Rise of Externalized Costs

The Center of Global Awareness is releasing our 6^th book this summer: Connecting the Roots of a Holistic System: The Global Economy, A Brief Edition. The book is for students in grades 9-12 and non-economic major undergraduate students. To celebrate this event we are publishing a series of blogs this summer that summarize the essence of one of the chapters in the book: The Impact of Neoliberalism in the United States: Ten Consequences. We hope you follow and enjoy the blog series!  The following blog is the sixth in the series.

Impact #6: Rise of Externalized Costs

A sixth impact of neoliberal policies is the increase in external costs or externalities since 1980. These are the costs not paid by the producer but which others must pay. The price of the goods and services we consume most often does not take into account external costs.

Categories of Externalized Costs

1. Social Costs…paying less than a living wage, safety issues from poor working conditions.
2. Health Care Costs…government pays for the uninsured, increased private insurance premiums, increased Medicare and Medicaid costs.
3. Environmental Costs… toxic waste clean-up, air and water pollution, oil spills and others.
4. Military Costs… used to defend the nation, protect scarce resources, access natural resources.
5. Security Costs… for fire protection, police, border patrols, airline security, homeland security.
6. Subsidies… corporate welfare, direct loans, loan guarantees, trade protection, exemptions.
7. Tax Deductions… tax loopholes, excessive executive salary, bonuses, perks deductions.
8. Infrastructure Development… payments for infrastructure that business disproportionately uses.

Price

Many corporate products have inaccurate prices because they fail to account for external costs that corporations should be responsible for. Instead, they shift the costs to the general public which picks up the tab. Prices would more exactly reflect their true value if corporations included externalized costs. The inaccurate pricing of scarce resources, such as clean air and water, leads to their abuse. A classic example is the factory that spews smoke over a nearby neighborhood. The factory forces a real cost onto society in the form of dirty air, but this cost is external to the company. Or, if you are debating between a car that has good miles per gallon and one that does not, the price of the gas-guzzler does not figure in the cost of pollution.

A Big Mac at McDonald’s

The carbon footprint of a Big Mac shows externalities and mispricing in action. I bet most of you have had a Big Mac at some point in your lives but never knew its external costs. One estimate says the energy cost of the 550 million Big Macs sold in the U.S. every year is $297 million, producing a greenhouse gas footprint of 2.66 billion pounds of CO₂ equivalent. Add to that the environmental impact of water use and ruined soil, together with the hidden health costs of treating diet-related illness such as diabetes and heart disease. If you add in all of these external costs to the price of a Big Mac, what do you think would be the cost? One estimate figures it would be about $200. It would be big time sticker shock if you pulled up to the drive-through window, and the McDonald’s clerk said $400 for two Big Macs.

The market externalizes health care costs, as seen in the McDonald’s example. Those who consume excessive sugar-laden or artery-blocking foods do not pay the real costs for these foods. Instead, present-day unhealthy eating habits result in higher health care costs down the road. These costs, such as a heart surgery, fall to private insurance companies, Medicare, or Medicaid. Critics say a “sugar tax” would help to stop external costs, but the soft drink companies and others have lobbied against such a law.

The classic case for externalizing health care costs to the general public is the cigarette companies. The price paid for a pack of cigarettes does not reflect the added health care costs to health insurance companies and public health programs that treat the chronic smoker. A study found that if the market added health-related costs to a pack of cigarettes the actual costs of smoking would be nearly $40 per pack. That included roughly $33 for reduced life expectancy and tobacco-related disabilities; $5.44 for the costs of secondhand smoke, and $1.44 for pooled-risk programs like Medicare, Medicaid, group life insurance and sick leave. Although the cost of cigarettes has increased over the years, it is far from reaching the $40 a pack price tag that reflects its real costs.

Walmart stores in US 2011

Arguably, the all-time best poster child for externalizing costs to taxpayers is the world’s largest retailer: Walmart. The company offers the lowest overall prices in the retail industry. Walmart has reduced costs through very efficient manufacturing and distribution networks and utilizing cheap Chinese labor to make most of their products. But if we look at their low prices as a system we can see that the price of an item does not include externalized costs, such as health insurance for all employees. If the company paid its external costs instead of the taxpayer, Walmart’s prices would be much higher. As it is, Walmart’s inaccurate low prices give them an unfair advantage in the marketplace. If Walmart prices were more accurate, many locally-owned businesses would be able to compete against them and other “big box” stores. Imagine the economic boost to local economies if the profits funneled to the Walton family – the richest family in the world – were instead circulated in local communities.

Subsidies

Subsidies are one of the most common forms of external costs. Although there are many different forms of subsidies, we will look at subsidies that go to corporations. In order to reduce their costs and increase their profits, corporations try to find government subsidies, tax breaks, and loopholes. A subsidy is a form of financial assistance paid to a business or a particular economic sector. Supposedly, the government gives most subsidies to producers or distributors in an industry to prevent the decline of that industry. For example, the U.S. heavily subsidizes farm products such as corn, soybeans, wheat, and cotton, which drives down the cost of these commodities for consumers. But when exported to countries that grow these crops, these farmers cannot compete with the subsidized low prices.

Walmart leads the pack in attracting subsidies. A study found that 90 percent of Walmart distribution centers received tax breaks and other subsidies, valued at an average of $7.4 million per distribution center. Walmart sought and received subsidies averaging about $2.8 million at 1,100 of their locations, about one-third of its U.S. stores. Local officials argue these big stores warrant subsidies because of the jobs and tax revenue they generate. But in most cases the big boxes do more harm than good. When big box stores move to town, other businesses shrink or close completely with hundreds of jobs lost, many of which provide higher wages and better benefits than Walmart or other big box chains.

1. What are some examples of externalities that you encounter in your daily life? Subsidies?