Externalities

Free markets, I believe, optimize human welfare, but only in the absence of externalities. Is it reasonable to expect that all externalities can eventually be controlled?

Property rights can handle most of the big externalities today, such as land and water usage, though we have great strides yet to make with regards to pricing in air quality. Optimists like myself will contend that any externality can be priced in eventually, given advanced technology. However, consider time: present-me and future-me share the same timeline, but future-me has no power over my present actions, even though he still suffers the consequences. In essence, future-me did not agree to my present actions; there was no dialogue, no transaction. In this way, to future-me, the consequences of present-me’s actions are externalities.

We see the cost of this externality in, among other things, nutrition. Those in the developed world, despite knowing that processed foods are worse for them than the natural alternative, continue to consume it by the ton. Those in the developing world, even when they have the resources to improve their diets, often choose to buy TVs and phones over better meals. In both cases, costs are unduly foisted onto future-selves.

This is a problem with human hardcoding. We are biologically predisposed to value the near-term over the long-term, because back in the days of caves and leopards, unless the near-term was secure, you starved or froze to death. Let your children deal with tomorrow; focus today on food, shelter, and progeny. As a result, we’re built with this externality. So long as we are human, it will exist.

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One thought on “Externalities

  1. There is opportunity then, in tapping both the logic outlined above, when it’s paired with the understanding of said logic. Let’s chat about it next time we run into each other, because there seems like some pretty awesome startups which could be formed around tapping into solving the issues of personal externalities as de-motivators.

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