Environmental Externalities

Certain kinds of economic costs—such as the cost of environmental damage—fall on the community at large rather than on those whose actions are responsible for incurring them. Because these costs lie outside the accounting framework of the 'polluter' they are often called external costs—or externalities. There are plenty of examples of these kinds of externalities: air pollution, water pollution, soil pollution, the loss of amenity value from degraded environments, the depletion of natural resources, the loss of natural habitats and so on.

Some of these costs are quite specific and relatively easy to define. For instance, air pollution has impacts on human health, increasing the number of people with respiratory problems, and increasing the demand on the health service which attempts to treat these problems. To take another example, there is an economic loss involved—as well as an environmental one—when a lake becomes too polluted to use for recreational purposes. Other costs are more nebulous. What is the economic cost, for example, of losing a pristine environment (Plate 6, p. 155)? What value should we place on the loss of agricultural land, the erosion of soil, or the extinction of a rare type of lichen?

A whole new branch of economics, known as environmental economics, attempts to bring these problems under its remit. A variety of ingenious proposals for costing environmental externalities has been made. Contingent valuation techniques are devised which try to assess people's 'willingness to pay' for environmental amenities by asking them in surveys. Critics have argued that these attempts to value the environment are flawed, partly by the difficulty of actually deriving monetary values, partly because the adoption of such values implies an unwarranted concreteness about the exercise, and partly by the moral implications of subjecting environmental protection to our perceptions of economic value.4 Although it seems clear that we should value other species who share our environment, it is not clear that it is appropriate to place an economic value on them. Equally, there are moral difficulties to the practice of assigning monetary values to human life. These difficulties are highlighted by the tendency of economic studies to place a higher value on human life in Western economies than in the developing world. From the point of view of 'willingness to pay' for an increased mortality risk, this practice might be justifiable. From a moral standpoint it is highly dubious.

In spite of the difficulties associated with placing actual economic values on certain kinds of external costs, the main point is clear. There are some very real costs associated with industrial pollution. Sooner or later these costs will have to be borne by someone. Some of them will fall upon the taxpayer. Others will be felt in terms of reduced environmental quality and lower amenity value. Some costs will not make themselves felt today at all. Instead they will have to be paid in the future: debts from today's activities borrowed against our children and their children.

The crucial point which I want to make is that these external costs are (by definition) not paid by the people who are responsible for incurring them. And the upshot is that it becomes too easy for the polluter to pollute. Industry finds it cheap to use materials and to generate wastes; the consumer finds it cheap to buy material goods and throw them away; governments find it cheap to overexploit mineral resources and pollute the global commons. And all this is because the price of using and consuming materials does not reflect the environmental costs associated with them.

There is an important consequence of this situation for the economics of pollution prevention: because the polluter does not pay for pollution, there is less economic incentive to reduce that pollution. Raw material savings from pollution prevention measures will be less than they might have been, because the raw material costs do not reflect the full cost of environmental damage. Emissions charges, disposal fees and environmental penalties are often absent or too low. The combined impact of lower input costs and lower output charges means that there is considerably less economic incentive for the producer to invest in preventive measures even when those measures carry net social benefits.

The situation is obviously worsened when materials prices are subsidised by government policies of various kinds. Often the price paid by consumers for fuel has been lowered by direct or indirect subsidies to the fuel supply industries. The situation in developing countries—and even the so-called 'economies in transition' such as the former Soviet bloc countries—is often much worse. There are seldom any environmental penalties, material costs are often subsidised and, generally speaking, disposal of all kinds of wastes is regarded as free.

Given these circumstances, it is probably remarkable that there are so many opportunities for pollution prevention which still appear profitable to firms. But equally it is clear that the line between profitable and nonprofitable investments is shifted by these failures of the economic system to account for external environmental costs. Ultimately this shift means that less pollution prevention is carried out in the industrial economy than is profitable to society.

Was this article helpful?

0 0

Post a comment