Mountaineering

From Wikipedia, the free encyclopedia

https://en.wikipedia.org/wiki/Mountaineering 

Mountain climbers ascending Mount Rainier looking at Little Tahoma Peak

 

A climber taking the final few steps onto the 6,160 m (20,210 ft) summit of Imja Tse (Island Peak) in Nepal, 2004

Mountaineering, or alpinism, is the set of outdoor activities that involves ascending tall mountains. Mountaineering-related activities include traditional outdoor climbing, skiing and traversing via ferratas. Indoor climbing, sport climbing and bouldering are also considered variants of mountaineering by some.

Unlike most sports, mountaineering lacks widely applied formal rules, regulations, and governance; mountaineers adhere to a large variety of techniques and philosophies when climbing mountains. Numerous local alpine clubs support mountaineers by hosting resources and social activities. A federation of alpine clubs, the International Climbing and Mountaineering Federation (UIAA), is the International Olympic Committee-recognized world organization for mountaineering and climbing. The consequences of mountaineering on the natural environment can be seen in terms of individual components of the environment (land relief, soil, vegetation, fauna, and landscape) and location/zone of mountaineering activity (hiking, trekking or climbing zone).

History

Early mountaineering

Humans have been present in mountains since prehistory. The remains of Ötzi, who lived in the 4th millennium BC, were found in a glacier in the Ötztal Alps. However, the highest mountains were rarely visited early on, and were often associated with supernatural or religious concepts. Nonetheless, there are many documented examples of people climbing mountains prior to the formal development of the sport in the 19th century, although many of these stories are sometimes considered fictional or legendary.

The famous poet Petrarch describes his 26 April 1336 ascent of Mount Ventoux (1,912 m (6,273 ft)) in one of his epistolae familiares, claiming to be inspired by Philip V of Macedon's ascent of Mount Haemo.

For most of antiquity, climbing mountains was a practical or symbolic activity, usually undertaken for economic, political, or religious purposes. A commonly cited example is the 1492 ascent of Mont Aiguille (2,085 m (6,841 ft)) by Antoine de Ville, a French military officer and lord of Domjulien and Beaupré.

In the Andes, around the late 1400s and early 1500s many ascents were made of extremely high peaks by the Incas and their subjects. The highest they are known for certain to have climbed is 6739m at the summit of Volcan Llullaillaco.

The Enlightenment and the Golden Age of Alpinism

Edward Whymper (1840–1911), painting by Lance Calkin

The Age of Enlightenment and the Romantic era marked a change of attitudes towards high mountains. In 1757 Swiss scientist Horace-Bénédict de Saussure made the first of several unsuccessful attempts on Mont Blanc in France. He then offered a reward to anyone who could climb the mountain, which was claimed in 1786 by Jacques Balmat and Michel-Gabriel Paccard. The climb is usually considered an epochal event in the history of mountaineering, a symbolic mark of the birth of the sport.

By the early 19th century, many of the alpine peaks were reached, including the Grossglockner in 1800, the Ortler in 1804, the Jungfrau in 1811, the Finsteraarhorn in 1812, and the Breithorn in 1813. In 1808, Marie Paradis became the first woman to climb Mont Blanc, followed in 1838 by Henriette d'Angeville.

The beginning of mountaineering as a sport in the UK is generally dated to the ascent of the Wetterhorn in 1854 by English mountaineer Sir Alfred Wills, who made mountaineering fashionable in Britain. This inaugurated what became known as the Golden Age of Alpinism, with the first mountaineering club – the Alpine Club – being founded in 1857.

One of the most dramatic events was the spectacular first ascent of the Matterhorn in 1865 by a party led by English illustrator Edward Whymper, in which four of the party members fell to their deaths. By this point the sport of mountaineering had largely reached its modern form, with a large body of professional guides, equipment, and methodologies.

Edelweiss, a plant associated with mountain sports

In the early years of the "golden age", scientific pursuits were intermixed with the sport, such as by the physicist John Tyndall. In the later years, it shifted to a more competitive orientation as pure sportsmen came to dominate the London-based Alpine Club and alpine mountaineering overall. The first president of the Alpine Club, John Ball, is considered to be the discoverer of the Dolomites, which for decades were the focus of climbers like Paul Grohmann and Angelo Dibona. At that time, the edelweiss also established itself as a symbol of alpinists and mountaineers.

Expansion around the world

In the 19th century, the focus of mountaineering turned towards mountains beyond the Alps, and by the turn of the 20th century, mountaineering had acquired a more international flavour.

In 1897 Mount Saint Elias (18,008 ft (5,489 m)) on the Alaska-Yukon border was summitted by the Duke of the Abruzzi and party. In 1879–1880 the exploration of the highest Andes in South America began when English mountaineer Edward Whymper climbed Chimborazo (20,549 ft (6,263 m)) and explored the mountains of Ecuador. It took until the late 19th century for European explorers to penetrate Africa. Mount Kilimanjaro in Africa was climbed in 1889 by Austrian mountaineer Ludwig Purtscheller and German geologist Hans Meyer, Mount Kenya in 1899 by Halford Mackinder.

The last frontier: The Himalayas

Mountaineers, circa 1900

The last and greatest mountain range was the Himalayas in South Asia. They had initially been surveyed by the British Empire for military and strategic reasons. In 1892 Sir William Martin Conway explored the Karakoram Himalayas, and climbed a peak of 23,000 ft (7,000 m). In 1895 Albert F. Mummery died while attempting Nanga Parbat, while in 1899 Douglas Freshfield took an expedition to the snowy regions of Sikkim.

In 1899, 1903, 1906, and 1908 American mountaineer Fanny Bullock Workman (one of the first professional female mountaineers) made ascents in the Himalayas, including one of the Nun Kun peaks (23,300 ft (7,100 m)). A number of Gurkha sepoys were trained as expert mountaineers by Charles Granville Bruce, and a good deal of exploration was accomplished by them.

In 1902 the Eckenstein-Crowley Expedition, led by English mountaineer Oscar Eckenstein and English occultist Aleister Crowley was the first to attempt to scale K2. They reached 22,000 feet (6,700 m) before turning back due to weather and other mishaps. Undaunted, in 1905 Crowley led the first expedition to Kangchenjunga, the third highest mountain in the world, in an attempt described as "misguided" and "lamentable".

Eckenstein was also a pioneer in developing new equipment and climbing methods. He started using shorter ice axes which could be used single-handed, designed the modern crampons and improved on the nail patterns used for the climbing boots.

By the 1950s, all the eight-thousanders but two had been climbed starting with Annapurna in 1950 by Maurice Herzog and Louis Lachenal on the 1950 French Annapurna expedition. The highest of these peaks Mount Everest was climbed in 1953 after the British had made several attempts in the 1920s; the 1922 expedition reached 8,320 metres (27,300 ft) before being aborted on the third summit attempt after an avalanche killed seven porters. The 1924 expedition saw another height record achieved but still failed to reach the summit with confirmation when George Mallory and Andrew Irvine disappeared on the final attempt. The summit was finally reached on 29 May 1953 by Sir Edmund Hillary and Tenzing Norgay from the south side in Nepal.

