Externalities – Why should I care about them?

The dictionary defines externality as “an external effect, often unforeseen or unintended, accompanying a process or activity.”

But what does this mean to me?

Actually, we deal with externalities on a daily basis with things such as second hand smoke, stepping in someone else’s gum left on the sidewalk or getting a flat tire from broken glass left in the street.

But externalities don’t necessarily have to have a negative connotation. Anytime an individual acts in a way that has more of a positive effect on others rather than themselves deems as a positive externality. An example of a positive externality can be something as simple as finding a dollar on the street that someone dropped.

Externalities are unavoidable for the simple fact that most people are completely oblivious to the affects their actions or lack of action have on others. One surefire way to reduce externalities is to internalize them. In other words, people are less likely to act in adverse ways if they are directly affected by the consequences (or externalities) of such actions.

The same goes for businesses.

Externality is a word often associated with businesses and their production processes. Many businesses operate in ways that may be cost efficient for them, but they often neglect to take into account the negative affects their practices may have on others. For these reasons, externality often has a negative implication surrounding it in terms of business.

Many major corporations like Chevron, Exxon Mobil, Fast food chains such as McDonald’s and KFC, and health care providers are often at the forefront of scrutiny for causing negative externalities. From damaging the ozone layer with air and water pollution to causing serious help problems in humans, these businesses have caught negative criticisms from a lot of different entities.

To help reduce these externalities, the government does things such as set emissions or pollution taxes and have cap and trade pollution quotas to discourage wasteful practices. Doing this makes it costly for businesses to pollute and cheaper to be less wasteful.

Fortunately, with internalized consequences such as the ones listed above, we are continuing to see a decrease in adverse production processes and an increase in corporate social responsibility.