The dominant form of economic philosophy since the 1980’s has been the market system. The problem with this approach is that its advocates assume that the market always produces the most efficient solution to problems. If all of the costs and benefits of an action were included in the market process they might have a point. However, markets do not take many costs and benefits into account. These excluded items are called benefit and cost externalities.
An externality is any cost or benefit generated by a market action that is not embodied in the market’s decision making process. For example, in the past Texas considered Polio immunization to be a private benefit to the person vaccinated. As a result, many children were not vaccinated. This led to the external cost of having children in Texas exposed to Polio. As we all know, no vaccine is 100% effective. This means that some vaccinated children would contract Polio even though they were vaccinated. However, if all children had been vaccinated the probability of anyone contracting the disease and passing it on would have been very low. There is a societal benefit from universal vaccination that is not taken into account by the private market. Private markets would not have eliminated the scourge of Smallpox.
In addition, business does not include external costs in the cost of production. For example: An electrical utility using high sulfur coal to produce electricity in Ohio doesn’t include the cost of dead fish in the Adirondacks or the reduced life of a Pennsylvanian’s car finish in its production costs. These external costs are bourn by New York sportspeople and Pennsylvania car owners.
The problem is not that markets do not work. The problem is that as currently constructed there are too many externalities. Attacking markets will, to the average American, appear to be an attack on our very way of life. This approach will not get anyone anywhere in the modern world. There is a need to aim policies and attacks at improving markets by finding ways to internalize the externalities. Markets need to be modified to place external costs into the costs of production and external benefits need to be incorporated in a manner that makes sure that the benefits are realized
An externality is any cost or benefit generated by a market action that is not embodied in the market’s decision making process. For example, in the past Texas considered Polio immunization to be a private benefit to the person vaccinated. As a result, many children were not vaccinated. This led to the external cost of having children in Texas exposed to Polio. As we all know, no vaccine is 100% effective. This means that some vaccinated children would contract Polio even though they were vaccinated. However, if all children had been vaccinated the probability of anyone contracting the disease and passing it on would have been very low. There is a societal benefit from universal vaccination that is not taken into account by the private market. Private markets would not have eliminated the scourge of Smallpox.
In addition, business does not include external costs in the cost of production. For example: An electrical utility using high sulfur coal to produce electricity in Ohio doesn’t include the cost of dead fish in the Adirondacks or the reduced life of a Pennsylvanian’s car finish in its production costs. These external costs are bourn by New York sportspeople and Pennsylvania car owners.
The problem is not that markets do not work. The problem is that as currently constructed there are too many externalities. Attacking markets will, to the average American, appear to be an attack on our very way of life. This approach will not get anyone anywhere in the modern world. There is a need to aim policies and attacks at improving markets by finding ways to internalize the externalities. Markets need to be modified to place external costs into the costs of production and external benefits need to be incorporated in a manner that makes sure that the benefits are realized
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