On Externalities, Economics and Dr. Suzuki

“Dr. Suzuki’s remarks on externalities were clarified in an interview given to the magazine Common Ground: ‘I won’t go into a long critique, but currently nature and nature’s services – cleansing, filtering water, creating the atmosphere, taking carbon out of the air, putting oxygen back in, preventing erosion, pollinating flowering plants – perform dozens of services to keep the planet happening. But economists call this an ‘externality.’ What that means is ‘We don’t give a shit.’ It’s not economic. Because they’re so impressed with humans, human productivity and human creativity is at the heart of this economic system. Well, you can’t have an economy if you don’t have nature and nature’s services, but economics ignores that. And that’s an unbelievably egregious error.’”

  • David Suzuki needs an economics refresher course, By MIKE MOFFATT, The Globe and Mail, Last updated Thursday, Oct. 11, 2012 10:36AM EDT

An apology is a bit much. This is what Mike Moffat – a professor of an assistant professor in the Business, Economics and Public Policy group at the Richard Ivey School of Business – wanted in response to some criticism of Dr. Suzuki. Dr. Suzuki’s sin comes from pointing out a problem that has existed in modern economics for nearly forth years: the inability for it to deal with environmental concerns.

To understand Dr. Suzuki’s point, one needs to understand a concept called externalities. Externalities, made simple, are events that fall outside of an economic model. For example, think about car insurance. Premiums for car insurance, in theory, are determined by the risk of an individual getting into a single accident. However, the truth is that a part of the premium cost is driven by those who drive without any insurance.

The same thing is true when it comes to pollution created by some companies. While, many companies dispose of their pollution in a safe and responsible; other firms choose to dispose of their chemicals in a way that might endanger our health, the health of our forests and our waterways. For economists, these acts of irresponsibility are externalities. Or put in different words, externalities are important because they are costs which do not fit into an economic model. Therefore, the true price of an externality could be suffered by someone or something which did not create the product or issue in question.

In our modern world, the problem of externalities occurs quiet frequently. Look at the issue of asthma and pollution. Modern science repeatedly finds that there is a strong link between increases in asthma rates, industrial activities and our environment. A 2010 Joint Study by the University of California at Berkeley and Stanford University found that there is a link between the exposure of dirty air and “changes in a gene that, in turn, is connected to more severe asthma symptoms.”  Its proponents argued that “while air pollution is known to be a source of immediate inflammation, this new study provides one of the first pieces of direct evidence that explains how some ambient air pollutants could have long-term effects.” (Press Release, Air pollution alters immune function, worsens asthma symptoms, University of California at Berkeley, October 5, 2010).

To many this study should not be a surprise.  Since the 1980’s, the US Centers for Disease Control and Prevention has reported that the rate of asthma diagnosis has doubled. Therefore, 1 in 10 children in the States are now affected by asthma. (Childhood Asthma On The Rise As Political Battles Threaten EPA’s Air Pollution Rules by Lynne Peeples, Huffington Post.com, Updated: 03/14/2012 12:09 pm)

However, with all of this being said, various economic players do not have to pay for the health consequences of their actions. For example, does Ford Canada pay a fee for each non-emission car that it produces? Or does Rio Tinto Alcan pay a fee for all of its emissions? The general answer is no.  Digital Camera Stores have the same tax regime as Automobile Dealerships.  Accountants live under the same regime as miners.

Furthermore, there is no “market” that allows individuals and companies to internalize the cost of their pollution or other anti-social behaviour. Existing Carbon Taxes or cost recovery regimes in BC, Alberta and Quebec don’t recover nearly enough to offset the costs created by externalities.  For example, American Studies indicate that the annual cost for asthma care could be as much as 7% of the median household income. Or put differently, there is no way for the average housshold to transfer the cost of asthma, induced by “poor air” onto the persons who created the poor air.

The same is true if one looks at the issue of carbon emissions. While, it is true that BC Carbon Tax has dropped British Columbia’s average per capital sales by 15.1 per cent since 2008 – in opposition to the 1.3% in the rest of Canada’s per capita sales – the Pembina Institute has argued that a proper Carbon market would increase the cost of carbon emissions from $30 to about $100 and $200 per tonne. At the end of the day, externalities of market players are not internalized. Therefore, Dr. Suzuki seems to be correct.

To further illustrate this point, we could look at what Economists are talking about. In the media, economists are talking about issues like Household Debt, Commodity Prices, Exchange Rates and Interest Rates. As my evidence, I will use the Canadian Journal of Economics. Produced by Canadian Economics Association, the Journal is a critical scan of some of the best peer-critiqued, economic analysis. Since 2010, there have only been two pieces on the cost and benefit of environmental regulation. While in August 2012 issue alone, there were four papers on international trade, two pieces on monetary policy, one each on agricultural, housing and R&D concerns. Thus, marginal tax rates and interest rates are more important to economists than the cost of environmental issues.

Therefore, without any evidence of a huge uproar from the Economics Community, one has no evidence that there is a huge concern among economics about environmental manners. Or in addressing Mike Moffat’s point, the silence of his community has been damning. There has been no huge move to sway governments – both provincial and federal – about the need for regulation. There has been no desire for economists to question the Harper Government’s  moves to “water-down” environmental regulations. The Harper Government has always contended that their legislative actions are backed up by economic reality and economists have never questioned those assertions.

As a Liberal, I know that balancing legislative priorities are essential. Therefore, it is not a surprise that the Trudeau Government started conversations on the Clean Air Act.  Nor is it surprising that those conversations were concluded under the Progressive Conservative Government of Brian Mulroney.  As we have seen in the past, Liberals view Environmental and Economic issues as being complimentary rather than adversarial in nature.  Therefore, to me, the silence of Economists says that there is a lack of concern, in that community over the environmental reality of Canada.

As a result, it is not surprising that Dr. Suzuki wagged his finger. For, he knows that environmental costs are expensive. China, for example, has regions where farmers have had to pollinate flowering trees themselves because most of the pollinating bees are extinct. These changes have cost China tens of millions of dollars. (Nature’s sting: The real cost of damaging Planet Earth, 11 Oct 2010, By Richard Anderson Business reporter, BBC News) Or one could look at a two-year study for the United Nations Environment Programme, entitled The Economics of Ecosystems and Biodiversity (Teeb). It estimates that the damage done to the natural world by human activity in 2008 at between $2tn (£1.3tn) and $4.5tn.  With that being said, Canadian Economists have decided not to raise their voices about the costs levelled against society, our planet and our country by private industry. In fact, Economists have not mentioned the need for Industrial and Private Sector responsibility to deal with their societal costs. This includes ensuring that the planet can cleanse itself, pollinate its forests and prevent soil erosion. For, as we have seen, environment costs have consequences.

If Economists cared, one would argue that they would discuss the issue. For, there are many environmental problems that could use an economic solution. To fix this ‘externality’, economists could recommend regulatory, tax or market driven solutions. Economists could advocate for those changes regularly. They could argue about the need to deal with the environmental costs. To paraphrase, Dr. Suzuki, Economists need to show that they give a shit. To date, Economists have not shown that action. Maybe, they should?

PDF can be found at http://www.scribd.com/doc/109952406

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One thought on “On Externalities, Economics and Dr. Suzuki

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