When I was an environmental studies major, I took an environmental economics class with a professor who identified as an economist. I remember on the first day of class, he started the class by showing us a video of gorillas dividing up bananas amongst each other. I think we were all wondering, what the hell is going on? When he turned off the video, he said, “economics is the system of how the gorillas split up the bananas.” I have often wondered about that sentence.
In that class, I became familiar with the term externality, which is a cost that is paid by a party that is not included in the economic transaction of buying and selling. Pollution has a cost. That cost is usually health. In other words, the externality is a cost always paid by a party that is outside the cost of a product. It is a cost that the buyer is not paying for. These costs are social, environmental, or political, which are hard to calculate into the value of a product that is being bought or sold. Economists refer to environmental pollution and degradation as an externality.
Externalities can be positive too. The famous examples of externalities are the “lighthouse”. Although the person who pays for the lighthouse receives its benefit, people outside the transaction of paying for the lighthouse also receive its benefit. The other example is the neighbor who plants a bed of roses. Even though I did not pay for, nor plant the roses, I still benefit from my neighbors roses in their beauty, smell, and purification of oxygen properties.
The Externality in Woburn
Years later, I read a book called “A Civil Action” about pollution in Woburn. In the 1980s, a woman named Anne Anderson learned that her child had leukemia. She also noticed a high incidence of a special type of leukemia in her town of Woburn, Massachusetts. She said that in her neighborhood she could stand in front of her house and see all the other houses where children had a similar cancer. This is what medical scientists now refer to as a cancer cluster. Anne began to investigate what all the homes had in common and found that all the homes were drinking the same contaminated water out of their tap. All the water was coming from two wells that were the subject of local complaints because of the water’s bad taste, smell, and strange color. It was found later in a court of law that the wells were polluted by industry nearby.
In the case of Woburn, instead of the industrial factory paying the price of disposing of contaminants correctly and passing that cost down to the consumer, someone outside that transaction paid the price. The children who died of cancer paid the price- the externality- a cost of a transaction they were not a part of. Industrial air and water pollution are common externalities because factories tend to avoid disposing of their waste correctly or legally in the towns where they are located. What happens in a town where everyone becomes sick as the result of one industry that pollutes? Who pays the medical bills of the people who work in the factory? Certain laws to regulate improper disposal and pollutants, such as requiring scrubbers on smokestacks, have been put in place in certain administrations, only to be repealed in other administrations that are cozy with big polluting industries. And now we are living in a time where the Environmental Protection Agency is being dismantled, which means there will be even less regulation of how waste is disposed of, which means more externalities.
Internalizing the Externality
I decided to explore the idea of externalities more in graduate school, where I wrote a paper titled “The Real Cost of Oil”. In that paper, I argued that the externalities of oil extraction should be internalized into the cost of oil- and that if we were to internalize the externality, if we paid the whole cost, oil would be a hell of a lot more expensive.
In my last essay, I talked about the human rights abuses and environmental degradation that often happens in the location where fossil fuels are extracted. For example, when oil is extracted from a cleared rainforest where people live, such as in Ecuador where Chevron Texaco extracted oil for decades, there is a social and environmental cost for locals. The local inhabitants suffer the externality- the cost of sickness from oil spills, and destruction of the rainforest, rivers, and forests. They are not paid in return for the cost- they get nothing in return. The real cost of pollution is externalized from the price of the gas in the car when we are not paying the price of restoring the degraded rainforest ecosystem after the petroleum is extracted. We are not paying for the medical bills of the local rainforest community that has suffered chemical poisoning. If the extractive industry does not pay the costs of the chemical clean up associated with the drilling for oil, the local peoples will suffer the externality of declining quality of life- and so- we are not paying the real price of oil. It goes back to the bananas. As a society, we need to price certain things higher to cover the cost of the externality of ecosystem degradation and public health deterioration. If we don’t, the individual consumer who fills their car with gas will never know the real cost of that gas.
