The Need for Environmental Justice Never Ends Because Externalities Persist

Why Externalities Exist: in Theory and Practice

Environmental regulation exists because it has to if we want to control the environmental harm caused by human activities. This has been the case ever since humans began to settle in one place as a people. ¹ Increasing population densities placed pressure on limited geographic space. The wonders of agriculture and animal husbandry carried with them the costs of increasing human sewage and other undesirable aspects of group living. These problems only grew as populations grew into cities. Sanitation became a foundational issue of city living in early human existence. These problems expanded with industrialization, which created new sources of air, water, and ground pollution through waste products from industrial and manufacturing processes. Collectively, these unwanted outputs of human activity are often referred to, particularly in economic parlance, as externalities.

In its simplest rendition, externalities exist because, if they can, business enterprises will externalize the unwanted aspects of their activities. The paper mill creates pulp and chemical waste in the process of turning wood into paper. The rivet manufacturer creates metal shavings as a by-product of fashioning rivets. The coal-burning power plant creates soot and particulate matter as it burns the coal to generate heat for the steam that will turn electric turbines. The human will create waste products from the ingestion of food and water that is not consumed for metabolic purposes. In all of these cases, there are by-products created: things we do not want that are part of the process in making and using the things we do want, and because we do not want them, they are considered costs incurred in the process of creating and doing the things we actually want. Not paying for those costs by externalizing them somewhere else results in a market failure. ²

The cost of externalities is real and can often be quantified either directly or indirectly. However, the question is not whether or not these costs exist, but rather who ends up paying for them? If a firm has to incorporate the cost of externalities into their operations, then without any intervention that cost will likely be added into the price demanded by the firm for its product or service. This increases the cost of the good or service, thus increasing the price demanded by the firm. Ideally, the firm wishes to keep production costs low to be as competitive as possible. So, if it can shed unwanted costs, it will try to do so. Most pollution in our environment is a result of individuals and firms externalizing unwanted costs onto the environment rather than internalizing those costs. ³

Ronald Coase attempted to reconcile this reality when he argued that environmental harm could be solved by ensuring the price of the harm was incorporated into market transactions. His preferred method was to privatize public resources such as the air and water. ⁴ His argument is borne out in the following example. Through privatizing rights to air and water, market competition can ensure the best use of the resource. Competing bidders for access to a body of water would lead to its best use. A company may want to use the water body to discharge waste. However, those who value the same water for fishing may wish to pay a higher price for fishing access, and there may be a situation where both fishing and dumping can occur: just not enough dumping to impact the quality of the water for fishing. Privatize the resource and let market condition determine the best use.

Coase's argument predates Elinor Ostrom's work on common resources such as air, water, and landscapes. ⁵ Ostrom helped to create a deeper understanding of the inherent nature of externalities by highlighting the unique characteristics of certain environmental resources. Such characteristics made them difficult for privatization, casting doubt on Coase's vision of a market-based solution to externalities in many instances. As Garret Hardin had earlier noted, if finite spaces contained characteristics of a common, there was the likelihood of tragedy following suit. ⁶ The tragedy Hardin was referring to was externalities through the individually rational behavior of free riding. His prescription was to develop rules that effectively limited the potential for free riding, and thus externalities, to occur. Because (as Mancur Olson theorized) without such rules, the common good can lose to individual rational decision making. ⁷ As in Hardin's example, the individual farmer rationally deduces that it is worth putting additional cattle to graze on the limited common space as they see other farmers doing the same. The farmer not only knows that doing so will likely result in destroying the grass on the commons but also knows that failing to do so will allow another farmer that additional grass at the ultimate expense of the commons anyway. The individually rational decision to maximize personal gain is at the expense of the collectively irrational decision to destroy the source of food: the commons.

Hardin, like Coase, discussed the potential for privatization. By privatizing the commons, a single farmer is in control of access to the former grounds of the commons. Now with the ability to exclude others from the property—a right not available in a traditional common—the farmer is incentivized to properly manage the resource for long-term benefits. Indeed, this form of privatization has worked in several areas of the public good. For example, federal fishing regulations have moved to privatize fishing rights in a bid to avoid the commons tragedy. Older methods of regulation, such as days at sea, incentivized a tragedy of the commons approach to maximize personal gain at the expense of the public resource. More recent approaches have favored setting quotas—rights to a quantity of fish—that are allocated to certain individuals: individual tradable quotas are one example. ⁸ In addition, the Clean Air Act Amendments of 1990 established a market-based cap-and-trade approach to sulfur emissions from stationary sources such as power plants. Government has capped total sulfur emissions annually, reduced the cap each year, and then allowed private plants to buy and sell rights to pollute under that cap. ⁹ Both approaches are examples of a mixed form of government intervention that privatizes aspects of public resources and allows market forces to efficiently allocate those resources.

So, externalities exist because private individuals and firms will find ways to not pay for what they deem costs. Government must intervene because of this fact. Thus, government intervention is a reaction to the fact of externalities, not the creation of externalities. To argue otherwise is to completely discount the genesis of externalities and the incentives that surround them. Now, understanding why externalities exist in both theory and practice, it is important to consider who bears the brunt of externalities, and research is quite clear on this question: externalities abnormally accrue to marginalized communities.

