Evaluating Externalities

By Deane Barker tags: politics, economics

What can get mystifying about politics is that opposing politicians can have such different opinions about political issues. It seems like they can never agree about what to do about a given situation even though both sides are presented with the same facts.

A large part of politics is about managing externalities. And how we evaluate these externalities very much determines our position on the issues.

In economics, an “externality” is something that happens to Person B because of an action taken by Person A. From Wikipedia:

[…] an externality is the cost or benefit that affects a party who did not choose to incur that cost or benefit.

So, an externality is a side effect of an action which screws someone else over, essentially. And a lot of how you view politics is defined by how you evaluate and compare specific externalities.

When evaluating an externality, you do so in two ways:

  1. What is the objective degree of the externality? How bad is it?

  2. How does this compare to a benefit we get from the thing that caused the externality in the first place? How much damage would be done if we stopped doing the thing which caused the externality? Is it worth it?

Let’s look at two examples:

The Acme factory in our town spews toxic fumes out of its smoke stack. These fumes affect everyone in the town, since we all breathe the same air. Mary, who lives down the street, didn’t choose to breathe the fumes – she has no choice. She is incurring a cost against her will. This is a classic externality of the Acme factory doing business.

When evaluating this problem, we do so two ways –

What is the objective degree of the externality? We could test the fumes and try to figure out how dangerous they are, but people might differ on the interpretation of the results. The health risks might only be suspected, but not proven. This might be enough evidence for some politicians, but not enough for others. People often simply don’t agree on the degree of damage.

Then, how does this compare to the benefit? The benefit in this case is that the Acme Company is in business, employs people in the town, and contributes to the economy. How much does this benefit compare to the degree of externality? To answer this, of course, we need to agree on the degree (the first question).

If (since) we don’t, it’s tough to compare to the benefit, but we can be sure that the Acme Company itself has an opinion – they would claim that eliminating the toxic fumes would cost them money or shut down the factory. Given the risk of eliminating this benefit, is it worth it to continue to allow the factory to emit the fumes?

So, the action a politician elects to take against the Acme Company (in the form of legislation that affects all companies in the town) depends on how we view the damage the externality causes against the benefit that it provides. Some politicians will claim that employing people is more important than clean air, or they may claim that the damage is minimal or even unproven. Or they may concede that the fumes are bad, but losing the employment benefits of companies like Acme would devastate the town. Others may say that clean air is more important, or that there is less risk because Acme will spend the money to eliminate the fumes rather than shut the company down.

Our position comes down to (1) degree, vs. (2) benefit. The only two cases a politician could make to allow Acme to continues emitting fumes is that:

  1. The fumes aren’t bad.

  2. The fumes are indeed bad, but the benefit is enormous and the cost of eliminating the fumes (shutting the factory down) would be too high.

Now let’s look at something less emotionally charged…like abortion. The externality of an abortion is that a fetus ceases to exist. (Regardless of where you stand on abortion, this point is unassailable – an abortion causes a fetus to go away.)

So, what is the degree of the externality? Like the first example, opinions differ. Many abortion rights advocates (pro-choice) would say that the fetus is a non-sentient clump of cells, not unlike a tumor, so there’s no damage done at all (in this case, there is no externality, because the damage wasn’t done to anyone else – the only person involved is the mother, and she did it voluntarily). Abortion foes (pro-life), on the other hand, would say that the damage is immense because the fetus is a human being, and an abortion effectively murders it.

How does the damage compare to the benefit? Again, it depends on what we think is the degree of damage. If we’re pro-life, then there’s no benefit that can surmount what we feel is effectively murder. If we’re very pro-choice, then we claim that there is effectively no damage in removing a clump of cells, and the benefit to the woman is enormous, so it should be allowed to continue.

What’s far more interesting, though, is a politician who is pro-choice, but less so that the type we discussed above. Let’s say that this politician concedes that there is some degree of externality – the fetus does cease to exist, and that fetus would turn into a human being, so they do have some reservations about an abortion taking place.

But, they reason, the benefits are considerable – there’s the direct benefit that a woman doesn’t have to be pregnant if she doesn’t want to be, plus there’s the indirect benefits of respecting the woman’s right to privacy and her right to make choices about her own body. So, this politician reasons, there is an externality, but not to a degree that it overcomes the benefits, therefore abortion should be allowed to continue.

And this is why politicians disagree so much. They all claim to want what’s best for the country, but when they evaluate externalities and what they should do about them, they can’t agree on:

  1. The degree of damage done.

  2. The benefit provided by it (or the cost to eliminate the damage).

How you interpret those two things will direct the course of action you take.

This is item #27 in a sequence of 114 items.

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