“Externalities are ubiquitous.” ~ Alfred E. Kahn
The term free market refers to buying and selling unfettered by government interference. The irony of the term is that nothing in a free market is free, other than the market itself, in operating unencumbered, at least theoretically.
From a supplier’s viewpoint, the price of a good envelopes cost and profit. It is a woefully incomplete accounting.
Anything taken from Nature cannot be taken again: an exploited natural resource is no longer natural. A hillside gouged out for coal or minerals is never the same, nor will the desired material renew itself.
The exception is organic resources which, in time, may replenish themselves, though the disruptive effect may last for centuries; certainly not the time scale in which economics operates. Overexploitation of an organic resource may tip its local population past self-organized criticality, and so foreclose the prospect of recovery. Overfishing, which has happened worldwide, is exemplary.
Producers manufacture products. Anything produced that does not go into a product is an externality of production.
Making any product invariably creates externalities. Building a factory takes land and water that precludes other use. Manufacturing takes raw materials, most of which are unsustainably gouged from the earth.
The production process itself produces more than just the products. Waste – in the form of heat, scrap, and pollution of the soil, air, and water – is inevitable. It is impossible to make anything without producing waste.
Waste is also theoretically messy. Economists lump all waste into a terminological dump called externality and leave it be. Externalities are of little interest to economists of the capitalist faith.
Price & Externalities
Environmental economics is the study of externalities. It most poignantly points out the inadequacy of price in capturing the cost of good.
Price is merely a measure of human value in the moment a transaction transpires. What is most important about the pricing mechanism is what it does not do: account for externalities.
“Markets, and therefore prices, do not reflect true costs.” ~ Clive Ponting
All the pollution ever produced under capitalism owes to the pricing mechanism as inapposite to serving natural and societal well-being. All the unsustainable rapacious exploitation that robs future generations emanates from the pricing mechanism, which makes no argument against, only for, pillaging resources as quickly and cheaply as possible. All the idleness of unemployment is courtesy of the pricing mechanism, which treats human labor and its dignity merely as an input into an economic machine. All the fraud and corruption ever committed was imbued by the pricing mechanism, which engenders the mentality of profit-taking in a society where people must fend for themselves rather than cooperatively thrive.
Producers ignore externalities as much as possible. Getting rid of manufacturing waste is a cost, which, like all other costs, is minimized. Beyond that, in a market economy, whatever bad results from a good is not captured in its price.
There are 3 types of externalities: environmental, health, and opportunity.
Environmental cost encompasses the ecological degradation that a good creates, either in production, use, or in disposal after its useful life is over. Environmental cost goes to the pollution created by the manufacture and consumption of a good.
The only goods that do not impose lasting environmental costs are those of entirely organic matter, which eventually decompose. Nature reclaims its dead.
Health cost is the penalty directly suffered in producing or consuming a good or service. Pollution ingested is the personal side of environmental cost.
Some goods are bad. Red meat, milk, and other junk food, cigarettes, alcohol, and anything else edible that does not do a body good imposes a penalty upon its consumers and society. Smoking and alcohol create 2nd- and 3rd-hand damage to those around its consumer. The genetic damage of such self-abuse imposes a penalty to offspring. Ultimately, consumption of unhealthy products is borne by society, in diminished quality of life for others that must tolerate the self-destructive behavior, and additional health care.
Opportunity cost encapsulates the materials and labor put into a product that can never be recovered. Any expenditure of energy and resources represent an opportunity foregone to apply those same energies and resources to some other endeavor, or to reserve resources for later.
The cost of foregone opportunities is not generally considered by environmental economists. Yet its cost is incalculably enormous: the difference between all the ills caused by market materialism versus a society that nurtures everyone in the population, with production practices that are sustainable as long as Earth provides viable habitats for humans.
Scarcity cost is the irretrievable loss of material resources used in making a product. Scarcity cost is the component of opportunity cost that has the most long-term effect.
Consumption of inorganic materials which are not recycled constitute a taking from future generations. Mineral and fossil fuel extraction are exemplary of resources consumed which cannot be replenished.
Externality costs are not voluntarily factored into price. Only a government can impose internalization of externalities. None do, other than in a token sense: of the most flagrant pollution, and rarely even that.