Externalities & Pollution
Externalities, or the effect of economic activity on a third party, can lead to undesirable consequences like pollution. Oil spills, like the one caused by British Petroleum in the Gulf of Mexico in 2010, are a prime example. Even though BP and its customers each benefit from the production of oil, others along the Gulf coast had their lives severely disrupted.
Not in My Backyard
REAL WORLD EXAMPLES
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Congestion Charges
In 2003, London instituted a congestion charge. Motorists entering the charge zone pay a flat rate of 8£ (approximately $12) between 7 am and 6 pm. A computerized scanner automatically bills the driver, so there is no wait at a toll booth. When the charge was first enacted, it had an immediate effect. The number of single vehicles entering the zone fell by a third, riders on public buses increased by 15%, and bicycle use rose by 30%.
Because congestion charges become part of a motorist’s internal costs, they cause motorists to weigh the costs and benefits of driving into congested areas. In other words, congestion charges internalize externalities.
Deforestation in Haiti
Nothing symbolizes the vicious cycle of poverty in Haiti more than the process of deforestation. Haiti was once a lush tropical island, but today, only about 3% of the country has tree cover. A number of factors contributed to this environmental catastrophe: shortsighted logging and agricultural practices, demand for charcoal, rapid population growth, and increased competition for land. Widespread deforestation caused soil erosion, and as a result, land that was once lush and productive became desert-like. Not enough food could be produced which contributed to widespread poverty.
Haiti is an extreme example of the tragedy of the commons. In Haiti, the land was a semi-public resource that was overused and abused and therefore subject to the tragedy of the commons.
