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How People Begin Internalize Externalities and Its Consequences to Identity

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An externality is a cost or benefit caused by a producer that is not financially incurred or received by that producer

An externality can be both positive or negative and can stem from either the production or consumption of a good or service. The costs and benefits can be both private—to an individual or an organization—or social, meaning it can affect society as a whole.

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In economics, an externality (a.k.a. “spillover”) of an economic transaction is an impact on a party that is not directly involved in the transaction. In such a case, prices do not reflect the full costs or benefits in production or consumption of a product or service. A positive impact is called an external benefit, while a negative impact is called an external cost. Producers and consumers in a market may either not bear all of the costs or not reap all of the benefits of the economic activity. For example, manufacturing that causes air pollution imposes costs on the whole society, while fireproofing a home improves the fire safety of neighbours. In a competitive market, the existence of externalities can cause distortions in the production and consumption of social goods, and in the overall costs and benefits to society (defined as the sum of the economic benefits and costs for all parties involved). To continue with the pollution example, the costs of treating the negative effects of pollution may well exceed the value of the manufacturer’s production, resulting in a net cost to society. And, even if effective pollution controls were available that would raise overall benefits to society, the manufacturer may still lack incentives to invest in them — resulting in the under-production of clean air. Incentives can be realigned, for example, by regulation. Costs can be imposed on organizations for failing to install effective pollution controls. But such incentives can, in themselves, also introduce negative externalities if the costs are excessive or fail to be effective in reducing pollution and its negative impact. This theory can be applied to organizations that handle personal information.

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First of all, Kapp identifies the origin of externalities in the “fiction” of the “economic sphere” as a closed sphere. This fiction rests upon market value considered as the only possible definition of value. If we consider the economy as an open system, then alternative definitions of what constitutes value have to be taken into account. “Social use value” is, for example, a definition of the value Kapp suggests and which rests upon issues of preservation of environmental equilibriums and satisfaction of human beings’ fundamental needs. Since the market cannot take into account these plural ways to define what constitutes value, we need other forms of evaluation and of social and political determinations of the social use value, involving different forms of knowledge about the environment and the interactions human beings have with it. The plurality of ways to define what constitutes value goes in tandem with different desirable collective goals to be pursued: allocative efficiency is just one of them. That is why “deliberative, i.e., political decisions” are needed in order to evaluate “environmental requirements in comparison to other public goals to be pursued” (Kapp, 1963: 317). Third, the question of legitimacy is connected by the author to the question of “conventional measurements of performance” and of indicators used as a basis for public decisions impacting the environment (Kapp, 1950: vii). Kapp stresses the epistemic complexity characterizing environmental damage. This implies the need to take into account a wide variety of indicators in order to decide on environmental issues. Besides economic indicators, social and natural indicators have to be considered as a knowledge base for the decision. Still, no easy synthesis is possible, because the different kinds of social and environmental cost are incommensurable

Economic tools based on monetary equivalences cannot offer a synthesis of the actual costs-benefits trade-off really at stake. The complexity of the social and environmental implications of decisions impacting the environment can thus not be expressed through “synthetic measures”, which usually hide forms of power abuse (apud Luzzati, 2005: 11).

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Ultimately, government needs to combine appropriate standards with market-based regulation in order to give the market the structure it needs to price goods and services accurately, taking into account negative externalities

Business needs to review its current practices and look for ways to increase the efficiency with which it uses energy and material. Running a business as if it were a part of a continuous closed cycle creates new opportunities. Looking for projects that reduce energy and material consumption represent significant savings for the firm, that are often less risky than investments in additional production and good for the environment.

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Kapp, Karl William (1950). “Political Economy and Psychology: The survival of Hedonism and the Research Tasks of the Future”. Kyklos, 3, 205-29.

Martinez-Alier, Joan (1987), Ecological Economics: Energy, Environment and Society. Oxford, UK: Blackwell.

Luzzati, Tommaso (2005), Leggere Karl William Kapp (1910-1976), “Per una visione unitaria di economia, società e ambiente”, Discussion Papers del Dipartimento di Scienze Economiche–Università di Pisa, 56, 1-30.

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