Externalities feature prominently in welfare economics. And they are a serious business in health economics. Externalities are those things that arise out of a transaction but that are not a direct component of that transaction. So for instance the person that buys petrol and the firm that sells it to them represent the transaction, and the benefits to each can be easily measured. The person gets to drive their vehicle and the firm gains revenue. But as we all know (though some continue to deny) when the petrol is burnt it releases green house gases, primarily carbon dioxide. Because this effect of the transaction isn’t reflected in the cost of the petrol and it happens to fall on other people who are not part of the original transaction, this release of greenhouse gases is an externality – and most people would agree that it is a negative externality.
But all that is very serious and since this is not a serious post, I shall return to this concept in a more serious fashion at a later date.
I’m more concerned with a less important example of an externality. In the UK, we are coming quickly upon the first anniversary of the ban on smoking in public places. If we think of this as a transaction between government and the populace with the intention of improving public health generally and the health of certain groups of workers more specifically then we can judge whether the ban is economically efficient by comparing the improvements in health with the cost of introducing the ban. But that’s a job for someone else.
Here, I am concerned with one positive and one negative externality. The positive is that my clothes now no longer stink of smoke when I get home from the pub meaning I can wear the same shirt or jumper the next day without necessarily having to wash them. The negative one is that all of my favourite pubs stink. Of piss. When you were allowed to smoke in pubs this seems to have covered the scent of stale urine wafting in from the gents toilets. This is absolutely a negative thing. It has made one of my former favourite places virtually uninhabitable as far as I am concerned. I bet no one saw this coming when they proposed the ban. They could have included incentives for pubs to improve their toilet facilities if they had foreseen this problem. This particular externality is borne by the publicans, since they don’t much benefit from the smoking ban in economic terms (few pubs will have seen their revenues increase as a result of the ban after all). And of course, it is borne by the olfactory senses of anyone that has the misfortune to be sat too close to the toilets.
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