Market Failures Con't

Externalities:
One of the most severe critiques of the free market is its inability up till now to price-in externalities. Externalities are hidden financial costs passed off to others without those people being compensated. Years ago, Mayor Rudolph Giuliani wasn't able to get strip clubs out of the city based on moral grounds. So he calculated the increased costs for the city and the surrounding neighborhoods in purely financial terms. He was able to show that surrounding these establishments there were more fights, more DUI's, and more vandalism... all of which required a greater police presence which cost money. He was able to get rid of these establishments by putting on paper the actual costs.

I read recently that the true cost of gasoline is close to $15 a gallon. What needs to be taken into account is government subsidies to the oil companies, the cost of roads, the cost of fighting wars for oil, and pollution. Charging the "real" or "true" price of a good would help people make better and more rational decisions.

Another example might be a factory that produces plastic 2 liter bottles and employs 100 people but produces a byproduct: air pollution that increases cancer for its 5,000 residents by 400%. The social costs of such a factory are born by the residents, but should be incorporated into the cost of the 2 liter bottles, with the increased medical bills being born by the factory and/or its insurance policy.

In the States, workers that are endangered generally get paid a premium for the risk they endure. Policemen and women, miners, utility workers all get paid a premium. And there are even charts that provide guidelines for how much someone will be compensated in a general accident if they lose a toe as opposed to a foot or are injured in another way. Somehow, we have tried to make economic trade-offs when faced with loss of life/loss of health/loss of limb.

The market has not done a good job of incorporating these costs. Ideally, each product sold should list as much information as possible: what are its ingredients (crops, natural resources, etc.), where each major ingredient/natural resource was ‘harvested’, if for clothes or food...what pesticides, steroids, antibiotics, fertilizers, and fungicides were used, the wages of the "harvesters" and other laborers, how far it traveled and by what method of transportation.

There would certainly be a point when the cost of calculating the information would be greater than the benefits. But legislators could decide on the biggest 4 or 5 economic factors and establish charts rating how efficient the companies were at estimating their costs (ALL their costs) or passing costs onto employees or the environment (both people and the earth).

On a small scale, this has started happening in some food circles. Interested consumers can purchase pork at the beginning of that particular pig's life. Buy the piglet and watch a pig-cam to see how well/poorly their pig is being treated, their living conditions, as well as knowing who sired the pig and if any antibiotics, steroids, etc. were given to the pig.

This has also started happening by some countries who are financially capturing the value of their ecosystems: forests and rainforests. In Costa Rica, payments are made to landowners for their "ecosystem services". The landowner agrees to preserve their forest for 20 years and the governments sells carbon offsets based on that land staying forested. The value of the forest is being calculated based on its contribution to the following areas: biodiversity, scenic beauty, hydrological services, and carbon sequestration.

I heard recently that some countries are demanding payment from the West for keeping their forests intact because they serve as the proverbial 'kidney' of the world. They are filtering a lot of the West's pollution and carbon and should be compensated.

The poor of the US and the poor of the world bear the brunt of externalities more than the middle-class or upper-class. City dumps and high polluting industries tend to get placed in poorer areas because the poor complain less. On top of their earlier economic problems, health concerns get added to the mix as they experience higher rates of asthma, cancer, birth defects, breathing disorders, etc.

I remember traveling to Lima, Peru years ago and in a poor neighborhood seeing a creek that was an unnatural neon green. I remember being told it was a diaper factory. Not only were the factory workers paid a low wage, but the entire community was suffering because of the pollution. That neighborhood paid the price for disposable spending on disposable diapers of the West.

I have heard several times that the climate change we are experiencing is being felt in some regions more than others. For instance, the Arctic and parts of Alaska are seeing their temperature rising more than the continental US. This is causing numerous problems in Alaska: threatening polar bears, killing trees, raising sea levels, causing drought, etc. These climate changes are affecting native Inuit peoples more than US citizens. Eventually we may see a world court where these charges can be settled. The Inuit people should have the right to bring a legal case against the US people and seek damages.

If the market is to function better, it must start to incorporate externalities in its disclosure and pricing. Even mandating that labels on goods incorporate more information would be a good start. The market doesn't have to fail in pricing externalities...it could start to make relevant costs more 'visible' to consumers. In that way, all of our decisions would be more rational because we would be able to take into account important information previously unreported.