Just a few months later, Hermann Buhl made the first ascent of Nanga Parbat (8,125 m), on the 1953 German–Austrian Nanga Parbat expedition, a siege-style expedition culminating in a last 1,300 meters walking alone, being under the influence of drugs: pervitin (based on the stimulant methamphetamine used by soldiers during World War II), padutin and tea from coca leaves. K2 (8,611 m), the second-highest peak in the world, was first scaled in 1954 by Lino Lacedelli and Achille Compagnoni. In 1964, the final eight-thousander to be climbed was Shishapangma (8,013 m), the lowest of all the 8,000-metre peaks. Reinhold Messner from the Dolomites was then the first to climb all eight-thousanders up to 1986.

Today

Long the domain of the wealthy elite and their agents, the emergence of the middle-class in the 19th and 20th centuries has resulted in mass interest in mountaineering. It became a popular pastime and hobby of many people. Some have to come to criticize the sport as becoming too much of a tourist activity.

Organization

Activities

There are different activities associated with the sport.

• Traditional mountaineering involves identifying a specific mountain and route to climb, and executing the plan by whatever means appropriate. A mountain summit is almost always the goal. This activity is strongly associated with aid climbing and free climbing, as well as the use of ice axe and crampons on glaciers and similar terrain.
• Ski mountaineering involves skiing on mountainous terrain, usually in terrain much more rugged than typical cross-country skiing. Unlike traditional mountaineering, routes are less well-defined and summiting may not be the main goal.
• Peak bagging is the general activity of ascending peaks that are on a list of notable mountains, such as the 4000m peaks of the Alps.
• Enchainment is climbing more than one significant summit in one outing, usually on the same day.
• Climbing via ferratas involves traversing ladder-like paths on highly exposed terrain.
• Ice climbing which involves proceeding on steep sections of blank ice with crampons and ice axes. This activity often requires progressing on steep and blank sections of ice. Most mountaineers have to rely on ice climbing skills to climb upon the higher peaks in the European Alps, Himalayas and Canadian ranges.

Rules and governance

Mountaineering lacks formal rules; in theory, any person may climb a mountain and call themself a mountaineer. In practice, the sport is defined by the safe and necessary use of technical skills in mountainous terrain: in particular, roped climbing and snow travel abilities. A variety of techniques have been developed to help people climb mountains that are widely applied among practitioners of the sport.

Despite its lack of defined rules and non-competitive nature, mountaineering has much of the trappings of an organized sport, with recognition by the International Olympic Committee and a prominent international sport federation, the UIAA, which counts numerous national alpine clubs as its members. There are also many notable mountaineering/alpine clubs unassociated with the UIAA, such as The Mountaineers and the French Federation of Mountaineering and Climbing.

The premier award in mountaineering is the Piolet d'Or. There are no "world championships" or other similar competitions for mountaineering.

Terrain and techniques

Antique climbing tools

Mountaineering techniques vary greatly depending on location, season, and the particular route a mountaineer chooses to climb. Mountaineers train to climb on all types of terrain whether it be level ground, rock, snow, or ice. Each type of terrain presents its own hazards. Mountaineers must possess adequate food, water, information, equipment and stamina to complete their tasks.

Walk-up terrain

The term "walk-up" or "trek" is used to describe terrain in which no technical equipment is needed. To traverse this terrain, mountaineers hike long distances to a base camp or the beginning of rough terrain, either following trails or using navigation techniques to travel cross-country. Hiking may be a strenuous activity, and adequate physical fitness and familiarity with the wilderness is necessary to complete a hike; it is also a prerequisite of success in all aspects of mountaineering.

Rock

Alpine rock climbing involves technical skills including the ability to place anchors into the rock to safely ascend a mountain. In some cases, climbers may have to climb multiple pitches of rock to reach the top. Typically, for any one pitch, there is a belayer who is stationary and creates tension on the rope to catch a climber should he or she fall, and a climber who ascends the rock. The first climber, called the leader, will reach a point on the rock and then build an anchor, which will secure subsequent climbers. Anchors could be created by using slings around a tree or boulder, or by using protection devices like cams and nuts.

Once anchored, the leader will then belay the climber coming up from below. Once the follower reaches the leader, the leader will often transfer all necessary protection devices (known as a rack) to the follower. The follower then becomes the leader and will ascend the next pitch. This process will continue until the climbers either reach the top, or run into different terrain.

For extremely vertical rocks, or to overcome certain logistical challenges, climbers may use aid climbing techniques. This involves the use of equipment, such as ladders, fixed lines, and ascenders to help the climber push themself up the rock.

In alpine climbing, it is common for climbers to see routes of mixed terrain. This means climbers may need to move efficiently from climbing glacier, to rock, to ice, back and forth in a number of variations.

Snow and ice

Mountaineers proceed across snow fields on South Tyrol; other climbers are visible further up the slopes.

Compacted snow conditions allow mountaineers to progress on foot. Frequently crampons are required to travel efficiently and safely over snow and ice. Crampons attach to the bottom of a mountaineer's boots and provide additional traction on hard snow and ice. For loose snow, crampons are less suitable, and snowshoes or skis may be preferred. Using various techniques from alpine skiing to ascend/descend a mountain is a form of the sport by itself, called ski mountaineering.

Ascending and descending a steep snow slope safely requires the use of an ice axe and different footwork techniques that have been developed over the past century, such as the French technique and German technique. Teams of climbers may choose to attach everyone together with a rope, to form a rope team. The team may then secure themselves by attaching the rope to anchors. These anchors are sometimes unreliable, and include snow stakes or pickets, deadman devices called flukes, or buried equipment or rocks. Bollards, which are simply carved out of consolidated snow or ice, also sometimes serve as anchors. Alternatively, a roped team may choose not to use anchors; instead all members of the team will prepare to use their ice axes to self-arrest in the event should a team member fall.

It is not always wise for climbers to form a rope team, since one falling climber may pull the entire team off the mountain. However, the risks of individual, unprotected travel are often so great that groups have no choice but to form a rope team.

For example, when travelling over glaciers, crevasses pose a grave danger to a climber who is not roped in. These giant cracks in the ice are not always visible as snow can be blown and freeze over the top to make a snowbridge. At times snowbridges can be as thin as a few inches, and may collapse from people walking over them. Should a climber fall, being protected by a rope greatly reduces the risk of injury or death. The other members of the rope team may proceed with a crevasse rescue to pull the fallen climber from the crevasse.

For extremely slippery or steep snow, ice, and mixed rock and ice terrain climbers must use more advanced techniques, called ice climbing or mixed climbing. Specialized tools such as ice screws and ice picks help climbers build anchors and move up the ice, as well as traditional rock climbing equipment for anchoring in mixed terrain. Often, mountaineers climbing steep snow or mixed snowy rock terrain will not use a fixed belay. Instead each climber on the team will climb at the same time while attached to anchors, in groups of two. This allows for safety should the entire team be taken off their feet which also allowing for greater speed than the traditional technique of belaying one climber at a time. This technique is known as simul-climbing or a running belay and is sometimes also used on ice, however the risk of dropping frequently displaced ice on the lower team member(s) limits its usefulness on ice. Traditional belays are also used; in this case, this is sometimes necessary due to ice fall hazard, steepness, or other factors.

Shelter

"Basecamp" redirects here. For other uses, see Base camp (disambiguation).