Who Bears the Costs of Externalities? Marginalized Communities

There is a large body of research that confirms environmental externalities accrue disproportionately to marginalized communities. ¹⁰ The underlying reasons for this are descriptively economic in nature, meaning they can be described in relation to the effect of environmental degradation on asset prices. For example, many historically industrial communities in the northeastern part of the United States contain land contaminated by toxic wastes that were by-products of industrial processes, often referred to as brownfields. Communities with brownfields reflect some of the lowest residential land values in the surrounding area. ¹¹ This is also true of land immediately proximate to traditional waste dumps ¹² and what is often termed locally undesirable land uses or LULUs for short.

The key is there is a clear correlation between lowered property values based on environmental degradation and the socioeconomic status of those inhabiting these communities. Affordability is a key consideration for those economically marginalized, and, of course, if the affordable areas carry environmental costs, then those costs are more acutely borne by those living in the area. Low-income families tend to disproportionately make up those living in areas suffering externalities, as areas suffering from environmental harms are disproportionately cheaper places to live than surrounding communities. ¹³

It is critical to note that this is not just a direct correlation: poorer people live in poorer places, and poorer places attract poorer people. There is a more nuanced relationship with externalities and their impact on poor communities. Consider a coal-burning power plant existing near a low-income community. The power plant operates under current federal law regulations to limit the amount of air pollution emitted as it burns coal. Even with the limits, there is pollution that enters the atmosphere and has its most intense effect on the nearby community. Let us assume the emission effects—which are hallmark externalities—are only respiratory in nature. Some of the members of the community will be impeded by these respiratory effects. Some children will miss school. Some adults will miss work. In addition, the area will be limited from certain kinds of economic expansion due to the localized air pollution. All of this is missed economic output and associated opportunity costs, a kind of market failure. These costs reinforce the conditions of marginalization by limiting economic opportunities. It is not only that poor people disproportionately live in environmentally poor conditions but it is also that poor environmental conditions help to make people poor or at the very least less likely to realize their economic potential.

What can be said is that from an environmental health perspective, poor environmental conditions create marginalization. Some can become marginalized by being exposed to poor environmental conditions. Others can be attracted to areas with poor environmental conditions because lower property values make the areas the single affordable choice. In both cases, the environmental harm creates marginalization. This relationship between environmental harm and marginalized communities has been shown in various circumstances. ¹⁴

Under conditions as explained above, increasing environmental harm will have an impact on affected communities in two ways. First, lowering regulations that protect against environmental harm logically will result in increasing pollution. Those increases can have an impact on the currently affected community, for example, increasing air pollution can increase the intensity of respiratory impacts on surrounding communities. Second, increasing pollution can increase the number of people affected, spreading a wider net than existed under regulated conditions. Thus, not only does reducing regulation of important pollutants intensify effects on susceptible populations but it can also have the effect of increasing their ranks. Unchecked externalities create costs that increase and expand their effects. So, it is not just a question of impacting who we define as marginalized today but also expanding those included within the definition of marginalized.

Why Externalities Persist

Externalities persist because they are a symptom of a market failure. The essence of the externality is a failure to capture the costs associated with the activities that create those costs. Smoking impacts the person choosing to smoke. However, it also has impacts on those in proximity to the smoker, so-called secondhand smoke effects. The impacts of smoking on nonsmokers within proximity of smokers are a market failure because those costs are not borne solely by the smoker, but rather dispersed to others based on proximity. Coase might argue the medium of transfer—the air—is the problem. The air is largely a public space and we do not charge the smoker for polluting the air and affecting others in the process of smoking. If only we could privatize all of the air, but of course we cannot—at least directly. Instead, in line with Hardin and Ostrom, we deal with the externality through government intervention. In the case of smoking, we place limitations on where a person can smoke, today removing many public and quasi-public spaces through smoking bans. The same analysis applies to other activities (individual to the largest corporation) that contain externalities. When there is no clear property right or no clear legal causation to correct the harm caused, government must intervene.

Preventing government from intervening in environmental harm, as the Trump administration has done, does not stop the harm from occurring. Rather, it opens the door for increasing environmental harm. The reason is that government regulation acts as a surrogate for the market failure that occurs when firms externalize unwanted costs of production. Regulation forces the costs of pollution to be internalized by the firm. It may do this by putting a price on the pollution through a tax. It may prohibit the release of pollution, requiring changes to the production process, or it may impose technological costs to capture the pollution. All of these methods, and there are many, force the firm to internalize the costs of pollution in one way or another.

Removing regulations does not lower pollution. Indeed, if the cheapest way of producing a good or service results in unwanted pollutants, firms will continue to seek to externalize this waste in the least costly manner possible. Externalities will likely increase in this scenario, and again, the reason is simple. Because we cannot privatize the nature of public goods, there is no market mechanism that will move participants to voluntarily internalize costs of production when they have the option to externalize those costs onto the environment. If we do not allow our government to act as the owner of the public good and protect our environment, then externalities will persist, and as they persist, they will continue to accrue to the most vulnerable of our society and likely add to the ranks of those we consider marginalized over time.

Conclusion

Removing environmental regulations, by itself, does nothing to reduce environmental harm. In fact, the weight of evidence and reason would suggest that reduced regulation will simply lead to more environmental harm, and the reason is simple: externalities. Our market system coordinates behaviors of producers and consumers based on signals that provide incentives. For producers, the incentive is to produce a product as cheaply as possible to be competitive with other producers of the same product and stimulate demand. This means unwanted aspects of production will be externalized if they can be. Reducing government regulation will almost certainly lead to greater environmental pollution for this reason, and it is almost certain that greater pollution will disproportionately affect humans at the margin of society. The problem is not government intervention into a market failure, but rather that is the solution to environmental pollution. Thus, it is likely the Trump administration's push for deregulation will only exacerbate existing environmental justice issues.