EXTERNALITIES. These are economic activities of one entity (individual or firm) that impose damage or benefit on another entity in such a way that is outside market mechanism. Negative externalities impose damage, while positive externalities are beneficial to others. Theoretical but simplistic approach to the discussion of this topic will introduce two parties; let’s say a factory and a fishery. Being profit maximizers, these two firms will only care about their own profits. Clearly, a negative externality is present as the factory dumps waste into the river and harms the fishery downstream. Graphical analysis follows, with the usual Marginal Benefit (MB), Marginal Private Cost (MPC), Marginal Damage (MD), and Marginal Social Cost (MSC) curves. Basically, the factory maximizes its profits at MB=MPC, but the socially optimum level is when production is at MB=MSC (MSC takes into account both MPC and MD). Thus, a response is needed to “internalize” the externality if we want to maximize social welfare.
Sounds simple right? One can already begin drawing policy responses, as long as these measures can achieve the socially optimum level. A form of private response that I learned is the Coase theorem, which states that once property rights are established, one party will bribe the other to attain the socially efficient quantity.
However, try to bring it into a real situation, something like the large scale mining here in the Philippines… and see if it can cure a chronic disease that easily.
And that’s one of the reasons why I’m thankful in our CWTS this second semester. Our group was assigned to a partner NGO, Alyansa Tigil Mina, which advocates in the reduction of rampant and poorly regulated large-scale mining in our country. Yes, at first I have this misconception about NGOs like ATM; I thought they are extremely radical in their advocacies in the sense that they are for the abolishment of the mining industry. Good thing was that in our first two meetings with them, they made clear their stance on the issue. Our stay with ATM has been a worthwhile experience so far, starting from the Indigenous People’s Gathering that we attended last year. Hearing from the stakeholders themselves, I got to know how the abstract concept of Marginal Damage really translates into people’s lives, especially in a community endowed with natural resources and culture that is being destroyed by the “profit maximizing” practices of mining firms. Just recently, ATM assigned individual tasks to us to make some basic analyses on the data sets that were given to us. Mine was about the poverty incidence and magnitude in the mining industry and I had some interesting findings. Lastly, I’m really looking forward to our fieldwork in Zambales, where we will have a community immersion and an opportunity to have a clearer picture of what has been a rhetoric in classrooms before.