the carpet that best met there needs.

I see parallels between a command economy, and the creation of markets that are prescribed as a means of internalizing costs. Commodifying soil , water and air to reduce pollution is a deconstructionist and arbitrary process on a planet with intimately interwoven systems.

It seems to me that we have a political problem. Consideration of who is making the important decisions is the means by witch we will solve our problems. Emphasis on involving local communities in projects and good science in policy discussions are two small moves towards resolving the issue of --not addressing the consequences arriving from--externalities


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At 1:23 PM, Blogger fpteditors said...

In the U.S. we have a command economy. The carbon-auto industry controls the government and commands the public to absorb the cost of externalities. In addition they force a tariff on the one thing that threatens them, public transit.



At 8:20 PM, Blogger simonpra said...

Very interesting, very thought provoking!
Thanks :)


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