How to deal with negative externalities

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Author: Patrick Crozier

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An externality in economic terms is anything that affects a third party. So, for instance, if I play my stereo loud that will likely affect my neighbours. If I burn my garden refuse that might also affect my neighbours. Both of these are examples of negative externalities; negative in that they are bad; externalities because they affect a Third Party. Another example is pollution. There are also positive externalities. If someone builds a railway station near where I live I am likely to see the value of my property rise.

How to deal with them

• For the most part negative externalities can be dealt with by the courts as the victims and perpetrators are reasonably easy to trace.
• If they aren't, if CO₂ or [insert name of pollutant here] production leads to climate change and this makes some people worse off it would be difficult to see how they would seek compensation from the billions of people who caused it. It would, at very least, make for an interesting summons. The answer really has to be a tax. Yes, I know, I am normally against taxes but in this case I'm not that bothered so long as the tax is aimed at the perpetrators.

Q&A

Who sets the level of the tax?

The problem here is that usually it's the government. But governments tend not to use the money to compensate the victims - they certainly don't in the case of fuel taxes. Worse still governments tend to vary the level of the tax over time depending on how much revenue they think they'll earn. The courts could do both - setting the level and arranging distribution. But there's a problem here in that it creates a bureaucracy. The problem with bureaucracies is that they tend to be interested in self-preservation. So, if for instance, new evidence showed that global warming was not happening at all, the court could not longer be counted on to give a balanced judgement. I suppose what you would have to do would be to separate the courts from the administration. Yes, that might work.

Why do you think this approach would be better than the sorts of measures currently being proposed for, say, climate change like discouraging road building, encouraging recycling etc?

• All these measures involve the state more than the compensation through the courts approach and because I think freer is better I also think less free is worse
• The victims are compensated
• It attacks the problem at source
• It allows people greater flexibility in adjusting to the new situation

Comments

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