This section links with the reasons for market failure (Syllabus Section 1.4) It would be useful if you thoroughly revised this part of the course before proceeding with this section. Can you, for example, accurately define the term 'negative externality' and distinguish negative externalities from social cost?
The most obvious negative externality from Economic Growth is pollution but consider also:
- soil erosion and degradation (have you read Grapes of Wrath by J. Steinbeck?),
- water scarcity and
- waste disposal (think Nuclear Waste for the most striking example, but also river (Tieté?) pollution)
All of these challenges face countries in the developed world but those experiencing the challenges of economic development have to 'balance' their desire to grow against the possible problems that might arise. The reduction in their biodiversity might also need to be addressed, as will atmospheric changes. Do the developing countries:
- Ban certain activities or impose strict rules and controls?
- Extend property rights and force private enterprise to pay more for the problems they cause?
- Impose taxes on pollution and other externalities?
- Subsidise non-pollution methods of production?
- Award permits to pollute?
Pause for thought
All developed countries have achieved rapid growth at some point in their history and in doing so have incurred significant external costs to society.
- Should less developed countries also not be entitled to grow in such a manner until they are in a better position to invest in technologies that reduce these external costs and are more sustainable?
- To what extent are the rich countries applying double standards when arguing that LDC should restrict production that involves negative externalities?
To achieve their goals, the developing countries will need to address problems of:
- Land ownership and reform
- Involving local communities in their own development
- Engaging the poor and making them feel that opportunities will come their way
- Pricing in ways that include the real costs of development
So externalities need to be taken into account when considering development, but for many developing countries there will be a significant opportunity cost if they try to grow their economies while minimising externalities, because this requires investment (and therefore slower growth) and perhaps reform - both of which are expensive.