Not a Popular Idea: Internalizing Through a Tax
I know paying more money for gas is not a popular idea, but we as the gorillas have to decide how to split up the bananas. If we increased the price of certain products that cause pollution through a tax, we could account for the cost of healthcare in the community where the product is made. When we include the social and environmental cost into something we buy, we internalize the price that the community pays when they do not benefit from the transaction between a seller and a buyer. If the externality was internalized, each individual who uses a resource would pay the real cost of pollution and environmental damage of bringing that resource to market. This would inevitably result in less pollution and more human rights protections!
Carbon emissions are pollution that is currently externalized from the cost of burning fossil fuels. Another way to internalize an externality is to create a tax that can be used to pay for social and environmental costs. Once the cost of carbon is accounted for, a tax on all products and processes that use carbon would pay for ways to remove carbon from the atmosphere. As a society, we would internalize the cost of carbon pollution so that we have to pay to pollute. We would do this because we recognize ecosystem services for their real value in our economy. A carbon tax has been experimented with in the United Kingdom which increased the costs of fuel in proportion to their emissions. Norway also introduced a carbon tax in the early 1990s.
More Popular: Internalizing the Externality through the Judicial System
In the U.S., when it comes to pollution or ecosystem degradation that causes sickness, there is always the option to sue for damages in a court of law. Basically, this would internalize the externality by making the polluter pay for the sickness they caused.
Back to the case of Woburn, a mother named Anne is the one who began to investigate where the water pollution was coming from that was making all the kids sick. There were a few industries located near the wells including the Riley Tannery factory, a subsidiary of Beatrice Foods, where the skins of animals were being treated with chemicals in order to produce leather. Anne gathered other families and hired a lawyer to see if they could prove in court that the water was contaminated by local industries. Their lawsuit alleged that contaminated groundwater was causing the cancers and the other negative health effects that economists would call externalities. Anne and the families of Woburn learned that from 1973 to 1986, nearby factories had dumped five different chemicals near the wells that provided their drinking water. The Environmental Protection Agency filed its own lawsuits against the companies and concluded that the industries and companies had contaminated the wells that provided drinking water to Woburn families. As a result of the 1987 EPA lawsuit, Beatrice Foods (Riley Tannery) as well as W.R. Grace was forced to pay for the chemical cleanup, which cost 68 million dollars. This is definitely a case of internalizing an externality, although this did not bring back the children who died in the cancer cluster.
Not Gonna Happen in This Administration: Internalizing the Externality Through Regulation
Not everyone who suffers an externality can hire a lawyer to go up against industry. In the case of the families of Woburn, the price of contamination that gravely affected the children’s health was an externality that could have been avoided if regulation had been put in place that would have forced W.R. Grace to properly dispose of the chemicals. Through regulations, the buyer would be paying the company the cost of being environmentally sound. By having the company pay for their pollution at the onset—enacting pollution prevention measures—the cost of pollution is included in the real price of doing business.
Currently, in 2025, all environmental regulations are being repealed. The Clean Water Act and the Clean Air Act have become weaker in this administration. So in this scenario, we would have to vote in an administration that cares about the externality: the cost of pollution.
I want to end this essay by saying that the optimum situation is to not pollute, but in the case that a company pollutes, there has to be some way to hold them accountable- and tax, courts and regulation are just the examples I could think of. I am sure there are other ways that I did not describe here, such as market based mechanisms. In my current profession, I work with youth, which makes me think they are going to come up with ways to solve the problem that I have never thought of. We have to be creative and think of all the different ways we can pay for ecosystem services as well as the cost of degrading them, or else we don’t know the real cost of anything.
Gregory Mankiw, Principles of Economics (San Francisco: Cengage Learning, 2000).
Eban S. Goodstein, Economics and the Environment (Upper Saddle River, NJ: Prentice Hall, 1999).
Anderson v. Cryovac, Inc., 805 F.2d1 (1st Cir. 1986); Anne Anderson et al. v. Cryovac Inc. W.R. Grace Inc., John J. Riley Company Inc., Beatrice Inc. et al. Superior Court Civil Action #82-2444, Commonwealth of Massachusetts. Filed May 14, 1982.
Jonathan Harr, A Civil Action (New York: Vintage, 1996).