Spot described how the owners of the planned Big Stone II coal-fired power plant were trying to avoid some of the costs of operating the plant, specifically through the extra pollution that the plant would emit without stringent emission controls. He called the pollution an “externality.”
You do remember that, boys and girls?
That was a while ago, Spotty.
It was yesterday, grasshopper, but here’s a refresher on what an externality is:
The indirect effect of one agent's consumption activity or production activity on the well‐being or economic activities of other agents. Pollution generated from the production of electricity or loud noise arising from the consumption of music are examples of externalities in markets. These effects may be negative or positive—they may cause disutility or costs to third parties in some cases and provide benefits in others. Thus in markets where an externality exists, social benefits or costs (the well‐being of all) are different from private benefits or costs—defined as those that accrue only to the original parties in the market activity. [from Dictionary of the Social Sciences, subscription req’d]
So Big Stone II is a dis-utility, Spotty?
Very good, grasshopper. That’s a better-than-average play on words for you.
Acid rain, asthma, and laundry getting dirty as it hangs to dry are examples of costs of running a power plant that will be borne by the neighbors and the public, not the plant owners.
That’s a dirty deal, Spotty.
Yes, grasshopper it is, and that’s why we regulate pollution and try to minimize these externalities by imposing conditions on the way power is generated. Obviously, electrical production is a useful thing to society and we need to do it. Virtually all human endeavor comes with some cost to society that we cannot eliminate but need to minimize where possible. That’s what a power plant permitting process is about.
But you know, grasshopper, it can work the other way, too: benefits can accrue to someone when they didn’t participate in the activity conferring the benefit or pay for it.
That’s a ripoff, Spotty!
No, not at all grasshopper, or at least it doesn’t have to be. Let Spot give you an example. A student decides to go to medical school, borrows a bunch of money from a bank to go, becomes a surgeon, and pioneers a life-saving medical procedure.
Well, the doctor gets paid, right?
Sure, but not by everyone whose life is saved by the procedure.
But doctors don’t pay the whole cost of their education, do they Spot?
No, grasshopper. Most medical schools are public institutions; they’re very expensive to run and rely on taxes for support.
Why do we do that, Spot?
How many doctors do you suppose we’d have if we didn’t?
A lot fewer, I suppose.
Um hum. And maybe the doctor who pioneered that life saving procedure wouldn’t have been able to borrow enough money to go to medical school and save so many people.
We all rely on positive externalities every day, don’t we Spotty?
Yes we do, grasshopper. When you play a round of golf on a municipal course, you take your boat through a public lock on the Mississippi River, or you read and rely on the truth of a prospectus of a company that wants you to invest in it, you are relying on a form of positive externality. You received the benefit, but at most paid for a part of it with taxes you pay, and almost certainly didn’t not participate in the decision to make the investment.
People who don’t want to pay anything for these externalities are really freeloaders, aren’t they, Spot?
Well grasshopper, sometimes we call them libertarians or conservatives.