I loved the car, but I sold it with a lot of good miles left in it. Why? Two reasons: (1) It didn’t have a cup holder; and (2) my wife was pregnant, and I had become fearful that our whole family would get flattened by a Chevy Suburban. I could have gotten beyond the cup holder problem. But putting a car seat in a vehicle that weighed a quarter as much as the average SUV was not an option. So we bought a Ford Explorer and became part of the problem for all of those people still driving Honda Civics. *
The point is this: My decision to buy and drive an SUV affects everyone else on the road, yet none of those people has a say in my decision. I do not have to compensate all the owners of Honda Civics for the fact that I am putting their lives slightly more at risk. Nor do I have to compensate asthmatic children who will be made worse off by the exhaust I generate as I cruise around the city getting nine miles to the gallon. And I have never mailed off a check to people living on small Pacific islands who may someday find their entire countries underwater because my CO 2 emissions are melting the polar ice caps. Yet these are real costs associated with driving a less fuel-efficient car.
My decision to buy a Ford Explorer causes what economists refer to as an externality, which means that the private costs of my behavior are different from the social costs. When my wife and I went to the Bert Weinman Ford Dealership and the salesman, Angel, asked, “What is it going to take for me to put you in this car?,” we tallied up the costs of driving an Explorer rather than a Civic: more gas, more expensive insurance, higher car payments. There was nothing on our tally sheet about asthmatic children, melting polar ice caps, or pregnant women driving Mini Coopers. Are these costs associated with driving an Explorer? Yes. Do we have to pay them? No. Therefore, they did not figure into our decision (other than as a vague sense of guilt as we contemplated telling our environmentally conscious relatives who live in Boulder, Colorado, and flush the toilet only once a day in order to conserve water).
When an externality—the gap between the private cost and the social cost of some behavior—is large, individuals have an incentive to do things that make them better off at the expense of others. The market, left alone, will do nothing to fix this problem. In fact, the market “fails” in the sense that it encourages individuals and firms to cut corners in ways that make society worse off as a result. If this concept were really as dry as most economics textbooks make it seem, then a movie like Michael Clayton would not have made millions at the box office. After all, that film is about a simple externality: A large agribusiness company stands accused of producing a pesticide that is seeping into local water supplies and poisoning families. There is no market solution in this case; the market is the problem. The polluting company maximizes profits by selling a product that causes cancer in innocent victims. Farmers who are unaware of (or indifferent to) the pollution will actually reward the company by buying more of its product, which will be cheaper or more effective than what can be produced by competitors that invest in making their products nontoxic. The only redress in this film example (like Erin Brockovich and A Civil Action before it) was through a nonmarket, government-supported mechanism: the courts. And, of course, George Clooney looks good making sure justice is done (as Julia Roberts and John Travolta did before him).
Consider a more banal example, but one that raises the ire of most city dwellers: people who don’t pick up after their dogs. In a perfect world, we would all carry pooper scoopers because we derive utility from behaving responsibly. But we don’t live in a perfect world. From the narrow perspective of some individual dog walkers, it’s easier (“less costly” in economist speak) to ignore Fido’s
The point is this: My decision to buy and drive an SUV affects everyone else on the road, yet none of those people has a say in my decision. I do not have to compensate all the owners of Honda Civics for the fact that I am putting their lives slightly more at risk. Nor do I have to compensate asthmatic children who will be made worse off by the exhaust I generate as I cruise around the city getting nine miles to the gallon. And I have never mailed off a check to people living on small Pacific islands who may someday find their entire countries underwater because my CO 2 emissions are melting the polar ice caps. Yet these are real costs associated with driving a less fuel-efficient car.
My decision to buy a Ford Explorer causes what economists refer to as an externality, which means that the private costs of my behavior are different from the social costs. When my wife and I went to the Bert Weinman Ford Dealership and the salesman, Angel, asked, “What is it going to take for me to put you in this car?,” we tallied up the costs of driving an Explorer rather than a Civic: more gas, more expensive insurance, higher car payments. There was nothing on our tally sheet about asthmatic children, melting polar ice caps, or pregnant women driving Mini Coopers. Are these costs associated with driving an Explorer? Yes. Do we have to pay them? No. Therefore, they did not figure into our decision (other than as a vague sense of guilt as we contemplated telling our environmentally conscious relatives who live in Boulder, Colorado, and flush the toilet only once a day in order to conserve water).
When an externality—the gap between the private cost and the social cost of some behavior—is large, individuals have an incentive to do things that make them better off at the expense of others. The market, left alone, will do nothing to fix this problem. In fact, the market “fails” in the sense that it encourages individuals and firms to cut corners in ways that make society worse off as a result. If this concept were really as dry as most economics textbooks make it seem, then a movie like Michael Clayton would not have made millions at the box office. After all, that film is about a simple externality: A large agribusiness company stands accused of producing a pesticide that is seeping into local water supplies and poisoning families. There is no market solution in this case; the market is the problem. The polluting company maximizes profits by selling a product that causes cancer in innocent victims. Farmers who are unaware of (or indifferent to) the pollution will actually reward the company by buying more of its product, which will be cheaper or more effective than what can be produced by competitors that invest in making their products nontoxic. The only redress in this film example (like Erin Brockovich and A Civil Action before it) was through a nonmarket, government-supported mechanism: the courts. And, of course, George Clooney looks good making sure justice is done (as Julia Roberts and John Travolta did before him).
Consider a more banal example, but one that raises the ire of most city dwellers: people who don’t pick up after their dogs. In a perfect world, we would all carry pooper scoopers because we derive utility from behaving responsibly. But we don’t live in a perfect world. From the narrow perspective of some individual dog walkers, it’s easier (“less costly” in economist speak) to ignore Fido’s
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