Externalities

The concept of externalities is instructive for the study of consumption and consumers insofar as it considers the public consequences of private consumption. Conventional microeconomic theory suggests that in a freely operating market, prices are a reflection of costs and benefits and so they act as signals for economic decision makers—be they individuals, firms, or nation-states. Consequently, the market will ensure an efficient allocation of resources insofar as the appropriate quantities of goods and services will be produced (and consumed) in terms of overall costs and benefits to society. Externalities represent a market failure through which the actions of one economic agent affect the welfare of another and for which no price or opportunity for compensation exists. The result of this market failure is that either too much or too little of a particular good or service is produced and consumed. Essentially, externalities can be understood in terms of a divergence between the private and social costs of an economic action. To illustrate, an individual who chooses to smoke a cigarette around a nonsmoking partner uses up a scarce resource—clean air. The price of the cigarette reflects private cost to the smoker and does not take into account the clean air used up and the effects on the nonsmoker who does not want to breathe in the dirty air. Since there is no market for clean air, there is no price, and so the private cost of the cigarette is less than the social cost. When judged against the criteria of maximizing the welfare of society as a whole, the cigarettes in this example can be seen to be overproduced and over-consumed by virtue of an artificially low price that fails to take the externalities into account.

While externalities can arise in any economic activity, they are particularly useful for studying consumption insofar as they provide a way of thinking about the public impacts of private consumption. Externalities are most commonly thought of in terms of negative spillovers. Popular examples revolve around the air and water pollution brought about by industrial production; for example, a factory that pollutes a nearby river kills the fishes in it and so damages the livelihood of a local fisherman. From the point of view of consumption, negative externalities are often thought about in terms of environmental impacts. For example, when purchasing a vacation that involves a long-distance flight or filling one's car up with gasoline, the price does not reflect the true cost of the activity in terms of the carbon emitted and environmental damage done in terms of contribution to climate change. More generally, it could be argued that global consumer culture is characterized by overconsumption insofar as the prices of consumer goods are too low on the grounds that they do not reflect environmental externalities (such as pollution, waste, resource depletion, and carbon emissions) as well as social externalities (such as the exploitation of workers in less-developed countries and the artificially low wages that keep prices down). Of course, not all consumption externalities are environmental. Many examples can be found in everyday life, such as playing one's personal stereo at excessive volumes in public spaces and so bringing about discomfort and annoyance to others.

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