Climbers use a few different forms of shelter depending on the situation and conditions; alpine shelters or arctic shelters. Shelter is a very important aspect of safety for the climber as weather in the mountains may be very unpredictable. Tall mountains may require many days of camping.

Short trips lasting less than a day generally do not require shelter, although for safety, most mountaineers will carry an emergency shelter, such a light bivouac sack.

Camping

Typical shelters used for camping include tents and bivouac sacks. The ability of these shelters to provide protection from the elements is dependent on their design. Mountaineers who climb in areas with cold weather or snow and ice will use more heavy-duty shelters than those who climb in more forgiving environments.

In remote locations, mountaineers will set up a "base camp", which is an area used for staging attempts at nearby summits. Base camps are positioned to be relatively safe from harsh terrain and weather. Where the summit cannot be reached from base camp in a single day, a mountain will have additional camps above base camp. For popular mountains, base camps may be at a fixed location and become famous. The Everest base camps and Camp Muir are among the most famous base camps.

Hut

Granite Park Chalet in Glacier National Park, US

Camping is not always an option, or may not be suitable if a mountain is close to civilization. Some regions may legally prohibit primitive camping due to concern for the environment, or due to issues with crowds. In lieu of camping, mountaineers may choose to stay in mountain huts.

The European alpine regions, in particular, have a large network of huts. Such huts exist at many different heights, including in the high mountains themselves – in extremely remote areas, more rudimentary shelters may exist. The mountain huts are of varying size and quality, but each is typically centred on a communal dining room and have dormitories equipped with mattresses, blankets or duvets, and pillows; guests are expected to bring and use their own sleeping bag liners. The facilities are usually rudimentary, but, given their locations, huts offer vital shelter, make routes more widely accessible (by allowing journeys to be broken and reducing the weight of equipment needing to be carried), and offer good value. In Europe, all huts are staffed during the summer (mid-June to mid-September) and some are staffed in the spring (mid-March to mid-May). Elsewhere, huts may also be open in the fall. Huts also may have a part that is always open, but unmanned, a so-called winter hut.

When open and manned, the huts are generally run by full-time employees, but some are staffed on a voluntary basis by members of alpine clubs. The manager of the hut, termed a guardian or warden in Europe, will usually also sell refreshments and meals, both to those visiting only for the day and to those staying overnight. The offering is surprisingly wide, given that most supplies, often including fresh water, must be flown in by helicopter, and may include glucose-based snacks (such as candy bars) on which climbers and walkers wish to stock up, cakes and pastries made at the hut, a variety of hot and cold drinks (including beer and wine), and high carbohydrate dinners in the evenings. Not all huts offer a catered service, though, and visitors may need to provide for themselves. Some huts offer facilities for both, enabling visitors wishing to keep costs down to bring their own food and cooking equipment and to cater using the facilities provided. Booking for overnight stays at huts is deemed obligatory, and in many cases is essential as some popular huts, even with more than 100 bed spaces, may be full during good weather and at weekends. Once made, the cancellation of a reservation is advised as a matter of courtesy – and, indeed, potentially of safety, as many huts keep a record of where climbers and walkers state they plan to walk to next. Most huts may be contacted by telephone and most take credit cards as a means of payment.

In the UK the term "hut" is used for any cottage or cabin used as a base for walkers or climbers. These are mostly owned by mountaineering clubs for use by members or visiting clubs and generally do not have wardens or permanent staff, but have cooking and washing facilities and heating. In the Scottish Highlands small simple unmanned shelters without cooking facilities known as "bothies" are maintained to break up cross country long routes and act as base camps to certain mountains.

Snow cave

Where conditions permit, snow caves are another way to shelter high on the mountain. Some climbers do not use tents at high altitudes unless the snow conditions do not allow for snow caving, since snow caves are silent and much warmer than tents. They can be built relatively easily, given sufficient time, using a snow shovel. The temperature of a correctly made snow cave will hover around freezing, which relative to outside temperatures can be very warm. They can be dug anywhere where there is at least four feet of snow. The addition of a good quality bivouac bag and closed cell foam sleeping mat will also increase the warmth of the snow cave. Another shelter that works well is a quinzee, which is excavated from a pile of snow that has been work hardened or sintered (typically by stomping). Igloos are used by some climbers, but are deceptively difficult to build and require specific snow conditions.

Hazards

Main article: Hazards of outdoor recreation

See also: List of deaths on eight-thousanders

Mountaineers face a variety of hazards. When climbing mountains, there are two types of hazards, objective and subjective. Objective hazards relate to the environment, and may include inclement weather conditions, dangerous terrain, and poor equipment. Subjective hazards relate to a climber's poor judgement, poor planning, lack of skills, or inadequate conditioning.

In terms of objective hazards, the dangers mountaineers face include falling rocks, falling ice, snow-avalanches, the climber falling, falls from ice slopes, falls down snow slopes, falls into crevasses, and the dangers from altitude and weather.

From 1947 to 2018 in the United States "2,799 people were reported to be involved in mountaineering accidents and 43% of these accidents resulted in death."

Altitude

Rapid ascent can lead to altitude sickness. The best treatment is to descend immediately. The climber's motto at high altitude is "climb high, sleep low", referring to the regimen of climbing higher to acclimatise but returning to lower elevation to sleep. In the Andes, the chewing of coca leaves has been traditionally used to treat altitude sickness symptoms.

Common symptoms of altitude sickness include severe headache, sleep problems, nausea, lack of appetite, lethargy and body ache. Mountain sickness may progress to HACE (High altitude cerebral edema) and HAPE (High altitude pulmonary edema), both of which can be fatal within 24 hours.

In high mountains, atmospheric pressure is lower and this means that less oxygen is available to breathe. This is the underlying cause of altitude sickness. Everyone needs to acclimatise, even exceptional mountaineers that have been to high altitude before. Generally speaking, mountaineers start using bottled oxygen when they climb above 7,000 m. Exceptional mountaineers have climbed 8000-metre peaks (including Everest) without oxygen, almost always with a carefully planned program of acclimatisation.

Styles of mountaineering

Fixed lines and ladders are distinguishing characteristics of expedition style mountaineering

There are two main styles of mountaineering: expedition style and alpine style.

Expedition style

The alpine style contrasts with "expedition style". With this style, climbers will carry large amounts of equipment and provisions up and down the mountain, slowly making upward progress. Climbing in an expedition style is preferred if the summit is very high or distant from civilization. Mountaineers who use this style are usually, but not always, part of a large team of climbers and support staff (such as porters and guides). To cover large distances with their massive amounts of gear, sleds and pack animals are commonly used. Climbers will set up multiple camps along the mountain, and will haul their gear up the mountain multiple times, returning to a lower camp after each haul until all the gear is at a higher camp; and repeating this procedure until they reach the summit. This technique is also helpful for acclimatization. While it is the original style in which high mountains were climbed, expedition style is rare these days as more mountains have become accessible to the general public with air travel and the penetration of highways into mountainous regions. It is still common in ranges such as the Alaska Range and the Himalayas.

