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Externalities
An externality affects someone without them agreeing to it. It can be positive or negative. Most externalities are small but can make a significant impact over time. Understanding the types of externalities and the consequences they have can help us improve our decision making.
One family member leaves their dirty dishes in the sink. They get the benefit of using the plate. Someone else bears the cost of washing it later.
MORE IDEAS FROM THE ARTICLE
We can never do one thing. We should consider what the second-order consequences will be. When we interact with a system, we need to find out what the broader repercussions of our actions will be.
They can occur during the production or consumption of a service or goods. Calling something a negative externality can be a way of avoiding responsibility.
If a factory pollutes nearby water supplies, it causes harm without added costs to the factory. The costs to society are high and are not reflected in the price of whatever the factory produces. Even if pollution is taxed, the harmful effects still remain.
A positive externality imposes an unexpected benefit on a third party. The producer doesn't agree to this, nor do they receive a 'reward' for it.
- Scientific research can have applications beyond their initial scope.
- Blaise Pascal and Pierre de Fermat developed probability theory to solve a gambling dispute. Probabilities are now a core part of how we think.
- Someone who comes up with a solution cannot expect compensation each time the solution gets used. It results in reduced incentives to invest time and effort to discover new solutions. Algorithms, patents, and copyright laws try to solve this dilemma by allowing creators to profit from their ideas for years.
- The "free-rider" problem: When we enjoy something that we aren't paying for, we tend not to value it. A large portion of online content succumbs to the free-rider problem.
They are a form of second-order effects. They arise when our decisions change the context of future perception or value.
A person decides to stay an hour after work, but the person still completes the usual amount of work. Co-workers might also stay an hour later. Now the same job takes an hour longer to complete, and anyone who leaves the standard time is perceived as lazy. It is a lose-lose situation.
Status symbols like diamonds, Lamborghinis, tailor-made suits lose their value if they become cheaper or if too many people own them. They derive their value only in comparison to the average of the group to whom the consumer compares.
The same is true when we change our attitudes.
Externalities are everywhere. It's easy to disregard the impact of our decisions - to stay late at the office or to drop litter. We run the risk of paying a price if we do not mind our actions.
Keep in mind to always ask: and then what?
RELATED IDEAS
Don't try changing people, try understanding them.
When you try to change someone they tend to resent you, dig in their heels, and get worse. The way to disengage a difficult person is to try understanding where they are coming from.
- When automobile safety laws were introduced, the drivers started taking more risks while driving, leading to more pedestrian accidents.
- Children (and even adults) take more physical risks while playing a sport with protective gear.
- Safety features like Anti-lock brakes in vehicles ended up increasing the accidents for taxi drivers in Germany
- Child-proof caps on medicine bottles made parents careless about their being opened by kids, including the ones which don’t have the safety feature.
Morning commuters seem to fall into one of two categories:
- the Caffeinated: ready to take on the day—they're reading their morning papers, or checking email, or reading for pleasure.
- the Un-caffeinated: with bleary-eyed, they walk more slowly up the stairs and are more irritable when you hurry them along—or hurry by them.
We're taught to look for these traits in connection with coffee.