The article on Externality, is talking about the two different types of externalities which are positive and negative. A positive externality is something that actually benefits the society as a whole; an example of this would be environmental cleanup. A negative externality is a lot more common, an example of this is pollution. There is a problem that is created from this where that companies do not fully measure the economic costs of their actions. Because they don’t subtract these costs from there revenues, so profit is inaccurately portrayed. This is where the government comes into play it is there basic goal to have companies internalize externality costs. For example if a company causes someone to get sick from there pollution then the company will be liable for the medical bills. So this way the company can more accurately compare revenues and expenses and decide if production is profitable. What do you think is this how it should be measured?


rico said...

Companies do subtract costs for litigation and other fines due to neglect, which could be pollution, faulty equipment, etc.. As far as if they are destroying the environment, that is hard to measure. Some European countries are on a system where they are only allowed so much pollution per company. There is a cost for each unit of pollution, so companies try to minimize the amount used. If they do not use all the units alloted to them, they may sell them to other companies.

Fred said...

It has always been difficult to measure the total effects of one's actions, whether it be an individual or a company. In most cases, we can't put all of the blame in one area, lots of time it spreads into another domain. It's difficult to say that it is companies who destroy the environment. Individuals probably do just as much damage; it's just easier to put the blame collectively on the big guys.

Dr. Tufte said...

Understanding externalities is one of the undertreated topics in economics.

Rico is actually describing something similar to what we cover later in the tragedy of the commons experiment.