Internalizing Externalities
Often times in life we don’t see the full consequences of our actions. At least, we don‘t see them immediately. We do x intending y, only to find out later that z happened too. In economic terms, that described above is more or less an externality.
One topic I found especially interesting in my *Economics for Everyone* class is the concept of these externalities. Specifically, how we can internalize externalities. Let me give an example:
I was eating a Reese‘s cup the other day, and was thinking about what it costs me to eat that as a snack. The common answer would be the $1 I paid for it, but that is not the true cost. As with anything in life, there are trade-offs, and these trade-offs come with their own set of added costs. For instance, since I‘m getting some calories from the candy, I will have to get less calories from other sources, sacrificing some more nutrient rich foods like fruit, leafy greens, etc. Alternatively, I simply eat the rest of the food as normal, but end up with a surplus of calories.
The decision to eat a single Reese‘s likely won‘t cause health problems, but the many pieces of candy I eat over the course of my whole life could add up, resulting in me having to undergo a reparative surgery to fix damage done by junk food. This surgery has a cost, and that cost is, at least for the purposes of our discussion, an externality. I eat the candy bar today, but only later do I have to undergo surgery, and I likely wouldn‘t relate the two events.
To internalize that externality, we could divide the cost of surgery and add it evenly to the price of each candy bar eaten. Now, we are a bit closer to understanding the true cost of the Reese‘s.
Of course, I also got enjoyment out of it, which may have improved my mindset, thus countering out the bad nutrition and actually helping me live a longer life due to increased happiness.
By now you may be starting to get it, but the applications for this kind of thinking are quite vast. Another application which is quite a hot topic now, is the idea of a carbon tax. Basically, a carbon tax takes the idea of externalities and applies them to environmental issues, with the idea being that if people see the true cost of their actions, they will either live more efficiently or pay enough to properly offset their mess. You can also imagine these trains of thought surrounding infrastructure, education, and so on.
Whatever the topic may be, there are probably some unseen costs to our actions. Of course, I am far from perfect-I ate the Reese‘s cup after all, and am writing this while burning jet fuel at 32k ft. At the end of the day, the idea is not to avoid behavior which has less than ideal consequences, as some such actions will likely be unavoidable in our lives. Rather, by thinking about these extra costs, we can begin to calculate the true cost of our purchases and decisions, and maybe even factor them in to account for them along the way.
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Photo is the reading room inside the Jacob und Wilhelm Grimm Center at Humboldt University in Berlin.
