Tag Archives: externalities

Environmental Economics

Negative Externalities of Fumigation in Poultry and Piggery Operations

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What is a negative externality? Appreciate the importance of knowing and understanding externality, an environmental economics concept, by reading this article.

In environmental economics, one of the interesting and useful concepts discussed is externality. And I was reminded of this concept when I took a trip, together with friends and family, to Kitu-Kito. It is an ideal spot to spend quiet time or to commune with nature . The place can be accessed within 30-minutes of leisurely driving from the City of Puerto Princesa.

It’s a holiday so we thought of having a picnic on board a raft made of large PVC pipes that a motorized boat tows along a river towards the open, deeper parts of Honda Bay. We did a similar trip several months back—but without the flies.

Why so Many Flies?

What reminded me of the externality concept? Well, I noticed an unusually large number of flies swarming at our food. We have to keep the food containers closed.

I asked why there are so many flies that day. The pests somewhat curbed our appetite because we all know that flies are harbingers of many kinds of diseases.

According to Penn State University (2014), flies transmit at least 65 diseases to humans. Flies leave pathogenic organisms in excretions upon alighting on food.

This is disturbing as this would mean that we might ingest contaminated food because of flies landing on our meal and doing their nasty behavior of regurgitating or excreting things that we don’t want. Getting ill means lost work hours or lost opportunity to do other important things.

flies on plate
Flies on plate after lunch.

Just curious what could have caused this large number of flies to come and pester us, I asked the group if anyone knows why. Then our boatman said, “This happens every time those guys operating the poultry and piggery in the upland spray fumigants to get their farm rid of flies.

“Ah, that’s an excellent answer to my question. ” I nodded indicating my enlightenment. Everybody new to the place sure learned something that day.

Negative Externality of Fumigation

Flies pestering our meals is a negative externality of fumigation.

The externality in the foregoing short narrative are flies swarming the neighborhood when fumigants are in effect. They were not killed on the spot but escaped from the poultry and piggery farms. Their eggs and larvae must have been killed but the adults are scot-free—and posed danger to neighboring houses and, us, picknickers.

The escaping flies that potentially bring diseases with them is a side effect of fumigation in the poultry and piggery farms. This is a negative externality that is not reflected in the cost of services involved in the operation of the farms.

To internalize the externality or to correct the inequality in benefits as a result of the operation, the poultry and piggery farm owners should pay parties affected by their activities. They should pay us for lessened enjoyment of the sea scape and the cool breeze because we have to contend with the flies that pester our meals.

How much should they pay us? This concern requires the conduct of a study. If we complain about the negative effects of the poultry farm, we should show the link between their operation and the unusual number of flies that affect third parties like us. Also, the owner of the farms should ask us and the neighborhood how much we are willing to accept as compensation for the nuisance.

Read more about externality in the following article:

Externalities: the Mango Grower and the Beekeeper

References

Pennsylvania State University, 2014. House flies. Retrieved June 21, 2014, from http://ento.psu.edu/extension/factsheets/house-flies

© 2014 June 21 P. A. Regoniel

Environmental Economics

The Externalities of Urban Development

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Should urbanization and development be always greeted with open arms? Here’s a personal account of the externalities of urban development.

Early this morning as I try to enjoy the refreshing light of dawn in our porch and wait for the sun to shine, I expected to breathe the fresh air to fill my lungs and get ready to face another day. But I was greeted by the putrid smell of methane, presumably coming from a neighbor’s pig business, a block away from home. They buy and hold a large number of pigs and cows to be butchered in nearby market that supplies the increasing meat demand of a growing population in the city. Occasionally, someone surreptitiously leaves a herd of goats to graze at the vacant lot next to our house, taking advantage of the fresh grass shoots that spring up whenever I have somebody mow down the tall cogon grasses that easily burn when withered and dry. In the past, I have to frantically douse the grass fire that pose hazard to our house. And the buffer of mowed area of about five meters lessens the risk. But then again, this herd of goats add stench to the already foul air because of their excrements. Their persistent, irritating calls to each other is a distraction to my writing mood.