• Uses multiple trips between camps to carry supplies up to higher camps
• Group sizes are often larger than alpine style climbs because more supplies are carried between camps
• Fixed lines are often used to minimize the danger involved in continually moving between camps
• For the highest mountains, supplemental oxygen is frequently used
• There is a higher margin of safety in relation to equipment, food, time, and ability to wait out storms at high camps
• Avoidance of being trapped in storms at high altitudes and being forced to descend in treacherous avalanche conditions
• Possible higher exposure to objective hazards such as avalanches or rockfall, due to slower travel times between camps
• Higher capital expenditures and a longer time scale

Alpine style

Alpine style, or informal variations of it, is the most common form of mountaineering today. It involves a single, straightforward climb of the mountain, with no backtracking. This style is most suited for medium-sized mountain areas close to civilization with elevations of 2,000–5,000 m (6,600–16,400 ft), such as the Alps or the Rocky Mountains. Alpine style ascents have been done throughout history on extreme altitude (above 5,000 m) peaks also, albeit in lower volume to expedition style ascents. Climbers generally carry their loads between camps without backtracking, in a single push for the summit. If the summit is reachable from the base camp or trailhead within one day, then alpine-style mountaineers will not change camps at all, and only carry the slightest of loads (necessary nourishment and equipment) up to the summit. "Light and fast" is the mantra of the alpine mountaineer.

• Climbers climb the route only once because they do not continually climb up and down to stock camps with supplies
• Fewer supplies are used on the climb, therefore fewer personnel are needed
• Alpine-style ascents do not leave the climber exposed to objective hazards as long as an expedition-style climb does; however, because of the speed of the ascent relative to an expedition-style climb there is less time for acclimatization
• For the highest mountains, supplemental oxygen is rarely used, or used more sparingly.
• Danger of being trapped at high altitude due to storms, potentially being exposed to HAPE or HACE
• Lower capital expenditures and a shorter time scale

Externality

From Wikipedia, the free encyclopedia

https://en.wikipedia.org/wiki/Externality 

 

Air pollution from motor vehicles is an example of a negative externality. The costs of the air pollution for the rest of society is not compensated for by either the producers or users of motorized transport.

In economics, an externality or external cost is an indirect cost or benefit to an uninvolved third party that arises as an effect of another party's (or parties') activity. Externalities can be considered as unpriced goods involved in either consumer or producer market transactions. Air pollution from motor vehicles is one example. The cost of air pollution to society is not paid by either the producers or users of motorized transport to the rest of society. Water pollution from mills and factories is another example. All consumers are all made worse off by pollution but are not compensated by the market for this damage. A positive externality is when an individual's consumption in a market increases the well-being of others, but the individual does not charge the third party for the benefit. The third party is essentially getting a free product. An example of this might be the apartment above a bakery receiving the benefit of enjoyment from smelling fresh pastries every morning. The people who live in the apartment do not compensate the bakery for this benefit. 

The concept of externality was first developed by economist Arthur Pigou in the 1920s. The prototypical example of a negative externality is environmental pollution. Pigou argued that a tax, equal to the marginal damage or marginal external cost, (later called a "Pigouvian tax") on negative externalities could be used to reduce their incidence to an efficient level. Subsequent thinkers have debated whether it is preferable to tax or to regulate negative externalities, the optimally efficient level of the Pigouvian taxation, and what factors cause or exacerbate negative externalities, such as providing investors in corporations with limited liability for harms committed by the corporation.

Externalities often occur when the production or consumption of a product or service's private price equilibrium cannot reflect the true costs or benefits of that product or service for society as a whole. This causes the externality competitive equilibrium to not adhere to the condition of Pareto optimality. Thus, since resources can be better allocated, externalities are an example of market failure.

Externalities can be either positive or negative. Governments and institutions often take actions to internalize externalities, thus market-priced transactions can incorporate all the benefits and costs associated with transactions between economic agents. The most common way this is done is by imposing taxes on the producers of this externality. This is usually done similar to a quote where there is no tax imposed and then once the externality reaches a certain point there is a very high tax imposed. However, since regulators do not always have all the information on the externality it can be difficult to impose the right tax. Once the externality is internalized through imposing a tax the competitive equilibrium is now Pareto optimal.

For example, manufacturing activities that cause air pollution impose health and clean-up costs on the whole society, whereas the neighbors of individuals who choose to fire-proof their homes may benefit from a reduced risk of a fire spreading to their own houses. If external costs exist, such as pollution, the producer may choose to produce more of the product than would be produced if the producer were required to pay all associated environmental costs. Because responsibility or consequence for self-directed action lies partly outside the self, an element of externalization is involved. If there are external benefits, such as in public safety, less of the good may be produced than would be the case if the producer were to receive payment for the external benefits to others.

History of the concept

Two British economists are credited with having initiated the formal study of externalities, or "spillover effects": Henry Sidgwick (1838–1900) is credited with first articulating, and Arthur C. Pigou (1877–1959) is credited with formalizing the concept of externalities.

The word externality is used because the effect produced on others, whether in the form of profits or costs, is external to the market.

Definitions

A negative externality is any difference between the private cost of an action or decision to an economic agent and the social cost. In simple terms, a negative externality is anything that causes an indirect cost to individuals. An example is the toxic gases that are released from industries or mines, these gases cause harm to individuals within the surrounding area and have to bear a cost (indirect cost) to get rid of that harm. Conversely, a positive externality is any difference between the private benefit of an action or decision to an economic agent and the social benefit. A positive externality is anything that causes an indirect benefit to individuals. For example, planting trees makes individuals' property look nicer and it also cleans the surrounding areas.

In microeconomic theory, externalities are factored into competitive equilibrium analysis as the social effect, as opposed to the private market which only factors direct economic effects. The social effect of economic activity is the sum of the indirect (the externalities) and direct factors. The Pareto optimum, therefore, is at the levels in which the social marginal benefit equals the social marginal cost.

Formal definition

Suppose that there are ${\displaystyle K}$ different possible allocations and ${\displaystyle N}$ different agents, where ${\displaystyle K,N<\infty }$ and ${\displaystyle N\geq 2}$. Suppose that each agent has a type ${\displaystyle \theta _{i}\sim F_{i}[0,1]}$ and that each agent gets payoff ${\displaystyle v_{i}(\theta _{i},k)+t_{i}}$, where ${\displaystyle t_{i}}$ is the transfer paid by the ${\displaystyle i}$-th agent. A map ${\displaystyle f=(\kappa ,t_{1},\ldots ,t_{N})}$ is a social choice function if

${\displaystyle \sum _{i=1}^{N}t_{i}(\theta )\leq 0}$

for all ${\displaystyle \theta \in [0,1]^{N}.}$ An allocation ${\displaystyle \kappa \colon [0,1]^{N}\to K}$ is ex-post efficient if

${\displaystyle \sum _{i=1}^{N}v_{i}(\theta _{i},\kappa (\theta ))\geq \sum _{i=1}^{N}v_{i}(\theta _{i},k)}$

for all ${\displaystyle \theta =(\theta _{1},\ldots ,\theta _{N})\in [0,1]^{N}}$ and all ${\displaystyle k\in K.}$

Let ${\displaystyle \kappa ^{*}}$ denote an ex-post efficient allocation and let ${\displaystyle {\tilde {\kappa }}_{i}}$ denote an ex-post efficient allocation without agent ${\displaystyle i}$. Then the externality imposed by agent ${\displaystyle i}$ on the other agents is

${\displaystyle \sum _{j\neq i}v_{j}(\theta _{j},{\tilde {\kappa }}_{i}(\theta _{-i}))-\sum _{j\neq i}v_{j}(\theta _{j},\kappa ^{*}(\theta )),}$

where ${\displaystyle \theta _{-i}}$ is the type vector ${\displaystyle \theta }$ without its ${\displaystyle i}$-th component. Intuitively, the first term is the hypothetical total payoff for all agents ${\displaystyle j\neq i}$ given that agent ${\displaystyle i}$ does not exist, and the second (subtracted) term is the actual total payoff for all agents ${\displaystyle j\neq i}$ given that agent ${\displaystyle i}$ does exist.

