Monday, June 16, 2014
Hotel Soaps and Externalities
Ignoring the moral gray area of taking too much of a free thing, there are some financial consequences that are entirely outside of what we, Mrs. Done by Forty and I, will ever pay for. Assuming that we use and take an above-average amount of free bathroom supplies (and we do), then that cost is going to be (mostly) passed on to other people. Even if a small share of our overconsumption is figured into our bill, we are certainly pushing more of that cost onto other customers than we are bearing ourselves. And when we consider the environmental costs of our overconsumption, we're pushing those long term costs onto future generations. Sorry, future grandkids: that's a problem you get to deal with. Have fun with that.
When we create a cost that other people end up paying for, we're coming into contact with an externality: a cost or benefit that affects a third party who didn't have a choice in the matter. These sort of externalities are all over the place. When my neighbor buys a brand new Hummer and puts 25,000 miles on it every year, the entire state gets to share in the environmental impacts, even though they aren't factored into the already huge price tag. When my cousin eats two Big Macs a day for a decade, we all end up paying for the health impacts when he claims bankruptcy after his triple bypass surgery.
Markets are not perfectly efficient, which is another way of saying there's more to our purchases than the dollars and cents we pay a vendor. There are often other costs, which the individual buyer and seller don't ever see themselves. But if we accept the premise that humans are inherently selfish, and are rarely that conscious of their purchasing behavior anyway, it's unrealistic for us to expect consumers to consider or act upon externalities. If some schmucks down the street or decades in the future are going to deal with the environmental impacts of my consumerism, then that's their problem, right?
In our own push towards financial independence, my wife and I typically only focus on the costs and benefits that find their way into our budget. When I talk about frugality, I care about reducing my costs...not necessarily the costs to anyone else. The same thinking applies to the income side. We invest in index funds, without really considering what impact our dollars might have in those hundreds and thousands of companies we're giving money to. I am primarily concerned with creating a good asset allocation and the return on our investment. I don't give much thought to the fact that funding certain companies likely has negative impacts on other people, which aren't perfectly factored into the stock price. So when I saw this Adbusters poll about the worst corporations in the world the other day, I realized, whoops, I fund most of those corporations. Buying the S&P500 means that I buy that whole index, not just the companies I think have a net positive impact on the world. So I invest in polluters, and companies that make products that harm people, and those that make their customers less healthy. We profit from this investment and, even in a worst case scenario, we will see only a tiny fraction of the real costs.
In the grand scheme of things, should I care?
*Photo is from miss pupik at Flickr Creative Commons.