Sunday, September 25, 2005

Externalities Ain't All That Radical

I frequently discuss externalities in markets because I think it cuts to the core of the inefficacy and fundamental injustice of markets, that they allow some to profit off of forcing others to pick up their mess. This may sound radical, but it really isn't.

For one thing, externalities say nothing about the justice of the existing wage and production system. Forcing either the end user or the producer to pay the cost may exacerbate inequity.
Mind you, to deal with this, I also propose raising the minimum wage, full employment policies, socialized health care, etc., all to reduce inequity. As a heuristic case, let's take oil and answer the question: Are the poor better off if people have to pay the full social cost of oil? Say, through some kind of sales tax levied on oil?

Sales taxes tend to be regressive: that is, because they add a constant amount, they harm those with less to spend more. However, poorer individuals spend less on consumption items and more on necessities, proportional to their income. Raising the price of oil raises prices across society since oil is involved with so much (agriculture, transportation and production of almost all goods, plastics), of course, but if it's done through a tax system, it could be put into programs that benefit the poor, perhaps even oil waivers for the poorer, as well as the obvious programs to cut carbon emission and deal with pollution.

Making people pay the full social cost of the products they buy has, of course, a major incentive value, in that it encourages socially beneficial production, and encourages producers to choose better methods that previously they would not have chosen because it was more expensive than the externalizing production type.

Also consider that those who pay the cost of externalities are typically the poor. They are the soldiers who forcefully extract from the Gulf. They suffer from the terrorism that ensues. They are proportionally the most harmed by the pollution and the global warming (heat strokes and such).

I don't know if this answers the question. There may indeed be a tradeoff between the proper cost of products and reducing inequity. What does this indicate to me? That even a very basic concept (people should pay for all their stuff) indicates how terrible markets are.


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