Implications

The implications caused as a result of externalities can be both positive and negative. If two separate businesses agree to allow their activities to affect each other than it is mutually beneficial, because they would not agree to it in the first place if it was going to be damaging to their business. However, other external parties can also be affected by the deal without their knowledge or the other businesses' knowledge. Unlike the original transaction as the third party did not agree it could provide both positive and negative implications.

A voluntary exchange may reduce societal welfare if external costs exist. The person who is affected by the negative externalities in the case of air pollution will see it as lowered utility: either subjective displeasure or potentially explicit costs, such as higher medical expenses. The externality may even be seen as a trespass on their lungs, violating their property rights. Thus, an external cost may pose an ethical or political problem. Negative externalities are Pareto inefficient, and since Pareto efficiency underpins the justification for private property, they undermine the whole idea of a market economy. For these reasons, negative externalities are more problematic than positive externalities.

Although positive externalities may appear to be beneficial, while Pareto efficient, they still represent a failure in the market as it results in the production of the good falling under what is optimal for the market. By allowing producers to recognise and attempt to control their externalities production would increase as they would have motivation to do so. With this comes the Free Rider Problem. The Free Rider Problem arises when people overuse a shared resource without doing their part to produce or pay for it. It represents a failure in the market where goods and services are not able to be distributed efficiently, allowing people to take more than what is fair. For example, if a farmer has honeybees a positive externality of owning these bees is that they will also pollinate the surrounding plants. This farmer has a next door neighbour who also benefits from this externality even though he does not have any bees himself. From the perspective of the neighbour he has no incentive to purchase bees himself as he is already benefiting from them at zero cost. But for the farmer, he is missing out on the full benefits of his own bees which he paid for, because they are also being used by his neighbour.

Graph of Positive Externality in Production

There are a number of theoretical means of improving overall social utility when negative externalities are involved. The market-driven approach to correcting externalities is to "internalize" third party costs and benefits, for example, by requiring a polluter to repair any damage caused. But in many cases, internalizing costs or benefits is not feasible, especially if the true monetary values cannot be determined.

Laissez-faire economists such as Friedrich Hayek and Milton Friedman sometimes refer to externalities as "neighborhood effects" or "spillovers", although externalities are not necessarily minor or localized. Similarly, Ludwig von Mises argues that externalities arise from lack of "clear personal property definition."

Examples

Externalities may arise between producers, between consumers or between consumers and producers. Externalities can be negative when the action of one party imposes costs on another, or positive when the action of one party benefits another.

Classification of externalities

	Consumption	Production
Negative	Negative externalities in consumption	Negative externalities in production
Positive	Positive externalities in consumption	Positive externalities in production

Negative

Light pollution is an example of an externality because the consumption of street lighting has an effect on bystanders that is not compensated for by the consumers of the lighting.

A negative externality (also called "external cost" or "external diseconomy") is an economic activity that imposes a negative effect on an unrelated third party. It can arise either during the production or the consumption of a good or service. Pollution is termed an externality because it imposes costs on people who are "external" to the producer and consumer of the polluting product. Barry Commoner commented on the costs of externalities:

Clearly, we have compiled a record of serious failures in recent technological encounters with the environment. In each case, the new technology was brought into use before the ultimate hazards were known. We have been quick to reap the benefits and slow to comprehend the costs.

Many negative externalities are related to the environmental consequences of production and use. The article on environmental economics also addresses externalities and how they may be addressed in the context of environmental issues.

"The corporation is an externalizing machine (moving its operating costs and risks to external organizations and people), in the same way that a shark is a killing machine." - Robert Monks (2003) Republican candidate for Senate from Maine and corporate governance adviser in the film "The Corporation".

Negative production externalities

Examples for negative production externalities include:

Negative production externality

• Air pollution from burning fossil fuels. This activity causes damages to crops, materials and (historic) buildings and public health.
• Anthropogenic climate change as a consequence of greenhouse gas emissions from the burning of fossil fuels and the rearing of livestock. The Stern Review on the Economics of Climate Change says "Climate change presents a unique challenge for economics: it is the greatest example of market failure we have ever seen."
• Water pollution from industrial effluents can harm plants, animals, and humans
• Spam emails during the sending of unsolicited messages by email.
• Noise pollution during the production process, which may be mentally and psychologically disruptive.
• Systemic risk: the risks to the overall economy arising from the risks that the banking system takes. A condition of moral hazard can occur in the absence of well-designed banking regulation, or in the presence of badly designed regulation.
• Negative effects of Industrial farm animal production, including "the increase in the pool of antibiotic-resistant bacteria because of the overuse of antibiotics; air quality problems; the contamination of rivers, streams, and coastal waters with concentrated animal waste; animal welfare problems, mainly as a result of the extremely close quarters in which the animals are housed."
• The depletion of the stock of fish in the ocean due to overfishing. This is an example of a common property resource, which is vulnerable to the tragedy of the commons in the absence of appropriate environmental governance.
• In the United States, the cost of storing nuclear waste from nuclear plants for more than 1,000 years (over 100,000 for some types of nuclear waste) is, in principle, included in the cost of the electricity the plant produces in the form of a fee paid to the government and held in the nuclear waste superfund, although much of that fund was spent on Yucca Mountain without producing a solution. Conversely, the costs of managing the long-term risks of disposal of chemicals, which may remain hazardous on similar time scales, is not commonly internalized in prices. The USEPA regulates chemicals for periods ranging from 100 years to a maximum of 10,000 years.

Negative consumption externalities

Examples of negative consumption externalities include:

Negative consumption externality

• Noise pollution: Sleep deprivation due to a neighbor listening to loud music late at night.
• Antibiotic resistance, caused by increased usage of antibiotics: Individuals do not consider this efficacy cost when making usage decisions. Government policies proposed to preserve future antibiotic effectiveness include educational campaigns, regulation, Pigouvian taxes, and patents.
• Passive smoking: Shared costs of declining health and vitality caused by smoking or alcohol abuse. Here, the "cost" is that of providing minimum social welfare. Economists more frequently attribute this problem to the category of moral hazards, the prospect that parties insulated from risk may behave differently from the way they would if they were fully exposed to the risk. For example, individuals with insurance against automobile theft may be less vigilant about locking their cars, because the negative consequences of automobile theft are (partially) borne by the insurance company.
• Traffic congestion: When more people use public roads, road users experience congestion costs such as more waiting in traffic and longer trip times. Increased road users also increase the likelihood of road accidents.
• Price increases: Consumption by one party causes prices to rise and therefore makes other consumers worse off, perhaps by preventing, reducing or delaying their consumption. These effects are sometimes called "pecuniary externalities" and are distinguished from "real externalities" or "technological externalities". Pecuniary externalities appear to be externalities, but occur within the market mechanism and are not considered to be a source of market failure or inefficiency, although they may still result in substantial harm to others.
• Weak public infrastructure, air pollution, climate change, work misallocation, resource requirements and land/space requirements as in the externalities of automobiles.