This scenario is quite different when we settled in this place 15 years ago. The place was quiet and generally rural. I can breathe fresh air and have a good sleep in the sleepy afternoon – deep slumber in a quiet environment. Only the sweet sound of chirping birds are audible. I long for this kind of atmosphere, but here I am suffering the externalities of so-called urban development.

Indeed, now we have piped-in water, electricity that powers up different appliances that provide information and entertainment, can easily access a mall where I spend a large sum of hard-earned money, modern communication gadgets that rapidly get outmoded as new, more pricey ones arrive with better designs or more ringtones than the previous one, a washing machine that replaced manual clothes washing, an air conditioner to cool off hot, humid days in a concrete house, among others. All these “conveniences” become desired targets of what I call the “active scavengers” – people who come to your house and pick anything they want when you’re away. Once, these guys were rarely a complaint.

sunrise

As more people came in and populate the city, the poorer the quality of life had become for me. I, therefore, list down the price of increased urbanization to the general environment below based on this musing:

  1. Poor air quality
  2. Noise pollution
  3. More expenses to keep up with the demands of modern living
  4. Increased threat to life and property

This list of the externalities of urban development should be long but just to put the point across,  these things made a major impact to the way I live. Are there things I could do to mitigate the effects of these externalities that lower the quality of life in the once peaceful place I used to live? As a thinking animal, adaptation takes the form of fight or flight. I can do something actively to change the environment, or escape the undesirable situation. Correspondingly, the ill effects of externalities listed above can be mitigated thus:

  1. Petition that the livestock holding station be located somewhere else, away from the residential houses
  2. Have my room fitted with sound proofing
  3. Buy only what I really need or live simply
  4. Secure the property area with burglar proof fences

Once, a professor from a British university visited our place. He talked about pollution. What really caught my attention was when he said that in many cities in England, they would like to step back in their development because of the high levels of lead found in the hair of young children. They were exposed to large levels of lead from petrol in the air because of a busy thoroughfare.

Where does this take us? This just means that urban planners must see to it that optimal conditions, not maximal, are maintained for the citizen’s greatest benefit. Urbanization and development must be taken with caution and good planning.

© 2013 December 15 P. A. Regoniel

Environmental Economics

Transaction Cost: Unaccounted and Underestimated Expenses Often Overlooked

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The resolution of unfair distribution of wealth entail cost. This is referred to as transaction cost. This article clarifies this concept in view of understanding how one’s actions can affect a great number of people.

In times when controversy arises due to faulty transactions or market failures, the cost associated with it is usually unaccounted for or underestimated. People tend to overlook the significance of transaction cost hence incur expenses which should have been better avoided.

But what is a transaction cost? If you search the internet for a definition of this concept, you will notice that there is no consensus on what it really means. In fact, Korolyova devoted a paper in an attempt to explain it.

Transaction Cost Defined

According to the Business Dictionary, transaction cost is the cost associated with exchange of goods or services and incurred in overcoming market imperfections. Examples include communication charges, legal feeds, informational cost of finding the price, quality, and durability, transport cost, among others.

On the other hand, based on textbook definition, About.com lists the components of transaction cost into 1) search costs, 2) negotiation costs, and 3) enforcement cost. Search cost is the cost incurred in locating information for a potential exchange, negotiation cost is the cost associated to forge an agreement on the terms of exchange, and enforcement cost is the cost of enforcing the agreement.

These definitions are a bit complex especially to an economics neophyte. To simplify matters, Turkcebilgi.com’s examples offer a better perspective of what transaction cost really means.

Transaction cost is:

  • the commission paid to brokers by a stock buyer or seller of stock.
  • the cost of buying a banana, excluding the price of the banana itself, such as the time, energy and effort you exerted to find the kind or price of banana you prefer, cost of transportation from your house to the store, the time you spend in the queue, the effort you made in paying, etc.

