Thursday, January 13, 2011

The Inevitability of Externalities

Lately, I have been reading a book by a sociologist who admittedly uses extreme examples to prove his points about how society should function. His general thesis is that we should have more concern for the effects our actions have on other people. It's not enough to consider how we interact with others directly, but we must also consider the indirect, far-reaching consequences our actions have on others that we may not ever come in contact with.

This author suggests that smoking may be a bad idea, not because of second-hand smoke, but rather because of the influence that such a habit may have on younger generations. Watching football could be unethical because it reinforces beliefs on war and male superiority. Young men may grow up thinking that woman should cheer them on while they go off to battle and kill people. Finally, for a woman to have a baby is a serious moral dilemma, because it perpetuates the stereotype of a woman being a stay-at-home-mom while the man makes money in the workplace. Young women, who see a newborn sibling in the arms of its mother, may unwittingly think, 'Gee, I want to be a mother when I grow up.' Do you see how each of these seemingly innocent actions could have an effect on uninvolved parties? Clearly, people who smoke, watch football, and give birth are operating on dangerous ethical territory.

An externality is an event in economics in which a transaction between two parties has an effect on other parties that are not involved in the transaction. The most common example of an externality given is environmental pollution. The product you buy from a factory that dumps pollution into a river may inadvertedly cause the death of Rosco--who catches and eats a poisoned fish downstream. Rosco just wanted to eat some fish. He had nothing to do with the transaction between you and the company. That is an externality. They are everywhere. But not all of them are bad. Suppose there is a thief going around your neighborhood and looting houses. He gets to your neighbor's house and, little does he know, your neighbor has a silent alarm. Within minutes, the police are there to arrest him. Your house was next but he never reaches it because of the alarm that your neighbor purchased from a security company. You were not involved in the transaction but you benefitted from it. Again, externalities are everywhere.

What is my point? That externalities are realities. We live in a social world. We interact with each other. There are going to be consequences of those interactions. Of course, we ideally want to minimize externalities--whether positive or negative. We don't want to pay for our neighbor's security and we certainly don't want to kill Rosco. But we have to recognize that externalities are there and they aren't going away. No matter what economic system we live under, there will be indirect consequences of our interactions with others or with our environment.

What should we do then? Well, no matter how 'ethical' we wish to be, none of us wants to be the unfortunate externality of someone else's decisions. I suggest that it is a good idea to think of the indirect, unintended consequences our choices may have. However, I don't see the examples above involving smoking, football, and having babies as being legitimate. Smoking does not force a child to pick up the habit. Nor does watching football make young boys join the army or having babies make young girls grow up to be submissive man-slaves. Each of these children, regardless of how heavily influenced they are, have a choice to make in the matter. Rosco could not choose whether or not he wanted to die after eating the fish. Nor could you choose whether or not you wanted your house robbed after the thief was arrested from your neighbor's house. The things we really need to consider, therefore, are the things in which uninvolved third parties have no choice but to be affected by our decisions. Those are the externalities that really matter.

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