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Why Business Should Confront Externalities Head-On

Externalities are costs (or benefits) not directly borne by those engaged in an economic transaction. Pollution is the most ubiquitous negative externality in the world. All externalities allow companies, large and small, to effectively cheat by pushing costs onto society that they should bear. With climate change accelerating, the failure to address externalities is literally threatening the future of human civilization.

Because of the prevalence of negative externalities throughout all sectors of our economy, we are living in a world of massive economic distortions, misallocation of resources, and grand illusions. This is not hyperbole, but simply the economic reality we face today. Pollution externalities allow us to fool ourselves into thinking that $4 a gallon for gasoline is too expensive, or that 99 cent hamburgers are a good deal.

If fossil fuel producers had to pay for the greenhouse gases they emit, agribusinesses for the nitrogen pollution that causes “dead zones,” chip makers for the heavy metal pollution from the production of laptops, or shipping companies for the diesel pollution that creates smog in the world’s port cities, the industrial landscape would be radically altered. Instead, we would have many more wind farms and fewer oil rigs, more recycling and less waste, smaller and more efficient homes, and more locally made goods.

Non-point Source Pollution in Florida

Sadly, not only do many of the most polluting businesses oppose measures to address the negative externalities they produce, but due to their tremendous economic power (ironically, oftentimes due to the fact their goods are underpriced in the market) they can disproportionately influence the political process to their advantage. This leads to a situation where not only do the largest polluters often pollute for free, but they secure all sorts of subsidies and tax breaks. This is truly perverse, hence the term “perverse subsidies” to label government handouts for environmentally destructive activities.

Opposition to paying for the pollution is both short-sighted and representative of a true market failure. It is short-sighted because well-crafted policies to address externalities could make the entire American economy stronger by spurring innovation and creating new products. It is unfair because in America we believe in personal responsibility. If someone crashes their car into someone else’s, they are liable for the damages. The same should be true for pollution from a business activity. The thousands of people who become ill from exposure to heavy particulate matter or from drinking contaminated water produces just as much real suffering as getting injured by a more obvious cause. Rising health care costs to address these hidden externalities place an undue burden on the entire society. But today, those who injure people through polluting activities often are allowed to continue to do so with impunity.

Businesses need to work with the Administration and Congress to craft new laws to address these market failures by taxing pollution at the source. The revenues can be used for a combination of deficit reduction, new technology R&D, and education, healthcare, and infrastructure investments. As a result, America would become much stronger. Yes, corporate profits might take an immediate hit in heavily polluting industries, and yes, consumers would feel an immediate pinch in their wallets, but with more money pumped into innovation, and a healthier, smarter, and more productive workforce, these costs would be more than mitigated over the medium term. And getting new revenue streams for critical infrastructure needs (both physical and virtual) would benefit all businesses.

Instead of running away from externalities, businesses should be leading the charge to effectively curtail them and channeling that new revenue into a host of productive uses for the greater economic good.

Jason Scorse is an Associate Professor and Program Chair, International Environmental Policy at the Monterey Institute of International Studies.