Budget conscious mothers tend to overlook this cost. Typically, they tend to spend a lot of time haggling the prices of goods with the vendor whenever possible, walk around in circles trying to find the cheapest price of a pair of shoes, dress, jewelry, among others. They forget the cost in time (opportunity cost), effort (all those energies equate to calories of energy from food to power the walk), and transportation cost to the male with the cheapest goods in town.

Hidden Transaction Cost in Controversial Transactions

negotiation

Based on the definitions provided above, transaction cost may be defined as the costs incurred in the instance of doing business. Let me expand discussion on this subject further to cover a recent controversial issue: the politics of the resource allocation  I recently wrote about. The original transaction involves misuse of public funds, which in business, can be equated to failed market transaction.

As the controversy rages on, lots of energies are expended to pursue the case. I felt I need to write about the high cost involved in this issue and identified these costs as transaction costs that for me unnecessarily becomes a burden to taxpayers.

As the investigations are going on, while concerned government agencies are hot on heels on the alleged perpetrators of misused government funds, costs are incurred. Specifically, the transaction costs associated with the pursuance of this case include the following:

  1. Provision of security, escorts, housing, medical treatment, etc. to the whistleblowers,
  2. Going after the principal suspect and accessories to the crime,
  3. Hearings plus more security costs to keep the suspects unharmed,
  4. Attorney’s fees for both the defendant and the plaintiff,
  5. Privileged speeches and investigations to clarify issues or shed light on some lawmakers’ involvement,
  6. Time, money and effort of people who go to the streets to protest the misuse of pork barrel funds, among others.

These are the transaction costs but these costs can also be treated as externalities of the misallocation of government funds, particularly royalties from sale of natural gas. Unless the issue is resolved soonest, transaction costs will incrementally go up. Had not the major issue arose, no cost would have been incurred for its resolution. Had there been fair distribution of wealth a big portion of which come from natural gas, there would not have been no transaction costs to correct the unfair distribution of proceeds.

How to Minimize or Get Rid of Transaction Costs

How should those involved in transactions reduce or eliminate the associated costs? Firstly, they should be made fully aware that there are costs involved in facilitating transactions. As cases like the misuse of funds can drag for years, a speedy resolution must be made to avoid incurring more expenses. It is obvious, and there are many evidences available to pursue the merits of the case. The problem appears to be that creative dodges made by defendants (as they have enough money to spend) can keep the wheel of justice from moving swiftly. This will entail more cost at the expense of the public.

If it is just a simple transaction of buying, say, a banana, buy that heck of a banana the first time you see it. If there will ever be a difference between the one you bought and the cheapest one available, you have saved time anyway. Time is more important than that negligible savings on price. Five minutes of valuable time spent with your children or loved one is way too important to miss.

© 2013 October 9 P. A. Regoniel

Environmental Economics, Environmental Issues, Research

The Relationship Between Bribery and the Environment

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Bribery can lead to environmental degradation. What are the evidences? Are there solutions to this age-old corrupt practice? This article explores these issues.

The recent spate of corruption highlighting a businesswoman allegedly bribing government officials to channel billions in taxpayers money to fly-by-night or bogus non-government organizations prompted me to write this article. Since my concern is largely on the environmental implications of events like this, I reviewed literature on how corruption, specifically bribery, relates to the environment.

Bribery and the Environment

Considering that governance becomes the prime focus of analysis when corruption issues arise, this discussion will examine undesirable practices, specifically offering of incentives to public officials in view of exempting them from the rule of law or pocketing taxpayers money for their own selfish purposes. Bribery occurs at different levels of government, that is, from the highest administrative or lawmaking bodies to operational levels charged with law enforcement responsibilities.

