Two Economic Concepts That Might Just Save Us: Part 1

06/18/2015 02:38 pm ET | Updated Jun 18, 2016

Knowledge is power, and knowledge brings transformative change.

This week and next, I'm going to explore two rather nerdy economic concepts. Not because I am an economist, but because I believe understanding these two ideas could be key to a better, healthier, fairer society.

Concept #1: Negative Externalities.

Brent Moore / Flickr

What is the cost of a bottle of cola?

When we go to the shops, open the refrigerator and buy that bottle of sparkling, sweetened beverage, we might pay about $4. We crack it open and we enjoy the bubbles and an honest investment.

We pay for what we get, right?

Actually, wrong.

When we buy that bottle of sugar-water wrapped in a plastic container, we pay the beverage industry and the retailer only for the drink itself. Water, sugar and petroleum cost almost nothing and so we pay very little directly at the counter that day. But who pays for the health effects of the sugar in that drink? Who pays to recycle the bottle?

We know soft-drinks are linked to diabetes and obesity, so who pays for the healthcare costs that will likely (eventually) result? The drink company doesn't. We do. But not at the time we buy that beverage.

Society absorbs these costs that are actually born out of the drinks these companies produce. The price we pay at the cooler to the drink companies ignores all these indirect, negative outcomes - or negative externalities. It might feel cheap when we grab the cold bottle, but it comes at a much bigger, hidden cost.

In a nation where diabetes is taking an expensive toll on our health system, this is no small issue. Mark Bittman of the New York Times recently wrote "our health will decline further, the environment will be further degraded, and our health care system (and therefore economy) will spend an increasingly disproportionate amount of money on diet-generated chronic disease".

None of this is factored into the cost of that bottle of cola.

Flickr / Till Krech

The same can be said about environmental pollution. When a mining company digs up and sells some carbon-laden, million-year old forest (coal), they make a tidy profit. They pay for finding, retrieving and transporting the coal (sometimes with subsidies from our pockets). But do they pay for the health and environmental effects directly caused by the burning of that coal? Do they pay for the asthma medications required by the community surrounding the plant that burns that coal, for the effect that the pollution has on local crops and agriculture, or for the damage to the marine ecosystems caused by the port, built to export that coal? What about petrol when we fill up our car, does the bowser price pay for the smog that results?

Not usually, but society does.

These negative externalities are the elephant in the health and climate rooms. The cost of these products, which in turn drive obesity or climate change for example, do not integrate the full costs of their production and consumption. The soda company pays for the bottle and the sugar, not the health effects we know will result. Industries spew pollution into our atmosphere and waterways, but society collects the bill for the legacy of ill effects.

What's the point?

Simon Cunningham

Understanding this concept helps us to understand why we are facing some monumental challenges in our current political, social and environmental systems. It is not to say that these things are wrong, or that cola should cost $10 a bottle. I am not saying anything needs necessarily to change. But knowledge is power, and we should understand and question our economic models. The true cost of the things we consume, who profits and who picks up the tab.

Understanding that when we fill up our petrol tank, or buy a bottle of cola - we are only paying part of that bill and society is paying the rest, is actually very healthy.


Connect with me on Twitter for more, via @SandroDemaio

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Alessandro R Demaio is Medical Doctor; Founder of kløver consulting; Fellow in Global Health & NCDs at Harvard University.