Similarly, an investment banker who, say, creates and sells mortgage backed securities that are likely to fail, doesn't personally absorb all the costs or damages associated with that investment product. The dude gets his bonuses long before the poo hits the fan, and a lot of other guys feel the pain down the road.
And then there are the real cost of cigarettes, which we all get to share in via insurance premiums.
This is a type of market failure. The market doesn't always pass on the total costs of goods to buyers and sellers, and a third party sometimes ends up bearing them. Like when a bunch of vegetarians pay higher health insurance premiums due to chubby meat-eaters' over consumption of Big Macs...that is not included in the $3.99 price tag.
And while this sort of economic trivia is fun to think about on the pages of a weird Arizona blogger, you have to ask: what's the point? So there are costs that avoid the purchaser and hit someone else. What good does that do me, and what can I do about it?
How do you apply a concept that, by definition, is about someone else making a payment or getting a benefit?
Estimate the Full Costs
Knowing that the market will often fail to illustrate the full costs of any product, our next best step is to try to build them into our analysis. When I'm looking at the bag of $2.99 Kettle Chips in their delicious glory, I can tell myself that they also cost me about five hours of running if I eat the whole bag. (And who am I kidding? I will.) If I don't run for five hours, I can build in the cost of gaining about a pound and a half, if I make the chips a habit. (And who am I kidding? I will.)
But this is a poor example of an externality, since I still bear the costs as a consumer. What if my purchases hurt someone else?
How about that sweater I bought this past fall? Might I do well to estimate that some guy or gal suffered in a cramped, unventilated room for twenty minutes, stitching the thing together? If I bothered to put a price on that suffering, maybe fifty or a hundred or a thousand dollars, would that change my purchasing behavior?
These are finger-in-the-air estimates, and not accurate at all. But the exercise of estimating secondary costs at least gets me thinking of what we, collectively, pay for in the long run for my purchases.
I'll always be a consumer, of course. I'm no homesteader, and being the specialized worker that I am, will have to buy the things I need, and want, from others. But my consumerism can't keep just being about getting the things I want, forever and ever, Amen.
Like the therapists say, acknowledging the problem is the first step.
Hi, my name is Mr. Done by Forty, and I hurt people with my purchases. Thanks for listening.
*Photo is from Danijel J at Flickr Creative Commons.