External costs and benefits, known as externalities in economics jargon, refer to costs and benefits that fall outside the parties to the transaction which creates them. They are therefore not considered in the marketplace or priced accordingly. The concept has become a powerful tool in the hands of environmentalists. In theory, the concept makes sense. In practice, problems emerge when it is incorrectly applied.
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External costs imposed upon third parties not directly involved in a transaction is nothing new. It was said that not a waterway in 19th century England was spared from the deluge of sewage that followed Thomas Crapper improving and popularizing the flush toilet. Parties living in proximity to rivers and lakes into which raw sewage from municipalities flowed endured horrid smells and sights, especially during humid summer months.
As standards of living improved, the public developed a more refined capacity to appreciate its natural surroundings, and improve them if possible. This sensibility culminated in the enactment of clean air and water acts in the 20th century that recognized the external costs of pollution. These acts shifted responsibility for controlling pollution to the municipalities that generated the sewage by compelling them to build wastewater treatment plants.
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The problem that we face today is quite different. Water and air quality have improved to the point that the remaining external cost imposed upon the public from water and air pollution is negligible. Efforts to remediate it further result in rapidly diminishing returns. However, that has not stopped environmentalists from lobbying for more stringent pollution controls, even in cases where external benefits outweigh costs.
Nowhere is this more apparent than with the environmentalist campaign to eliminate fossil fuel burning. The external benefit to agriculture from increased levels of atmospheric CO2 measured in terms of greater crop yield should outweigh the external cost of shoreline remediation to address sea level rise in the future. The shrill tone that environmentalists have taken in promoting extreme weather has been an attempt to inflate present-day external cost. Costs closer to the present are discounted less. Environmentalists have overplayed their hand in arguing for externalities. In fact in this case, it has downright backfired on them.
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