Expensive Externalities

The bane of being in love with multiple things at the same time is that it is difficult to convince one of the other and ensure there is no partiality; but when the two things in concern are not humans, but streams of study, the task becomes easier. Formally, having studied engineering and finance, I have always been in love with logic, maths and reason - believing in the power of rock solid rationale. At the same time through these past 7 years, my hobby of study of spirituality, philosophy and metaphysics has intrigued me in the perceived abstractness of  the same and hence resulted into me falling in love with them too, and thus the boon. One of the beautiful results of this love for both has led me to a deep concept which fits into the logic of science and the faith/trust of philosophy/spirituality.

Simple actions can be pictured:

1. Leaving electric equipment running after use.

2. Parking Two-Wheelers on side stands eating up additional space on crowded streets.

3. Not cleaning shared toilets or bathrooms after usage or leaving soap wrappers free to clog sinks or drains (pretty important one for a person like me having lived in hostels for the past 7 years!)

4. Playing loud (and disgusting) music in public spaces.

5. Not keeping appointments and proudly declaring the same as 'the Indian Way'

The purpose in just listing the points is to indicate that the supposedly 'small' things have results going beyond those actions. Such results many a times lead to loss, damage, death or basically any kind of 'costs'. Moving on those lines, the concept I landed upon, which I personally would dub as the marriage of both, is that of Social Cost.

Economics places the equation of Social Cost as follows:

Social Costs (SC) = Private Costs (PC) + External Costs (EC)

PC = All those monetary and non-monetary costs which are directly accounted in costing, budgeting and usage while creation of products or providing for a service.

EC = All monetary and non-monetary costs barring above and not included in a firm's pricing and/or in consumer decisions.

Let us take two examples which we can easily connect with:

Example 1 : A building contractor saves up on costs by using lower quality material, flouting environmental norms, disregarding open space and FSI rules/regulations resulting in a relatively cheaper home for us consumers which we also tend to lap up! This implies low Private Costs for the building; at the same time, risk of failure(and hence death) has gone up. Hazard of close spacing and environmental impact of cutting of trees stands unaccounted - thus the high External Costs. In the light of this concept, for every unit decrease of Private Costs, External Costs ramp up to the nth power. Thus if I may use the term, the Marginal External Cost of every dollar of Private Cost Decrease is much higher displaying a compounded effect.

Example 2 : Say a Farmer buys multiple saplings of herbs, fruit-producing trees and other medicinal plants. The Private Costs (Procurement and Maintenance) he incurs would be more than covered by the benefit these saplings would lead to. We would have a cleaner environment, the farmer himself would earn from their produce, aesthetic pleasing and the positive force spread to nature. Thus, there are some Private Costs and negative External Costs. This leads to lower Social Costs and hence a larger benefit to society.

Few things to observe in these examples:

1. Lower the Private Costs vis-a-vis External Costs, naturally high would be the demand for the product/service since it would have a cost benefit over other similar products and the advantage of shrugging off costs to the intangible domain of Externalities and hence postpone scrutiny (sometimes long enough too).

2. Higher Private Costs as a corollary would tend to naturally drive down demand because of preference to lower pricing and the human tendency of not owing up to Social Costs hence a challenge for the Producer to produce such products! Since lower external costs don't attract demand, there is a need to incentivize them - that is why social projects (unlike business ventures) need the support of society and the Government because of low/negative external costs in comparison with Private Costs. (Eg: Huge Private Costs can be incurred to set up green energy plants, but low external costs leads to them being neglected or not sufficiently explored.)

3. Similarly, if External Costs are also factored into the final price of our products and services, we would ensure a safer and balanced society; the reason why Governments are meant to heavily tax grey areas of gambling, liquor, tobacco, slaughter etc - to reduce the lead of External Costs over Private Costs. At the same time, as if logic vindicates morality, that would lead to an increase in Social Cost - and hence such should be shunned in the long run!

Now if we go back to the earlier 5 actions I listed:

1. Leaving electric equipment running has lower private costs (because we might not actually pay for it or simply because the rates are relatively too low for us); at the same time, higher external costs to environment leading to wastage of resources and energy increasing demand for energy import affecting our currency and hence our economy !

2. Parking Two Wheelers on side stands has negligible private costs (if I have to speak of a cost - maybe the extra pressure on the side stand in violation of mechanics); again, high external costs are involved - traffic difficulties, congestion and promotion to pollution. Also, discomfort to travelers hence increase in negativity.

3. Toilets ! What can we say - again, next to negligible private costs but great degree of discomfort, unhygienic conditions leading to diseases, incurring the negative thoughts of those who would use the toilet next lead to high external costs.

4. Loud Music tends to agitate people around especially so in public transport and even more so if we have cheap and disgusting music going on. We are at comfort listening to the music - negligible private costs, high external costs!

5. I have always personally detested this and I truly admire the Japanese and the Germans. Simple communication of not being able to keep appointments can suffice, but we refuse even that. Low Private Costs but Higher External Costs - maybe a loss in business/social project, affecting the schedule of the person we are supposed to meet, wastage of time - all of them add up.

It can easily be observed that most negative effects tend to stem when the Private Costs tend to be lower (enough in magnitude) as compared to External Costs. It is indeed akin to the example where the greatest of treasures are found at the most deepest places on land or at sea. At the surface, we will hardly ever discover value. To understand how our actions can lead to affecting society by increasing external costs, we need to delve into our own thoughts and deeds. We can fish on the surface or dive down deep into the freezing waters where life would be tough, but life would also discover value. I truly believe that if can start factoring in External Costs from smallest to the greatest of our actions, in our everyday life, we can have a tremendous impact on the fate of our own selves, of the society and of this great nation. What we can do is to work out whether we add to social costs, or assist in defeating them to the point of obliteration!

Jai Hind!