Positive

A positive externality (also called "external benefit" or "external economy" or "beneficial externality") is the positive effect an activity imposes on an unrelated third party. Similar to a negative externality, it can arise either on the production side, or on the consumption side.

Positive production externality

A positive production externality occurs when a firm's production increases the well-being of others but the firm is uncompensated by those others, while a positive consumption externality occurs when an individual's consumption benefits other but the individual is uncompensated by those others.

Positive production externalities

Examples of positive production externalities

• A beekeeper who keeps the bees for their honey. A side effect or externality associated with such activity is the pollination of surrounding crops by the bees. The value generated by the pollination may be more important than the value of the harvested honey.
• The corporate development of some free software (studied notably by Jean Tirole and Steven Weber)
• Research and development, since much of the economic benefits of research aren't captured by the originating firm.
• An industrial company providing first aid classes for employees to increase on the job safety. This may also save lives outside the factory.
• Restored historic buildings may encourage more people to visit the area and patronize nearby businesses.
• A foreign firm that demonstrates up-to-date technologies to local firms and improves their productivity.

Positive consumption externality

Positive consumption externalities

Examples of positive consumption externalities include:

• An individual who maintains an attractive house may confer benefits to neighbors in the form of increased market values for their properties. This is an example of a pecuniary externality, because the positive spillover is accounted for in market prices. In this case, house prices in the neighborhood will increase to match the increased real estate value from maintaining their aesthetic. (such as by mowing the lawn, keeping the trash orderly, and getting the house painted) 
• Anything that reduces the rate of transmission of an infectious disease carries positive externalities. This includes vaccines, quarantine, tests and other diagnostic procedures. For airborne infections, it also includes masking. For waterborne diseases, it includes improved sewers and sanitation. (See herd immunity)
• Increased education of individuals, as this can lead to broader society benefits in the form of greater economic productivity, a lower unemployment rate, greater household mobility and higher rates of political participation.
• An individual buying a product that is interconnected in a network (e.g., a smartphone). This will increase the usefulness of such phones to other people who have a video cellphone. When each new user of a product increases the value of the same product owned by others, the phenomenon is called a network externality or a network effect. Network externalities often have "tipping points" where, suddenly, the product reaches general acceptance and near-universal usage.
• In an area that does not have a public fire department, homeowners who purchase private fire protection services provide a positive externality to neighboring properties, which are less at risk of the protected neighbor's fire spreading to their (unprotected) house.

Collective solutions or public policies are implemented to regulate activities with positive or negative externalities.

Positional

Positional externalities are also called Pecuniary externalities. These externalities "occur when new purchases alter the relevant context within which an existing positional good is evaluated." Robert H. Frank gives the following example:

if some job candidates begin wearing expensive custom-tailored suits, a side effect of their action is that other candidates become less likely to make favorable impressions on interviewers. From any individual job seeker's point of view, the best response might be to match the higher expenditures of others, lest her chances of landing the job fall. But this outcome may be inefficient since when all spend more, each candidate's probability of success remains unchanged. All may agree that some form of collective restraint on expenditure would be useful."

Frank notes that treating positional externalities like other externalities might lead to "intrusive economic and social regulation." He argues, however, that less intrusive and more efficient means of "limiting the costs of expenditure cascades"—i.e., the hypothesized increase in spending of middle-income families beyond their means "because of indirect effects associated with increased spending by top earners"—exist; one such method is the personal income tax.

Inframarginal

The concept of inframarginal externalities was introduced by James Buchanan and Craig Stubblebine in 1962. Inframarginal externalities differ from other externalities in that there is no benefit or loss to the marginal consumer. At the relevant margin to the market, the externality does not affect the consumer and does not cause a market inefficiency. The externality only affects at the inframarginal range outside where the market clears. These types of externalities do not cause inefficient allocation of resources and do not require policy action.

Technological

Technological externalities directly affect a firm's production and therefore, indirectly influence an individual's consumption; and the overall impact of society; for example Open-source software or free software development by corporations.

Supply and demand diagram

The usual economic analysis of externalities can be illustrated using a standard supply and demand diagram if the externality can be valued in terms of money. An extra supply or demand curve is added, as in the diagrams below. One of the curves is the private cost that consumers pay as individuals for additional quantities of the good, which in competitive markets, is the marginal private cost. The other curve is the true cost that society as a whole pays for production and consumption of increased production the good, or the marginal social cost. Similarly, there might be two curves for the demand or benefit of the good. The social demand curve would reflect the benefit to society as a whole, while the normal demand curve reflects the benefit to consumers as individuals and is reflected as effective demand in the market.

What curve is added depends on the type of externality that is described, but not whether it is positive or negative. Whenever an externality arises on the production side, there will be two supply curves (private and social cost). However, if the externality arises on the consumption side, there will be two demand curves instead (private and social benefit). This distinction is essential when it comes to resolving inefficiencies that are caused by externalities.

External costs

Demand curve with external costs; if social costs are not accounted for price is too low to cover all costs and hence quantity produced is unnecessarily high (because the producers of the good and their customers are essentially underpaying the total, real factors of production.)

The graph shows the effects of a negative externality. For example, the steel industry is assumed to be selling in a competitive market – before pollution-control laws were imposed and enforced (e.g. under laissez-faire). The marginal private cost is less than the marginal social or public cost by the amount of the external cost, i.e., the cost of air pollution and water pollution. This is represented by the vertical distance between the two supply curves. It is assumed that there are no external benefits, so that social benefit equals individual benefit.

If the consumers only take into account their own private cost, they will end up at price P_p and quantity Q_p, instead of the more efficient price P_s and quantity Q_s. These latter reflect the idea that the marginal social benefit should equal the marginal social cost, that is that production should be increased only as long as the marginal social benefit exceeds the marginal social cost. The result is that a free market is inefficient since at the quantity Q_p, the social benefit is less than the social cost, so society as a whole would be better off if the goods between Q_p and Q_s had not been produced. The problem is that people are buying and consuming too much steel.

This discussion implies that negative externalities (such as pollution) are more than merely an ethical problem. The problem is one of the disjunctures between marginal private and social costs that are not solved by the free market. It is a problem of societal communication and coordination to balance costs and benefits. This also implies that pollution is not something solved by competitive markets. Some collective solution is needed, such as a court system to allow parties affected by the pollution to be compensated, government intervention banning or discouraging pollution, or economic incentives such as green taxes.

External benefits

Supply curve with external benefits; when the market does not account for the additional social benefits of a good both the price for the good and the quantity produced are lower than the market could bear.

The graph shows the effects of a positive or beneficial externality. For example, the industry supplying smallpox vaccinations is assumed to be selling in a competitive market. The marginal private benefit of getting the vaccination is less than the marginal social or public benefit by the amount of the external benefit (for example, society as a whole is increasingly protected from smallpox by each vaccination, including those who refuse to participate). This marginal external benefit of getting a smallpox shot is represented by the vertical distance between the two demand curves. Assume there are no external costs, so that social cost equals individual cost.

