Addressing Externalities: A Modest Proposal

How to make health and safety a personal priority for industry officials.

According to economists, firms have little reason to take into account the cost of externalities — that is to say, the harms their activities may impose on others. The traditional solutions are damage remedies or taxes to transfer the financial cost to the industry, or regulation to force industries to limit their harmful activities. Why not try a more direct solution? Why not require owners and managers to expose themselves to the same risks?

For instance, we could require managers of nuclear plants, utility officials, and officials of reactor manufacturers to live within a mile of the plant, along with their families. That would enhance the incentive to think of safety. Similarly, we might require oil company executives and their families to live within a mile of a refinery, so they would experience the same risks and the same exposure to air pollution as the surrounding community. Along the same lines, chemical company executives could also be required to live near their own facilities and drink the local water, as would operators of hazardous waste disposal sites. We could even imagine that coal company executives would be required to have their offices inside working coal mines.

Indeed, we could even multiply the risk in order to further incentivize safety. An economist once suggested that, if we really wanted to increase auto safety, we should install large sharp spikes on steering wheels — the idea is that people will drive very carefully if they are afraid of being impaled during an accident. In a similar vein, we could require oil sprinkler systems in the homes and offices of oil company executives that would be automatically triggered the moment a pipeline or oil tanker spill took place, thus drenching them and their homes in crude oil. The message would be a variant of the Golden Rule: “Don’t do unto others lest you be done two-fold unto yourself.”

Liberals are likely to find these solutions appealing. For conservatives, the tradeoff might be reductions in some existing regulations that would no longer be necessary given the greater incentive toward safety. It’s win-win. Isn’t it?

4 Replies to “Addressing Externalities: A Modest Proposal”

Joel Masser says:

October 19, 2015 at 7:02 am

Oil, gas, and coal executives are exposed to the same risks as everyone else. They apparently evaluate the risk to reward ratio differently from normal people. It hasn’t made them slow down in driving catastrophic changes to the climate and the chemistry of the atmosphere and oceans.
PAUL GRANT says:

October 19, 2015 at 11:14 am

Clearly, you aren’t being serious. What you are suggesting would require a belligerent police state for enforcement.

The idea of externalities is an artificial creation, invented to justify political interference with market outcomes. Economists use that idea to justify coercive interventionist policies – i.e., to take control over markets. That works well for politicians and statist economists, but not so well for markets and the public.

Imposing your preferences by force may seem like a good idea, but only if your preferences are chosen.

But what about the consequences of bad laws? How about requiring lawyers and legislators who wrote and enacted drug laws, to spend their winters with their families in Juarez, or to share jail cells with people serving long sentences for drug crimes.

If environmental lawyers and activists are successful in suppressing coal usage, how about requiring them to live in rural India or Africa in communities where electricity remains unavailable due to the suppression of energy production?

I am just saying . . .
Michael Colvin says:

October 19, 2015 at 4:12 pm

I think that there are lots of way of adjusting for health and safety risks in the decision-making process. Using a risk-based approach is one way – there is never a way to completely eliminate potential side effects, but we could compenstate for them using the classic dose/response model. I think that your post doesn’t that that into account. We could have the coal mines office but we need to think about liklihood and consequence of impact, and I’m not certain if your examples get us there.
Yogini says:

November 2, 2015 at 7:17 am

With all due respect, I fear that this manner of addressing externalities might disincentivize production, which might be completely unacceptable to the neoliberal mode of production. Do you suggest a solution to that in this model?

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