A brief review of reports on the relationship between bribery at different levels of government and the environment yielded the following summaries and conclusions:

1. Bribery of law enforcers leads to low compliance among violators thus pressure to natural resources.

Sundström’s study[1] in South Africa revealed that law enforcers’ acceptance of bribes from small-scale fishers who commit illegal fishing such as poaching decrease their trustworthiness. As a result, fishers tended to exploit their natural marine resources more than what it can sustain. Overfishing upsets the balance of the marine food chain such that the population of target fishes decline and sizes of fish caught by fishermen get smaller through time.

2. Ineffective regulatory systems results to pollution.

Environmental inspections as a regulatory system serve to deter non-compliance with rules and regulations set forth for approval of environmentally critical projects. Once those tasked to do such inspections receive money in exchange for favorable reports on the project’s environmental performance despite exceeding permissible emission levels, pollution results. The effects of pollution may be immediate (acute) or long-term (chronic) depending on the nature of the pollutant.

For example, if a mining project does not have adequate leachate treatment facilities as a result of non-compliance to required mitigating measures, high concentrations of heavy metals will be discharged into waterways. This will disrupt the normal biological processes in aquatic ecosystems where various organisms including man derive sustenance.

3. Environmentally harmful policies are formulated such that disasters occur.

When unscrupulous individuals bribe lawmakers to craft policies towards their favor, environmentally harmful policies result. For example, if the government allows logging in highly elevated or watershed areas, lack of trees to cushion the impact of heavy rains result to flooding of low-lying villages. This will mean loss of lives and property aside from loss of important ecological goods and services.

4. Unfair allocation of environmental resources lead to further environmental degradation.

thief

If high-ranking officials accept bribes to allow large commercial fishing companies to fish in municipal waters, unfair allocation of marine resources occur. As small fishers do not have the means to compete with the efficient, mechanized fishing equipment of large-scale fishers, they will resort to illegal means that further degrade the environment. One of them is the use of dynamite in fishing wherein large areas of productive reef are destroyed. The attitude that prevails is “Well take them (the fish), before they (the large-scale fishers) do.”

What has been done so far to curb bribery?

Acceptance of bribes shows the vulnerability of those tasked to govern and enforce the rules and regulations of a country. Many solutions have been suggested, recommended and enforced including reforms to improve transparency and accountability, legislation to reduce flaws in existing laws, reducing the discretionary powers of public officials, greater awareness among the people, involving citizens in government affairs, and so on and so forth.[2] However, despite these measures, corruption persists in many countries.

The Economic Solution

Based on the resource allocation point of view, the practice of bribery continues because it offers those involved to get more than enough resources to satisfy their wants. The one giving the bribe and the one receiving the bribe both benefit from their transaction but third parties suffer. The negative environmental impacts then are externalities of these transactions. There is a need, therefore, to integrate the externality of environmental degradation as a result of bribery.

In view of developing a research concept using the economic solution of internalizing externalities, economic valuation may be used as an approach to determine if there is a relationship between the amount of bribe and the cost of environmental degradation. Thus, the following questions may be asked:

  • Is there a relationship between the amount of bribe and the corresponding cost of environmental degradation?
  • How much environmental degradation occurs for a certain amount of bribe?

For the benefits gained by both the briber and the bribed (my own terms for brevity), monetary incentives to disadvantaged parties can offset the negative effects of environmental degradation. The point is, the guilty parties should be made to pay for the consequences of their actions. Penalties should be proportionate to achieve environmental justice.

Environmental justice is defined by the US Environmental Protection Agency as “the fair treatment and meaningful involvement of all people regardless of race, color, sex, national origin, or income with respect to the development, implementation and enforcement of environmental laws, regulations, and policies.” This means fair allocation of natural resources to everyone should be pursued in a democratic society.

