cost minimization. Externalizing costs can include pollution discharge, exploitation
of regulatory differences between countries, overuse of natural resources, and
limited waste disposal and reduction efficiencies. Though in the immediate period
this may be beneficial to profitability, it may promote both short-lived unsustainable
returns and longer-term environmental and social costs.
Consumers may not be aware of the implicit trade-offs being made as a result of
the production of a good. This informational asymmetry can be attributable to many
reasons, including a belief that regulatory agencies guarantee safety, to just simply a
lack of diligence when assessing goods. For consumers, reliance on market efficiency without an understanding of the embedded incentives of producers can
promote negative externalities. In effect, the pursuit of satisfying unlimited wants
may include effectively delegating environmental and social stewardship to
producers whose incentives may not include the evaluation of these parameters.
The end result is most readily seen in natural resources, where under-pricing (Boran
2006) due to lack of inclusion of scarcity can lead to extinction or elimination of a
resource’s availability.
In a market driven economy, such as in the USA, the market is credited with
efficiently determining the price of an item by implicitly incorporating the costs
associated with production. When consumers or producers face low prices for
consumption and input purchases, respectively, and the underlying belief is that
the price being paid is fully reflective of the cost of the item being purchased, there is
less of an incentive for efficient use and higher potential for waste. Price effectively
becomes a measure of a resource’s worth. When asymmetric or incomplete assessment of scarcity is prevalent, price may not properly indicate the cost of the resource
being consumed.
In some areas of the world, forested land has been perceived as abundant and the
resulting price for land has been limited to the perception of present period abundance. The net result of the perception has been excessive global deforestation,
resulting in present period-pronounced scarcity in some regions. Decades will be
required to promote regrowth of the same lands. Had prices considered the impact of
forest harvesting, or the price of temporal scarcity, demand would have been
lessened. Both consumption and production could have promoted efficient market
pricing leading to sustainable resource use, all from this simple inclusion.
Demand and supply yield market outcomes that are assumed to represent an
efficient allocation of resources. The price at which the quantity demanded equals
the quantity supplied is therefore expected to embody the cost associated with the
production and consumption of the good or service. However, production and
consumption are not limited to the transactional nature of exchange of the final
good at the determined market price. In the process of production and consumption,
there are costs that are not factored that impact the well-being of the economy at
large and these are referenced as externalities. In essence, externalities arise when an
individual or firm engages in activities that influence the well-being of others and
where no compensation is provided in exchange for the imposition.
Typically externalities are characterized as negative, signifying that the externality yields an adverse outcome. These externalities are referenced as being negative
26
M. Venkatesan
of regulatory differences between countries, overuse of natural resources, and
limited waste disposal and reduction efficiencies. Though in the immediate period
this may be beneficial to profitability, it may promote both short-lived unsustainable
returns and longer-term environmental and social costs.
Consumers may not be aware of the implicit trade-offs being made as a result of
the production of a good. This informational asymmetry can be attributable to many
reasons, including a belief that regulatory agencies guarantee safety, to just simply a
lack of diligence when assessing goods. For consumers, reliance on market efficiency without an understanding of the embedded incentives of producers can
promote negative externalities. In effect, the pursuit of satisfying unlimited wants
may include effectively delegating environmental and social stewardship to
producers whose incentives may not include the evaluation of these parameters.
The end result is most readily seen in natural resources, where under-pricing (Boran
2006) due to lack of inclusion of scarcity can lead to extinction or elimination of a
resource’s availability.
In a market driven economy, such as in the USA, the market is credited with
efficiently determining the price of an item by implicitly incorporating the costs
associated with production. When consumers or producers face low prices for
consumption and input purchases, respectively, and the underlying belief is that
the price being paid is fully reflective of the cost of the item being purchased, there is
less of an incentive for efficient use and higher potential for waste. Price effectively
becomes a measure of a resource’s worth. When asymmetric or incomplete assessment of scarcity is prevalent, price may not properly indicate the cost of the resource
being consumed.
In some areas of the world, forested land has been perceived as abundant and the
resulting price for land has been limited to the perception of present period abundance. The net result of the perception has been excessive global deforestation,
resulting in present period-pronounced scarcity in some regions. Decades will be
required to promote regrowth of the same lands. Had prices considered the impact of
forest harvesting, or the price of temporal scarcity, demand would have been
lessened. Both consumption and production could have promoted efficient market
pricing leading to sustainable resource use, all from this simple inclusion.
Demand and supply yield market outcomes that are assumed to represent an
efficient allocation of resources. The price at which the quantity demanded equals
the quantity supplied is therefore expected to embody the cost associated with the
production and consumption of the good or service. However, production and
consumption are not limited to the transactional nature of exchange of the final
good at the determined market price. In the process of production and consumption,
there are costs that are not factored that impact the well-being of the economy at
large and these are referenced as externalities. In essence, externalities arise when an
individual or firm engages in activities that influence the well-being of others and
where no compensation is provided in exchange for the imposition.
Typically externalities are characterized as negative, signifying that the externality yields an adverse outcome. These externalities are referenced as being negative
26
M. Venkatesan