If consumers only take into account their own private benefits from getting vaccinations, the market will end up at price P_p and quantity Q_p as before, instead of the more efficient price P_s and quantity Q_s. This latter again reflect the idea that the marginal social benefit should equal the marginal social cost, i.e., that production should be increased as long as the marginal social benefit exceeds the marginal social cost. The result in an unfettered market is inefficient since at the quantity Q_p, the social benefit is greater than the societal cost, so society as a whole would be better off if more goods had been produced. The problem is that people are buying too few vaccinations.

The issue of external benefits is related to that of public goods, which are goods where it is difficult if not impossible to exclude people from benefits. The production of a public good has beneficial externalities for all, or almost all, of the public. As with external costs, there is a problem here of societal communication and coordination to balance benefits and costs. This also implies that vaccination is not something solved by competitive markets. The government may have to step in with a collective solution, such as subsidizing or legally requiring vaccine use. If the government does this, the good is called a merit good. Examples include policies to accelerate the introduction of electric vehicles or promote cycling, both of which benefit public health.

Causes

Externalities often arise from poorly defined property rights. While property rights to some things, such as objects, land, and money can be easily defined and protected, air, water, and wild animals often flow freely across personal and political borders, making it much more difficult to assign ownership. This incentivizes agents to consume them without paying the full cost, leading to negative externalities. Positive externalities similarly accrue from poorly defined property rights. For example, a person who gets a flu vaccination cannot own part of the herd immunity this confers on society, so they may choose not to be vaccinated.

Another common cause of externalities is the presence of transaction costs. Transaction costs are the cost of making an economic trade. These costs prevent economic agents from making exchanges they should be making. The costs of the transaction outweigh the benefit to the agent. When not all mutually beneficial exchanges occur in a market, that market is inefficient. Without transaction costs, agents could freely negotiate and internalize all externalities.

Possible solutions

Solutions in non-market economies

• In planned economies, production is typically limited only to necessity, which would eliminate externalities created by overproduction.
• The central planner can decide to create and allocate jobs in industries that work to mitigate externalities, rather than waiting for the market to create a demand for these jobs.

Solutions in market economies

There are several general types of solutions to the problem of externalities, including both public- and private-sector resolutions:

• Corporations or partnerships will allow confidential sharing of information among members, reducing the positive externalities that would occur if the information were shared in an economy consisting only of individuals.
• Pigovian taxes or subsidies intended to redress economic injustices or imbalances.
• Regulation to limit activity that might cause negative externalities
• Government provision of services with positive externalities
• Lawsuits to compensate affected parties for negative externalities
• Voting to cause participants to internalize externalities subject to the conditions of the efficient voter rule.
• Mediation or negotiation between those affected by externalities and those causing them

A Pigovian tax (also called Pigouvian tax, after economist Arthur C. Pigou) is a tax imposed that is equal in value to the negative externality. In order to fully correct the negative externality, the per unit tax should equal the marginal external cost. The result is that the market outcome would be reduced to the efficient amount. A side effect is that revenue is raised for the government, reducing the amount of distortionary taxes that the government must impose elsewhere. Governments justify the use of Pigovian taxes saying that these taxes help the market reach an efficient outcome because this tax bridges the gap between marginal social costs and marginal private costs.

Some arguments against Pigovian taxes say that the tax does not account for all the transfers and regulations involved with an externality. In other words, the tax only considers the amount of externality produced. Another argument against the tax is that it does not take private property into consideration. Under the Pigovian system, one firm, for example, can be taxed more than another firm, even though the other firm is actually producing greater amounts of the negative externality.

Further arguments against Pigou disagree with his assumption every externality has someone at fault or responsible for the damages. Coase argues that externalities are reciprocal in nature. Both parties must be present for an externality to exist. He uses the example of two neighbors. One neighbor possesses a fireplace, and often lights fires in his house without issue. Then one day, the other neighbor builds a wall that prevents the smoke from escaping and sends it back into the fire-building neighbor’s home. This illustrates the reciprocal nature of externalities. Without the wall, the smoke would not be a problem, but without the fire, the smoke would not exist to cause problems in the first place. Coase also takes issue with Pigou’s assumption of a “benevolent despot” government. Pigou assumes the government’s role is to see the external costs or benefits of a transaction and assign an appropriate tax or subsidy. Coase argues that the government faces costs and benefits just like any other economic agent, so other factors play into its decision-making.

However, the most common type of solution is a tacit agreement through the political process. Governments are elected to represent citizens and to strike political compromises between various interests. Normally governments pass laws and regulations to address pollution and other types of environmental harm. These laws and regulations can take the form of "command and control" regulation (such as setting standards, targets, or process requirements), or environmental pricing reform (such as ecotaxes or other Pigovian taxes, tradable pollution permits or the creation of markets for ecological services). The second type of resolution is a purely private agreement between the parties involved.

Government intervention might not always be needed. Traditional ways of life may have evolved as ways to deal with external costs and benefits. Alternatively, democratically run communities can agree to deal with these costs and benefits in an amicable way. Externalities can sometimes be resolved by agreement between the parties involved. This resolution may even come about because of the threat of government action.

The use of taxes and subsidies in solving the problem of externalities Correction tax, respectively subsidy, means essentially any mechanism that increases, respectively decreases, the costs (and thus price) associated with the activities of an individual or company.

The private-sector may sometimes be able to drive society to the socially optimal resolution. Ronald Coase argued that an efficient outcome can sometimes be reached without government intervention. Some take this argument further, and make the political argument that government should restrict its role to facilitating bargaining among the affected groups or individuals and to enforcing any contracts that result.

This result, often known as the Coase theorem, requires that

• Property rights be well-defined
• People act rationally
• Transaction costs be minimal (costless bargaining)
• Complete information

If all of these conditions apply, the private parties can bargain to solve the problem of externalities. The second part of the Coase theorem asserts that, when these conditions hold, whoever holds the property rights, a Pareto efficient outcome will be reached through bargaining.

This theorem would not apply to the steel industry case discussed above. For example, with a steel factory that trespasses on the lungs of a large number of individuals with pollution, it is difficult if not impossible for any one person to negotiate with the producer, and there are large transaction costs. Hence the most common approach may be to regulate the firm (by imposing limits on the amount of pollution considered "acceptable") while paying for the regulation and enforcement with taxes. The case of the vaccinations would also not satisfy the requirements of the Coase theorem. Since the potential external beneficiaries of vaccination are the people themselves, the people would have to self-organize to pay each other to be vaccinated. But such an organization that involves the entire populace would be indistinguishable from government action.

In some cases, the Coase theorem is relevant. For example, if a logger is planning to clear-cut a forest in a way that has a negative impact on a nearby resort, the resort-owner and the logger could, in theory, get together to agree to a deal. For example, the resort-owner could pay the logger not to clear-cut – or could buy the forest. The most problematic situation, from Coase's perspective, occurs when the forest literally does not belong to anyone, or in any example in which there are not well-defined and enforceable property rights; the question of "who" owns the forest is not important, as any specific owner will have an interest in coming to an agreement with the resort owner (if such an agreement is mutually beneficial).