Reference

1. Sundström, A. (2013). Corruption in the commons: Why bribery hampers enforcement of environmental regulations in South African fisheries. International Journal of the Commons, 7(2). Retrieved from http://www.thecommonsjournal.org/index.php/ijc/article/download/370/360

2. Winbourne, S. (2002). Corruption and the environment. Retrieved September 11, 2013, from http://pdf.usaid.gov/pdf_docs/PNACT876.pdf

© 2013 September 12 P. A. Regoniel

Environmental Economics, Environmental Issues

List of Negative and Positive Externalities of Oil Spill

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Many people view oil spills as grossly disadvantageous to everyone. In reality, there are benefits gained by some sectors from disasters like this. Read and find out how could this be so.

There was a lot of concern about wasted lives and property due to the collision of a cargo vessel and a passenger ferry last August 16, 2013 in Cebu in central Philippines. Aside from lost lives due to the accident, there were also concerns on the ill-effects of oil leaked into the environment. The sunken passenger ferry spilled thousands of liters of diesel and bunker oil that affected around 5,000 hectares of nearby coastal areas[1].

The oil spill in Cebu, although locally significant, pales in comparison to major oil spill disasters in human history. Among those that gained worldwide attention were the oil leaks due to a ruptured well in the Timor Sea in 2009 and a similar incident in the Gulf of Mexico in 2010. The latter one is considered the worst US environment disaster, second worldwide to the intentional oil spill during the gulf war in 1991[4].

Externality: Cost and Benefit of Oil Spill

These oil spills have both negative and positive externalities. An externality is a cost (negative effect) or benefit (positive effect) to a third-party as a result of an activity, transaction, or event like the oil spill. The third-party is originally not a part of the transaction, activity or event.

Oil spills are usually perceived negatively owing to the overwhelming impact to the environment and people’s livelihood especially those who are natural resource dependent. But viewing it more objectively, benefits accrue to other parties as it opens new opportunities to some sectors. While companies responsible for the disaster incurred millions of dollars to contain the spill and make reparations, benefits accrued to those tasked to do the clean-up, support services, and associated activities.

Here are lists of positive and negative externalities based on reports about the oil spill in Cebu[1], Timor Sea[2][3], and the Gulf of Mexico[4][5].

Negative Externalities of Oil Spill

  1. Fishing opportunities for thousands of fisherfolk lost due to mangrove contamination
    dead fish
  2. Reduced marine productivity due to disruption of the food chain
  3. Opportunity cost due to government dispatch of ships and aircraft to conduct clean-up operations
  4. Loss of marine and coastal wildlife (e.g. fish, birds, turtles, sea snakes, mammals)
  5. Loss of tourism revenue (affects surfers, beach goers, sports fishing, SCUBA diving)
  6. Loss of ecological function of marshlands and mud flats
  7. Lost income for tourism industries
  8. Decline in aquaculture production (e.g. seaweed farms, fish cages, shellfish beds)
  9. Oil price hike due to lost oil production
  10. Health costs for those engaged in clean-up operations

Positive Externalities of Oil Spill

  1. Research opportunity – universities dispatched research ship to collect samples and analyze toxicity of water; monitoring project
  2. Containment technology development – improved devices or techniques to contain oil spills in extremely high pressures underwater
  3. Local materials development to contain oil spills (e.g. coconut husks, sawdust, chicken feathers, and hair)
  4. Increased profit from sale of dispersants and chemical compounds that break the oil into smaller molecules
  5. Work for thousands of workers addressing the spill
  6. Income from treatment and storage of retrieved oil
  7. Consultancies for oil spill experts
  8. Better oil field operation practices to prevent future disasters
  9. Thousands of scoopers and respirators sold to the benefit of manufacturers
  10. Income from rentals of portable toilets and bedrooms

Conclusion

While these lists of the negative and positive externalities of the oil spill are not exhaustive, these highlight the importance of viewing things objectively. These negative and positive externalities may be valued to see the overall impact of the disaster.

It must be pointed out, however, that the expected net benefits from oil spill will likely be negative because the effect of the oil spill to the environment can last for years. And the natural environment as life support systems is priceless.

