Externalities and Costs


In Module 4 we introduced the concept of an externality.

An externality is any cost that a corporation can push onto some other person, group, or entity. If two parties engage in a business transaction, that transaction will have costs, hidden or explicit, that are not borne by one party or the other.

In Module 4, we were talking about externalities that apply to the environment. When we pollute, those “costs” are not expressed in terms of cash money. The costs are costs in the sense that they are damages to the environment. If we were to balance the books of the environment, those pollution costs would go in the debt columns. They reduce the capacity of the environment to absorb pollution and they damage the ability of the environment to sustain life as it should. This cost is imposed on the creatures in the environment and on the environment’s system itself. They are each damaged (paying a cost) for our activities even though they don’t benefit from those activities and they never agreed to them. It doesn’t really matter that the squirrels can’t agree to anything at all. They still absorb the costs for our activities. The environment and its systems are a resource that we use even when we’re not taking anything out of the ground. We’re putting things into the ground, water, and air.

You might think of it as a closet that we are cramming things into. We know that there are only so many things that we can put in a closet before it cannot contain the mess any longer. The environment is like this, but it has the ability to get rid of the mess a little at a time, and it’s a huge space. That means we can put as much into the environment as we want to (individually) and we’ll never see it filled up. Our contributions are small, but there are a lot of us, and we’ve been storing pollution in the environment for a really long time. The costs will catch up to us eventually.

Those costs are imposed on the environment, but they are also imposed (in a sense) on future generations as well. Those future generations can’t produce waste at the same rate that we have because they will overwhelm the environment’s ability to compensate for our pollution. These future-people will have to find some way to do things differently than we did, and that has costs associated with it, as well. They will need to engage in research that will hopefully lead to better industrial processes and less waste. The costs are real, and they’re mounting up, but they seem to be far in the future, so we feel as though we don’t have to worry as much about them as we do our immediate needs for products, services, gasoline, etc.

How we act, what we make, and how we make it has an effect on the well-being of other people and the environment.


The Current Paradigm

The current paradigm is one in which people in the USA, and other developed nations, are used to buying inexpensive products at their local stores. Sometimes, the prices of these goods are lower than the cost would be of making them locally. We have become used to this system, and we would probably resist any upward shift in prices. This paradigm has come about over time through the evolution of international business.

Part of the cost of any product comes from the cost of the resources necessary to make that product. When a product needs to be made, we must use many different resources. Labor is a resource. Just like any other resource, it is consumed by businesses at some cost. Like lumber or steel, labor is available from many different sources, in different qualities, and it costs more or less depending upon the source. Like lumber and arable farmland, the supply of labor is large but finite.

The cost of labor in a local market is affected by factors like cost of living, minimum wages, safety regulations, and competition for workers. When a business must produce their products locally, they have to contend for employees and production facilities with the other businesses in that locale. Globalization has changed the game.

In a global marketplace, businesses can search outside of their home range for the labor that they need to produce their goods. If it is too expensive to produce cars in Michigan or furniture in North Carolina, then these industries can look for cheaper production facilities elsewhere in the world. Perhaps it is cheaper to open an automotive manufacturing plant in a foreign nation. The workers will work for lower wages. The local taxes might be very low or even nonexistent. The regulations that would protect worker’s wages and safety in the USA are relaxed or ignored in that country. This keeps costs lower than they would be in the auto company’s home nation, and it brings money and jobs into the host nation.

The ability to shop around for the lowest prices on labor give businesses the ability to sell us very inexpensive goods, but it also leads to a situation in which nations compete to offer the lowest price for labor. In effect, this creates a “race to the bottom” in terms of employee pay and working conditions. In most cases, this means the production facilities that we have come to call “sweatshops.”

Sweatshops as Externalities

Sweatshops are an externality of this system just as pollution is an externality of some businesses. When we produce a car, there are pollutants that end up in the environment and effect people who don’t work at the factory and who didn’t consent to the damage that the pollutant does to them. When we (Westerners) demand cheaper and cheaper goods, we produce a need for sweatshops that affects workers and others in foreign lands. Where sweatshops are profitable, people will build them, and when people need jobs they will take the jobs that are available to them. These production facilities would not exist in their current form if it were not for our insistence upon cheap goods and high wages in the USA and elsewhere.

It might seem odd to think of sweatshops as an externalized cost of the way that international business has developed, but there are very real effects imposed on the people who work at the sweatshops and the areas that support sweatshops. Some of the effects of sweatshops are good ones, as Ian Maitland points out in a paper that you’re about to read. Some of them are burdensome costs, as Bowie and Arnold will argue in the other paper.