However, the Coase theorem is difficult to implement because Coase does not offer a negotiation method. Moreover, Coasian solutions are unlikely to be reached due to the possibility of running into the assignment problem, the holdout problem, the free-rider problem, or transaction costs. Additionally, firms could potentially bribe each other since there is little to no government interaction under the Coase theorem. For example, if one oil firm has a high pollution rate and its neighboring firm is bothered by the pollution, then the latter firm may move depending on incentives. Thus, if the oil firm were to bribe the second firm, the first oil firm would suffer no negative consequences because the government would not know about the bribing.

In a dynamic setup, Rosenkranz and Schmitz (2007) have shown that the impossibility to rule out Coasean bargaining tomorrow may actually justify Pigouvian intervention today. To see this, note that unrestrained bargaining in the future may lead to an underinvestment problem (the so-called hold-up problem). Specifically, when investments are relationship-specific and non-contractible, then insufficient investments will be made when it is anticipated that parts of the investments’ returns will go to the trading partner in future negotiations (see Hart and Moore, 1988). Hence, Pigouvian taxation can be welfare-improving precisely because Coasean bargaining will take place in the future. Antràs and Staiger (2012) make a related point in the context of international trade.

Kenneth Arrow suggests another private solution to the externality problem. He believes setting up a market for the externality is the answer. For example, suppose a firm produces pollution that harms another firm. A competitive market for the right to pollute may allow for an efficient outcome. Firms could bid the price they are willing to pay for the amount they want to pollute, and then have the right to pollute that amount without penalty. This would allow firms to pollute at the amount where the marginal cost of polluting equals the marginal benefit of another unit of pollution, thus leading to efficiency.

Frank Knight also argued against government intervention as the solution to externalities. He proposed that externalities could be internalized with privatization of the relevant markets. He uses the example of road congestion to make his point. Congestion could be solved through the taxation of public roads. Knight shows that government intervention is unnecessary if roads were privately owned instead. If roads were privately owned, their owners could set tolls that would reduce traffic and thus congestion to an efficient level. This argument forms the basis of the traffic equilibrium. This argument supposes that two points are connected by two different highways. One highway is in poor condition, but is wide enough to fit all traffic that desires to use it. The other is a much better road, but has limited capacity. Knight argues that, if a large number of vehicles operate between the two destinations and have freedom to choose between the routes, they will distribute themselves in proportions such that the cost per unit of transportation will be the same for every truck on both highways. This is true because as more trucks use the narrow road, congestion develops and as congestion increases it becomes equally profitable to use the poorer highway. This solves the externality issue without requiring any government tax or regulations.

Solutions to greenhouse gas emission externalities

The negative effect of carbon emissions and other greenhouse gases produced in production exacerbate the numerous environmental and human impacts of anthropogenic climate change. These negative effects are not reflected in the cost of producing, nor in the market price of the final goods. There are many public and private solutions proposed to combat this externality

Emissions fee

An emissions fee, or carbon tax, is a tax levied on each unit of pollution produced in the production of a good or service. The tax incentivised producers to either lower their production levels or to undertake abatement activities that reduce emissions by switching to cleaner technology or inputs.

Cap-and-trade systems

The cap-and-trade system enables the efficient level of pollution (determined by the government) to be achieved by setting a total quantity of emissions and issuing tradable permits to polluting firms, allowing them to pollute a certain share of the permissible level. Permits will be traded from firms that have low abatement costs to firms with higher abatement costs and therefore the system is both cost-effective and cost-efficient. The cap and trade system has some practical advantages over an emissions fee such as the fact that: 1. it reduces uncertainty about the ultimate pollution level. 2. If firms are profit maximizing, they will utilize cost-minimizing technology to attain the standard which is efficient for individual firms and provides incentives to the research and development market to innovate. 3. The market price of pollution rights would keep pace with the price level while the economy experiences inflation.

The emissions fee and cap and trade systems are both incentive-based approaches to solving a negative externality problem. They provide polluters with market incentives by increasing the opportunity cost of polluting, thus forcing them to internalize the externality by making them take the marginal external damages of their production into account.

Command-and-control regulations

Command-and-control regulations act as an alternative to the incentive-based approach. They require a set quantity of pollution reduction and can take the form of either a technology standard or a performance standard. A technology standard requires pollution producing firms to use specified technology. While it may reduce the pollution, it is not cost-effective and stifles innovation by incentivising research and development for technology that would work better than the mandated one. Performance standards set emissions goals for each polluting firm. The free choice of the firm to determine how to reach the desired emissions level makes this option slightly more efficient than the technology standard, however, it is not as cost-effective as the cap-and-trade system since the burden of emissions reduction cannot be shifted to firms with lower abatement.

Scientific calculation of external costs

"Relative percentage price [∆] increases for broad categories [...] when externalities of greenhouse gas emissions are included in the producer's price."

A 2020 scientific analysis of external climate costs of foods indicates that external greenhouse gas costs are typically highest for animal-based products – conventional and organic to about the same extent within that ecosystem-subdomain – followed by conventional dairy products and lowest for organic plant-based foods and concludes that contemporary monetary evaluations are "inadequate" and that policy-making that lead to reductions of these costs to be possible, appropriate and urgent.

Criticism

Ecological economics criticizes the concept of externality because there is not enough system thinking and integration of different sciences in the concept. Ecological economics is founded upon the view that the neoclassical economics (NCE) assumption that environmental and community costs and benefits are mutually cancelling "externalities" is not warranted. Joan Martinez Alier, for instance shows that the bulk of consumers are automatically excluded from having an impact upon the prices of commodities, as these consumers are future generations who have not been born yet. The assumptions behind future discounting, which assume that future goods will be cheaper than present goods, has been criticized by Fred Pearce and by the Stern Report (although the Stern report itself does employ discounting and has been criticized for this and other reasons by ecological economists such as Clive Spash).

Concerning these externalities, some, like the eco-businessman Paul Hawken, argue an orthodox economic line that the only reason why goods produced unsustainably are usually cheaper than goods produced sustainably is due to a hidden subsidy, paid by the non-monetized human environment, community or future generations. These arguments are developed further by Hawken, Amory and Hunter Lovins to promote their vision of an environmental capitalist utopia in Natural Capitalism: Creating the Next Industrial Revolution.

In contrast, ecological economists, like Joan Martinez-Alier, appeal to a different line of reasoning. Rather than assuming some (new) form of capitalism is the best way forward, an older ecological economic critique questions the very idea of internalizing externalities as providing some corrective to the current system. The work by Karl William Kapp argues that the concept of "externality" is a misnomer. In fact the modern business enterprise operates on the basis of shifting costs onto others as normal practice to make profits. Charles Eisenstein has argued that this method of privatising profits while socialising the costs through externalities, passing the costs to the community, to the natural environment or to future generations is inherently destructive. Social ecological economist Clive Spash argues that externality theory fallaciously assumes environmental and social problems are minor aberrations in an otherwise perfectly functioning efficient economic system. Internalizing the odd externality does nothing to address the structural systemic problem and fails to recognize the all pervasive nature of these supposed 'externalities'. This is precisely why heterodox economists argue for a heterodox theory of social costs to effectively prevent the problem through the precautionary principle.