An important economic concept is that of “externalities” which are effects that are experienced by third parties not subject to an economic activity. Externalities can be positive or negative.
Externalities
For example, streetlights are installed for convenience and safety of pedestrians and drivers, which is a benefit to those people traveling on those streets. A negative externality of streetlights is that their light adds to the “skyglow” over urban areas and makes seeing all but the handful of brightest stars impossible and generates other types of “light pollution” for people far away from the streetlights. Thus, the streetlights, which have a positive purpose, cause an unintended detriment to third parties.
Positive externalities can occur as well. A classic example is that of a beekeeper who raises bees to make honey. A positive externaility occurs if those bees also pollinate crops of surrounding farms and gardens. Thus, the bees provide a positive unintended benefit to third parties.
Tragedy of the Commons
The “tragedy of the commons” is similar to a negative externality. It occurs when a resource which is not owned (or is owned by the public in general) gets over-used. The classic example of this is from Garrett Hardin who published a paper titled “The Tragedy of the Commons” in the journal Science in 1968. His example concerned cows and common pastures but his overall issue was overpopulation of the planet by humans. Here’s a summary of tragedy of the commons by the University of Houston:
A commons was a pasture that belonged collectively to a village. Everyone in the village grazed cattle on the commons. As the number of animals owned by the village approached the capacity of the commons, the problem took the following form:
A villager could buy one more cow and gain the full income that a cow provided. The damage caused by one cow too many grazing the pasture would be small compared with the gain. Of course, the entire community would suffer from the damage. Consequently, every member of the village was motivated to keep adding cows. The tragedy is that, to preserve the commons, the personal freedom of the villagers had to be curtailed.
Pollution and Greenhouse Gasses
The main problem with negative exernalities is that the total cost of the activity/product is not borne by the consumer(s) of the activity/product. Pollution and emission of greenhouse gasses are a great example of this. Take a coal-fired power plant. It generates pollution and emits greenhouse gasses which contribute to global warming. That is a negative externality. The power plant makes a profit based on what it costs the utility to produce the electricity but does not incur the true cost of the production of the electricity which also includes the costs borne by others due to the pollution and increased global warming.
Similarly, a chemical manufacturer who pollutes a stream which flows into a lake is not incurring all the costs of producing the chemicals. It’s cost savings of not properly disposing of waste chemicals is borne by third parties affected by the pollution.
The concept of the Tragedy of the Commons also comes into play with respect to greenhouse gas emissions. Just like the pasture in Hardin’s example, all of us on earth share the atmosphere and environment to some extent. None of us wants to harm the earth’s environment – that would be stupid. The problem is that economically, there is some sense to each individual country continuing to pollute and create greenhouse gasses given that it currently is cheapest form of energy and each country’s pollution is profitable. (Of course, sometimes it is just easier to deny that the pasture is being overgrazed than to incur the cost of limiting the grazing of our own cows voluntarily.)
Carbon Tax
The concepts of a carbon tax and cap and trade (a version of a tax) seek to come closer to replicating the full cost of the production of greenhouse gasses. According to Investopedia, a carbon tax is a type of “a Pigovian tax (named after economist Arthur C. Pigou). A Pigovian Tax is considered to be equal to the value of the negative externality. This tax is meant to discourage activities that impose a net cost to an unrelated third party. That means that by imposing this type of tax, it will reduce the market outcome of the externality to an amount that is considered efficient.” A goal of a carbon tax is to make carbon-based energy more expensive and encourage the private sector to find more environmentally friendly energy sources such as Nuclear Fusion Reactors and Solar Power.
Notably, Cap and Trade was proposed by the Bush 41 Administration and found life in an amendment to the Clean Air Act in 1990. Cap and Trade was key in solving America’s acid rain problem. Read more about cap and trade and acid rain here.
Most (and maybe all) economists are in favor of a carbon tax or a cap and trade system to address greenhouse gas emissions. Of course, taxes are not popular. The recent riots in France are exhibit one. According to the Brookings Institution a carbon tax would: “improve the operation of the economy, lower our dependence on foreign oil, reduce pollution, slow global warming, allow cuts in government spending, and decrease the long-term deficit.”
A voluntary system of addressing negative externalities related to greenhouse gas emissions is the purchase carbon offsets. The carbon offset proceeds are then invested in carbon mitigating projects such as preventing rain-forest deforestation. Here’s an example of an organization that sells carbon offsets: https://www.cooleffect.org/. The Cool Effect website also estimates carbon footprint based on lifestyle – you can find that page here.
thanks John! Happy new year.
The tragedy of the commons is a fundamental pillar supporting quite a bit of the work JSMF supports in our complex systems program where important questions sit at the interface of science and society. Elinor Ostrom (Nobel in economics) was both a grantee and a long time advisor. Trade-offs are not something our decision-making has an easy time handling. Thanks for bringing this important work — ongoing for half a century – to the community.