An externality is a cost created by a transaction between two parties which is not paid for by either of them. With externalities, every individual tries to maximize their utility without paying for the cost associated with deriving the said utility. In a laissez-faire society, the problem of externalities is evinced in a concept of rational choice commonly termed as the ‘Tragedy of the Commons.’
Garrett Hardin coined the phrase ‘Tragedy of the Commons’ to express the disposition by individuals to serve their interests in a way that is contrary to the best interests of the entire group.Since there is no requirement for coordinated action in a free market, the decisions made by the individual will be detrimental to those of thewhole group The individual will, however, not pay for the losses he occasions.Hardin argued that the propensity for individuals to serve their best interests without regard for the good of the whole is ultimately self-defeating, as the consequence of such action is depletion of resources for the entire group (Hardin 1243-1248). Hardin’s metaphor articulates the flaws of rational choice and unrestricted, unregulated demand. Since every individual maximizes use of the resources but expects the rest of the populace to bear the costs of exploitation, the result is a depletion of the resource and reduction in utility for all parties.
The upsurge in coal mining best exemplifies the tragedy of the commons. As the world grapples with rising fuel costs, most corporations have turned to an alternative cheap energy source, coal. Coal use has grown 3% in recent years to attain a market share of 30% of global energy consumption. While coal mining reduces energy overheads for companies and reduces unemployment in the nation, the adverse health effects of toxins and coal dust are many. Studies have demonstrated that people living in areas where coal is minedhave a 5% increased risk of developing cancer than those in other regions. Children born in coal-mining areas are also highly likely to have birth defects. Coal mining in Appalachia also occasions public health costs amounting to $75 billion a year.
Besides coal dust, other toxins from coal mining are leached into the ground and water bodies and can persist for decades after exploitation ceases. These heavy metals and carcinogens that include silica and Sulphur compounds are harmful to the ecosystem and lead to climate change. Despite the enounced adverse effects, coal mining is highly unregulated. The mining industry blocks every attempt to impose regulations on mining, citing the joblessness that such an act would occasion(Rothkopf 1). Unregulated coal mining not only depletes natural resources but also increases health risks and costs for individuals residing near the coal mines.
Laissez faire societies dictate that there should be minimal government intervention, but this condition helps amplify the tragedy of commons. The externality is fuelled by a lack of mechanisms to stem the adverse effects of overexploitation of resources. Since individuals and corporations make rational choices, they will not willingly incorporate the costs and adverse effects of their actions when making decisions. The costs associated with exploitation and those of depletion of resources are borne by future generations and people not involved in the process. Government intervention would entail charging the originators of negative externalities and instituting regulations governing how the resources will be exploited. In a competitive market with a laissez-faire philosophy, the role of governments is diminished. The result is thus an increase in adverse effects of exploitation and difficulty in solving the externality of tragedy of commons.
Most of the measures to solve the externality involve some form of government intervention, and this poses the problem of how to solve it in a free market. In a laissez-faire society, the best way to solve the externality is using the coarse theorem of bargaining. The theorem dictates that the parties to the externalities; those causing the externality and those being affected by the externality, bargain. The parties will engage in dialogue on how to address the issue. The resolution may be that the party causing the externality minimize using the resource, or it may continue to produce the externality but offer compensation to the affected parties. Garrett Hardin alludes to the Coarse theorem by stating that resources should be privatized. Those wishing to use the resources have to compensate the owners of the resources for their use. With private resources, it is very easy to impose rules on how the resources will be used.
Bargaining is hard to achieve in a laissez-faire society. It requires a precise definition of rights for all the parties involved, rational parties, and low transaction costs. The three conditions are seldom present. In the case of public resources, the party causing the externality will have no reason to bargain with the afflicted parties as it has nothing to lose. The same would apply in a scenario where the pollutant owns the private property. If transaction costs are high, the parties will prefer to continue causing the externality since it would be cheaper than bargaining. The solutions available to solving externalities in a free market way all have implementation difficulties, meaning that to solve externalities, meaning that there needs to be some form of government intervention.
Hardin, Garrett. “The Tragedy of the Commons.” Science 162.3859 (1968): 1243-1248 . Document.
Rothkopf, Joanna. “Coal CEO lionized by Fox News is no hero.” 1 August 2014. salon.com. Document. 23 March 2015.