The Rhetoric of Negative Externalities
13 Pages Posted: 10 Feb 2016 Last revised: 11 May 2016
Date Written: December 23, 2015
The concept of negative externalities is firmly entrenched in economic analysis even though it is almost impossible to apply with any rigor in many important real-world contexts. For instance, what is the baseline from which “pollution” is measured? How clean must the air and water surrounding the firm be? And whose costs must the firm take into account in order to internalize the externalities? Clearly, the firm’s next door neighbors harmed by the polluted air generated by the firm. But what about people who are more remotely affected?
There is no neutral way to set the baseline below which deviations count as costs (and above which positive deviations count as benefits), nor is there a neutral way of determining whose costs count. Indeed, the baseline that separates negative and positive externalities and, more broadly, taking only one’s own versus others’ interests into account, is not only indeterminate, it is also dynamic, affected by actions and reactions. The rhetoric of negative externalities has the pernicious effect of reinforcing a view to the contrary: that a firm should, and should be required by law to, avoid imposing what can uncontroversially be characterized as negative externalities, but that it need not otherwise take others’ interests into account. An uncritical acceptance of the concept of negative externalities has led people on seemingly opposing sides of a hot debate in corporate law to miss large areas of existing convergence and fail to capitalize on possibilities for more convergence. The difference between pure profit-maximizing firms and socially responsible firms may be far more evident in theory than in practice.
Keywords: Externalities, profit-maximization, corporate social responsibility
JEL Classification: A13, K2, K22, K32, L21
Suggested Citation: Suggested Citation