Lessons in Sustainability: Externalities

  • Competition will lead the prices to equilibrium of supply and demand
  • Everyone pays for the goods and services they use
  • Equilibrium prices will be enough to pay for the costs of goods

Property Rights, are the social institutions that define or delimit the range of privileges granted to individuals to specific resources, such as parcels of land or water. — Libecap, 1989

  1. Ownership Right
  2. Usership Right
  3. Right to transfer
  4. Exclusion right
  5. Right to enforcement
  1. Degree of Excludability: The degree of control of access to goods by potential users. In some cases, it can be costly and even virtually impossible. For eg. Common goods such as natural resources
  2. Degree of Rivalry: When consumption by one consumer prevents simultaneous consumption by other consumers.
  3. Degree of Subtractability: The degree to which competing users are able to subtract the welfare of other users. Non subtractability can become a source of potential divergence between individual users and society
Source: https://www.e-education.psu.edu/geog432/node/277
  1. Low Nonexcludability leads to the problem of free rider when goods and services are open to use for everyone and some some entities are able to consume more than their fair share of the shared resource or pay less than their fair share of the costs. Free riding prevents the production of valuable goods and services through the conventional free-market route, a route where a sufficient amount of demand and willingness to pay would lead to production. And so, such valueable goods remain unproduced.
    Consider roads. Roads, 70 years back were a public good because it was difficult to exclude it. Now, with the advent of toll systems, smart cards, excludability is possible and subsequently engagement of private companies through the build, operate, transfer model.
  2. The cost of the good is indivisible — marginal cost is zero
  3. Due to the high degree of subtractability of welfare in case of a common good, The Tragedy of Commons occurs which means that the divergence between the individual and collective rationality is high.

Consider, the example of fish in international waters. Each individual fisherman, acting independently, will rationally choose to catch some of the fish to sell. This makes sense: there is a resource that the fisherman is able to use to generate a profit. However, when a lot of fishermen, all thinking this way, catch the fish, the total stock of fish may be depleted. When the stock of fish is depleted, none of the fishermen are able to continue fishing, even though, in the long run, each fisherman would have preferred that the fish not be depleted. The tragedy of the commons describes such situations in which people withdraw resources to secure short-term gains without regard for the long-term consequences. — Source


Economics of Negative Production Externalities from Production and Consumption Point of View

Negative Production Externality

Source: Public Finance and Public Policy, 2/e, Jonathan Gruber

Negative Consumption Externality

Source: Public Finance and Public Policy, 2/e, Jonathan Gruber
Source: BSEM Project done at IIML

Ways to manage the harm that’s already been done: Mitigating GHGs

  1. Not letting any further increase or reducing the rate of increase in GHGs. Ideally, GHGs shouldn’t exceed 450 PPM in the enviroment
  2. Adaptation Measures: Devising ways to adapt to the changing climate. Example — heat resistant wheat variety
  3. Sinks: Creating sinks for carbon back into the places it came from — fossils, trees, sea (planktons)

Climate Change Deliberations and Negotiations


  1. 1979 — First every World Climate Change Conference in Geneva: They issued a declaration calling the world’s governments to prevent potenrial man made changes in climate that can have adverse impacts on humanity
  2. 1980–90 — Intergovernmental conferences on climate change
  3. 1990 — Second World Climate change conference in Geneva
  4. 1990 — Approval for treaty negotiations on UNFCC (UN Framework Convention on Climate Change), the first ever binding international instrument to address climate change
  5. 1992 — UNFCC opened for signature in Rio De Janeiro. Signatures by 154 countries
  6. 1994 — Convention initiated into action after its ratification by 50 states
  7. Feb 1995 — Conderences of the Parties became the convention’s governing authority
  • Sufficient time should be allowed to ecoystems to adapt naturally
  • Ensure food production is not threatened
  • Enable economic development in a sustainable manner




MBA Candidate | I write about sustainability, wellness, books and life experiences. Constantly on the lookout to reduce, replace and refurbish.

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Dhanushree Bhanawat

Dhanushree Bhanawat

MBA Candidate | I write about sustainability, wellness, books and life experiences. Constantly on the lookout to reduce, replace and refurbish.

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