The NGO Tearfund published that four big drinks companies generate more than a half-million tonnes of plastic pollution in six developing countries each year.
Before starting to talk about externalities, I think the horrifying report gives you a sort of impression of what negative externality is about.
Externality originates when the difference between private and social benefits exists or the difference between private and social costs exists. It could be positive or negative. The positive externality is a benefit for society as a whole. On the other hand, when the externality is recognized as a cost for a society, it’s called a negative externality.
To grasp the idea of the positive and the negative externality more clearly, we need to understand what social and private cost or benefit means.
Private cost is any cost required to manufacture or supply a particular product or service. And private benefits are what the producer or supplier of a particular product gains after incurring expenses to produce or supply the product.
Private costs and benefits are all about sole benefits and costs. It is related to corporate profits and expenses.
On the other hand, social benefits and costs are all about how much society in general gains and sacrifices because of the existence of a particular product.
Let’s get to an example to understand the concept of how social and private benefit or cost take place.
Google Inc. and its products may be a good example if we want to discuss social and private benefits. Google search engine makes it easier to get information efficiently and effectively. Not only the Google Inc. earns profit, but also it provides assistance to society. What Google Inc. earns is private benefit. On the other hand, social benefits are the part when society as a whole gains benefits from using the google search engine.
Even though Google Inc. says, it carbon neutral since 2007, it has to use natural resources to manage heavy equipment and technical kinds of stuff to manage the enormous databases.
“Every company that manufactures something is causing some damage either to the soil or water or air. Most companies treat these as externalities. But the growing movement of sustainability calls for companies to internalize these costs. Once companies do this, they will have a strong incentive to reduce their carbon footprint.” – Philip Kotler
So the use of natural resources by Google Inc. is what social costs look like. Then the company has to maintain a workforce, database which is responsible for incurring costs that Google Inc. has to pay. And it is a private cost.
So if the people gaining social benefits are higher than the supplier gaining private benefits of a particular product or service, it is called beneficial externalities. As you know, it has another name called a positive externality. It could happen.
For instance, public goods create positive externalities since the objective of producing or supplying the goods is to serve the public or local community.
However, negative externality also known as harmful externalities are more common than positive externalities as private benefits are being prioritized in this free market world.
In a free-market world, a corporation’s main objective is to maximize the shareholder’s wealth as much as possible. Due to having this perspective, the executive decisions are based on activities that maximize the wealth and profitability of the corporation.
It sometimes leads to a situation that corporations ignore the fact that they use natural resources shared by all.
The Corporations and Negative Externality
Everybody now and the future generations have a right to the nature we are sharing now. But corporate lust could destroy the natural balance for temporary benefits. And the impact is shared by all even though the public, in general, is not the responsible ones. These kinds of harmful externalities are being ignored over the years.
We don’t usually tend to think that there should be a pollution cost that is paid by the corporations who are accountable to natural harmony. And, the pollution made by the corporations gets unchecked by the authority. These overlooked externalities never come up in the financial reports prepared by the corporations.
In 2015, Elon Musk urged the world leaders at the Sorbonne in Paris to put a price on pollution. He said, “We need to go from having an untaxed negative externality, which is effectively a hidden carbon subsidy of enormous size“.
During a recent podcast with Joe Rogan, Musk talked about how he presented the idea of instituting the carbon tax on goods to the Biden Administration.
Endeavor to Reduce Negative Externality
Many humanitarian and environmentalist organizations are working together to acknowledge the negative externality caused by big organizations. Even these issues are brought to the light on an international level.
Convention on the Protection of the Black Sea against Pollution, Convention for the Protection of the Marine Environment and Coastal Area of the South-east Pacific, United Nations Convention on the Law of the Sea, Kyoto Protocol – greenhouse gas emission reductions, International Tropical Timber Agreement, North American Agreement on Environmental Cooperation, Kuwait Regional Convention for Co-operation on the Protection of the Marine Environment from Pollution, the Paris Agreement are few of them to protect the nature.
Government has the responsibility to diminish externality to avoid market failures. There are many ways by which externality on a national level can be reduced.
Acknowledgment is essential. The corporate governance mechanism has to work in consideration of protecting the rights of other important stakeholders like government, local community, the public at large, and the natural environment.
As these stakeholders right has been neglected while taking major decisions by executive bodies, it does create an initiation of the negative externality. A corporation does not add the social costs into their product valuation, acknowledgment is much needed to define what the public has been losing due to the production of their products.
It is not possible to have a compatible healthy environment for society without acknowledging the rights of the public in general. If a corporation starts to realize the rights, it would create added value to society.
Government must subsidize to encourage the companies that produce positive externality. The government has to control the negative externality through effective taxation policy or even creating more restrictions on producing goods that create more negative externalities.
As the free market has been expanding, there needs a mechanism from the government to control the harmful externality so that scarce natural resources can be utilized more effectively.
Establishing more effective public goods, encouraging environment-friendly corporations through giving incentives, discouraging environment pollution and negative externality producers by setting up a good taxation policy are much needed to make the society more sustainable.
Moreover, government regulation is essential to solve the ignored problem. After all, it is all about public benefits. So, public benefits should be the center point.
- Report reveals ‘massive plastic pollution footprint’ of drinks firms
- Elon Musk said the Biden administration rejected his idea of a carbon tax as ‘too politically difficult’
- What Are Externalities?