References

1. Rappler. (2013, August 19). Oil spill: Cebu under state of calamity. Retrieved August 29, 2013, from http://www.rappler.com/nation/36787-oil-spill-cebu-under-state-of-calamity

2. Al Jazeera. (2009, October 30). Timor sea oil leak continues. Retrieved August 29, 2013, from http://www.aljazeera.com/news/asia-pacific/2009/10/200910307564274566.html

3. Arup, T. (2009, November 3). (2009, November 3). Mud to be used to stop oil rig fire today. In The Sydney Morning Herald. Retrieved August 29, 2013, from http://www.smh.com.au/environment/mud-to-be-used-to-stop-oil-rig-fire-today-20091102-htfp.html

4. Dell’Amore, C. (2010, May 13). Gulf oil leaks could gush for years. In National Geographic Daily News. Retrieved August 29, 2013, from http://news.nationalgeographic.com/news/2010/05/100513-science-environment-gulf-oil-spill-cap-leak/

5. BBC News. (2010, May 30). Gulf of Mexico oil leak ‘worst US environment disaster.’ Retrieved August 29, 2013, from http://www.bbc.co.uk/news/1019433

© 2013 August 30 P. A. Regoniel

Environmental Issues

Number Coding Scheme: Is It a Good Idea?

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Is the number coding scheme implemented in Metro Manila a good policy to reduce traffic congestion? Probably not. Read on to find out why.

The number coding scheme is up again in Metro Manila, this time adding another day ban on the last number of a vehicle’s plate for a specific range of time, i.e., from 10am to 3pm. Is this a good idea at all?

If the intention of the number coding scheme is to reduce the number of vehicles to avoid road congestion, I would say this is a stop-gap measure. In the long term, this would worsen urban pollution as unexpected results can come out of it.

Unexpected Results

I remembered encountering this number coding scheme idea in the textbook authored by English[1] while preparing my lectures for introductory environmental economics students. According to a study conducted in the country (I misplaced my book so I cannot exactly remember the country) that implemented the number coding scheme, the policy produced unexpected results. Instead of decongesting the roads, the opposite took place — more vehicles roamed the streets.

The researchers tried to find out why this happened. They discovered that those who can afford to buy another car did so, to avoid the limitation and the inconvenience of not being able to use their cars on days their plates are banned from the streets. Thus, the roads got all the more congested and air pollution in that city worsened. The added pollution is an externality.

warning

Source: xkcd

Perverse Incentive

In economics, the unexpected result or the undesirable result of a policy is referred to as a perverse incentive. It is never the intention of the number coding scheme to add more vehicles on the road. It occurred because the planners did not foresee that the scheme would encourage vehicle owners to buy another vehicle. They would not give up their convenience, or probably their dire need to use their vehicles daily.

I am not not aware if the Metro Manila Development Authority conducted any study to find out if indeed the number coding scheme had a significant impact on regulating traffic in the major thoroughfares of Metro Manila. It would be interesting to know if the number coding scheme as an incentive was not, in reality, a perverse incentive in the case of the Philippines.

If no study was done to evaluate the impact of the former coding scheme, then obviously, the additional day ban on vehicle plate number is just another guessing game. As I browse feedback on the number coding scheme, I landed on a site that lists the coding scheme as another stupid law.

Perhaps graduate students in numerous universities in Metro Manila may be interested in pursuing this issue as their research topic.

Reference:

1. Field, B. 1997. Environmental economics: an introduction. 2nd edition. New York:
McGraw Hill. 490 pp.

© 2013 July 15 P. A. Regoniel

Environmental Economics

Externalities: The Mango Grower and the Beekeeper

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One of the important concepts in environmental economics or economic valuation is the concept of externalities. This concept may sound so sophisticated and complex to understand to the novice in environmental economics. However, while teaching this concept to students I realized that this is a very important concept that everyone must know to be able to come up with informed decisions. Understanding what externalities are and how they can be used in making the most of your decisions can make a difference between “the devil and the deep blue sea” as the popular adage on difficult decision situations say. I narrate the story of the mango grower and the beekeeper to further make clear the concept of externalities.

