“An ‘externality’ occurs when a transaction between two people affects a third person without that person’s permission. Professor Michael Munger illustrates a simple externality problem with potato chips” in the video above.
The concept of an externality is not a foreign one to Kentuckians. Though not all externalities have to be negative, it’s the negative externalities related to Kentucky’s energy sector that have many jumping to the conclusion that federal bureaucrats at the Environmental Protection Agency must intervene in our economy.
When a power plant like Big Sandy in Louisa, KY transforms Kentucky coal into electricity for the commonwealth, certain by-products and waste material are created during the process. Often, these materials are expelled from the power plant and can enter the atmosphere or waterways of neighboring communities. Some waste materials – like steam – are completely innocuous to the plant’s neighbors. But other waste – like mercury or particulate matter (dust) – are not.
It’s these potentially harmful emissions that have concerned many in the commonwealth – and as explained in the video above, they have a very good economic reason for being concerned.
Just as waking up in the morning and taking out the garbage by tossing the bag into my neighbor’s yard affects a third party – my neighbor – without that party’s permission, so too does disposing of harmful emissions by releasing them into the property, waterways, or breathing air of neighboring individuals.
Pollution from power plants are the archetypal negative externality. Such pollution imposes costs on others without their consent. Since the price to a power plant of releasing these emissions do not traditionally include the pollution costs to neighboring communities, more pollution occurs than is economically optimal.
So why do some areas of the nation have such a hard time dealing with an externality like coal plant emissions?
Some will argue it’s the result of not enough government regulation. If this is the case, entrusting far-and-away bureaucrats at the EPA to “clean up our environment” is not necessarily the logical solution. After all, these people may lack both the man-on-the-spot knowledge and even the desire to accurately weigh the benefits and costs of the energy source in question. The feds and their political jockeying may actually make life worse for Kentuckians by getting involved in the first place. State and local regulation may be more efficient. This seems to be the case in Kentucky.
However, there is another explanation for why some areas have a hard time dealing with externalities like coal plant emissions – and that’s a deficient assignment of property rights.
If Kentucky recognized the breathing air and waterways on my land to be my rightful private property, just as much as it recognizes the land itself to be my private property, then power plants that pollute these resources would be liable for a crime – just as I would be if I were to dump my garbage on my neighbor’s yard. The power plant would have to compensate me – not a federal or state government – for infringing upon my property.
In such a way, the true cost to releasing emissions on neighboring communities would be included in the price to the power plant, and the externality would be “internalized.” The economically efficient outcome would thus ensue in Kentucky’s energy sector.
Instead, due to a deficiency in defining property rights, we have a situation where federal bureaucrats have finagled yet another way into our local economies.