18 November 2007

Internalising Externalities

One of the problems with most everyday economics is that pollution tends to be regarded as an externality:

An externality occurs when a decision causes costs or benefits to third party stakeholders, often, although not necessarily, from the use of a public good. In other words, the participants in an economic transaction do not necessarily bear all of the costs or reap all of the benefits of the transaction. For example, manufacturing that causes air pollution imposes costs on others when making use of public air.

But externalities have a habit of coming home to roost:

China's rising energy demand isn't just leaving its mark on the country's heritage. Every 30 seconds, an infant with birth defects is born in China, according to Jiang Fan, deputy head of the country's National Population and Family Planning Commission. The rate of birth defects nationwide has soared 40 percent in the past five years, from 105 defects per 10,000 births in 2001 to nearly 146 in 2006. The problem now affects nearly 1 in 10 Chinese families, the Commission stated in a recent report .

Birth defect rates are highest in the northern province of Shanxi, an area that is also home to some of China's richest coal resources. "The incidence of birth defects is related to environmental pollution," An Huanxiao, director of Shanxi's provincial family planning agency, told Xinhua News. "The survey's statistics show that birth defects in Shanxi's eight large coal-mining regions are far above the national average."

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