Externalities are defined as a type of market failure based on the premise that
optimal social outcomes result from individual economic agents acting in selfinterest. However, if instead of being a market failure, externalities could be
evaluated to assess and develop an optimizing strategy between individual interests
and enhanced social outcomes, externalities could be internalized within the market
model as a modification of preference. Perhaps externalities only indicate a lack of
holistic awareness on the part of the consumer and producer or a cultural bias toward
immediate gratification. These characteristics can be potentially modified through
education. Optimal and universally acceptable strategies could then be adopted to
promote sustainability.
The success of this internalization strategy relies on the development of the
educated rational economic agent as a consumer. If consumers are aware of the
responsibility inherent in their consumption and are aware of the environmental and
social impact of production processes, consumer demand can create the coalescing
framework to augment preference to exhibit demand for sustainably produced
products. The augmentation in demand does not allow for the opportunity of
delegation of responsibility of pollution capacity to a cost or alternatively, the
incorporation within a cost minimization framework, as a result, the change in
preference and subsequent modification in demand promotes the development of
market outcomes that are environmentally and socially optimal from the position of
what is supplied.
Resources such as air and water have no market price and are considered to be
abundant. On the surface, these resources may appear to be unlimited; however,
increased population pressures along with externalized costs related to production,
such as pollution, have diminished the availability of both potable water and clean
air. How could this have occurred?
The lack of price, a market model promoting the focus of profit maximization,
and promotion and validation of unlimited wants are largely responsible. Consumers
have effectively allowed supply to determine demand by not imposing restrictions
on how goods can be produced. Producers have focused on short-term profitability in
lieu of long-term strategic resource utilization. In the short-run, both consumers and
producers have benefitted but the cost of consumption and profitability was
externalized to other nations, the environment, and future generations. For example,
in the seventeenth century, North American coastal waters were described and
recorded as being rich in quantity and diversity of fish; the perception of abundance
led over time to overfishing and presently many varieties are endangered or at the
risk of extinction. The cost of fishing included the human and capital costs not the
replenishment costs. This yielded an ability to maintain artificially low prices,
greater yields for profitability (over fishing), and waste.
28
M. Venkatesan
optimal social outcomes result from individual economic agents acting in selfinterest. However, if instead of being a market failure, externalities could be
evaluated to assess and develop an optimizing strategy between individual interests
and enhanced social outcomes, externalities could be internalized within the market
model as a modification of preference. Perhaps externalities only indicate a lack of
holistic awareness on the part of the consumer and producer or a cultural bias toward
immediate gratification. These characteristics can be potentially modified through
education. Optimal and universally acceptable strategies could then be adopted to
promote sustainability.
The success of this internalization strategy relies on the development of the
educated rational economic agent as a consumer. If consumers are aware of the
responsibility inherent in their consumption and are aware of the environmental and
social impact of production processes, consumer demand can create the coalescing
framework to augment preference to exhibit demand for sustainably produced
products. The augmentation in demand does not allow for the opportunity of
delegation of responsibility of pollution capacity to a cost or alternatively, the
incorporation within a cost minimization framework, as a result, the change in
preference and subsequent modification in demand promotes the development of
market outcomes that are environmentally and socially optimal from the position of
what is supplied.
Resources such as air and water have no market price and are considered to be
abundant. On the surface, these resources may appear to be unlimited; however,
increased population pressures along with externalized costs related to production,
such as pollution, have diminished the availability of both potable water and clean
air. How could this have occurred?
The lack of price, a market model promoting the focus of profit maximization,
and promotion and validation of unlimited wants are largely responsible. Consumers
have effectively allowed supply to determine demand by not imposing restrictions
on how goods can be produced. Producers have focused on short-term profitability in
lieu of long-term strategic resource utilization. In the short-run, both consumers and
producers have benefitted but the cost of consumption and profitability was
externalized to other nations, the environment, and future generations. For example,
in the seventeenth century, North American coastal waters were described and
recorded as being rich in quantity and diversity of fish; the perception of abundance
led over time to overfishing and presently many varieties are endangered or at the
risk of extinction. The cost of fishing included the human and capital costs not the
replenishment costs. This yielded an ability to maintain artificially low prices,
greater yields for profitability (over fishing), and waste.
28
M. Venkatesan