Property Rights for the Common Good
Page 18 2 Externalities and the Environment 2.1 EXTERNALITIES The problems of the destruction of the ozone layer, global warming or even the noise from a neighbour's lawninower on an early Sunday morning are called externalities. They arise whenever individuals or firms act without considering their impact on others. Externalities exist in many forms: they are “positive” when people's actions benefit others, and ‘‘negative” when they do not. Our focus in this book is on negative externalities. For example, if my sleep is disturbed early on Sunday morning by my neighbour mowing his lawn, a negative externality has occurred because my neighbour doesn't consider the consequences of his actions on my sleep. If I value sleep more than he values mowing the lawn early on Sunday, we do not have a socially desirable outcome because it is possible for me to make a bargain with my neighbour to stop mowing the lawn and make both of us better off. If this transaction were to take place, the externality is said to be internalized. Solving the world's environmental problems is obviously a lot more complicated than paying a neighbour to stop mowing the lawn on a Sunday morning. In the case of global warming, literally billions of people contribute to the release of greenhouse gases. Most of us only consider the private cost of our actions — like barbecuing sausages or driving to work — and not the social cost that these actions (burning of propane with a gas barbecue or the exhaust...
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