Definition of Externalities

Externalities are just those unexpected outcomes or third party effects that may arise when someone makes a decision while making transactions with another entity. That entity may be a person, an organization or a company.

The concept of externalities can be made clearer by the classic story of the apple grower and the beekeeper. However, this is a temperate country example so to put it in context in tropical countries, I will relate the story of the mango grower and the beekeeper as an adapted version.

The Mango Grower and the Beekeeper

In a small island in the tropics, two farmers engaged in two different livelihood activities. The first man grows mango trees and produces mangoes for local consumption and exports these mangoes abroad. The other man, a beekeeper, rears bees in culture boxes also for the same purpose, i.e., for local consumption and export.

beekeeping and externalities
The author once engaged in beekeeping.

These activities went on for several years and both businesses thrived until the beekeeper noticed that the bees are no longer bringing in a significant amount of nectar in the culture boxes. This phenomenon happened when the mango grower started to cut down some trees in his farmland to make way for a road to facilitate transport of mangoes from his growing export business.

Due to poor honey production, the beekeeper decided to stop engaging in beekeeping because his income could no longer sustain his once thriving business. Since the decline in honey production, he had to trim down on the number of employees until he could no longer support even two of them.

Back to the mango grower, the farmer noticed a decline in mango production since his neighbor beekeeper stopped his business operation. What could be the reason behind this decline?

The mango grower, concerned that he might likewise stop his mango growing business like the beekeeper, sought the help of a local university knowing that there are faculty members engaged in agricultural research. The university dispatched a veteran researcher to look into the plight of the mango grower (that person could be someone from the environmental science department). The main objective of the researcher is to find out the reason why there was a decline in mango production.

The environmental scientist, knowing the classic story of the apple grower and the beekeeper, related the story to the farmer. He said, the decision of the beekeeper to stop his beekeeping operation affected the mango grower’s agricultural production because the bees pollinate the flowers of the mangoes. Since the mango grower decided to cut down some of his mango trees to make way for the road, the availability of nectar from these mango trees also declined. Hence, less honey for the beekeeper.

Realizing his mistake, the mango grower decided to see the beekeeper and explain the scenario. They were both illuminated of their situation. The mango grower convinced the beekeeper to resume his business and while doing so, he will compensate for the pollination services of the bees. He also assured the beekeeper that he will plant more mango trees to replace the number of trees that was lost. From then on, their business once again thrived and they lived happily ever after.

The Externalities in the Story

What then are the externalities in the story of the mango grower and the beekeeper? These are the unexpected benefits that arose from their business operations. What are these benefits?

Two unexpected benefits are evident in the business operation of the two farmers. These are 1) the pollinating services of the bees, and 2) the mango trees’ flowers as source of nectar.

Once these externalities are recognized and incorporated in decision making, these are internalized externalities and they no longer are considered externalities. So when someone talks about internalizing the externalities, this refers to the incorporation of the third party effects in any transaction. This means that in the story, the mango grower internalized the externality of the pollinating services of the bees.

But is the other externality, that is, the flowers of mango trees that serve as nectar internalized? In this story, it is not. How can this be internalized? The mango grower must also be compensated by the beekeeper because the honey are obtained by the bees from the mango trees. So if honey production is good, the beekeeper must likewise compensate or provide a share to the mango grower to internalize this externality.

Conclusion

From this story and discussion, externalities therefore are the benefits, disadvantages, or third party impacts that may ensue as a result of any situation or transaction that affects the environment. Thus, to come up with sound decisions and to achieve environmental sustainability, these externalities must be internalized.

Externalities may be positive or negative. I illustrate both types of externalities in the gulf oil spill incident in Mexico several years ago that caused not only negative externalities but also positive externalities. You may click here to read the article to further strengthen your understanding of externalities.

© 2013 November 3 P. A. Regoniel