Controlling Externalities

Free markets work great. Supply and demand curves for a good or service provide a market price and quantity that should be produced to maximize social surplus. However if there is a negative externality associated with bringing a good or service to market, the socially efficient equilibrium will be different from the market equilibrium. This will create dead weight loss in the market, or in other terms, creates an inefficient or non-Pareto efficient market. This raises the question of who should be responsible for controlling externalities in a free market setting? And do externalities harm development?
Broad, Cavanagh and Bello address the issue of externalities in their essay entitled, “Development: The Market is Not Enough.” And their title says it all, the market is not enough to control externalities. To a firm producing the good or service an externality by definition is not captured within their cost structure and therefore they have no incentive to eliminate it. Externalities have the potential to prevent sustainable development and most of the time cause direct harm to the low income class.
Governments are suppose to be the organization that can regulate and control negative externalities. However developing world governments have too often been twisted in a web of narrow interest groups who promote development to benefit a multinational corporation or high income class over sustainable development to benefit society. Sustainable development has been undermined in country after country in the developing world as governments have often resorted to the easiest short term approach to increasing GDP by exploiting natural resources. (On a side note: GDP is not an adequate measure of development. In order to fully assess whether a country is developing or not one must analyze life expectancy rates, literacy rates, unemployment, average years of schooling and many more non-GDP related factors.)
Why do governments fail to control externalities and who is left to regulate MNCs? Not all governments do fail in controlling externalities. Authoritarian governments most regularly fail in the task of controlling externalities in the market because they/he are typically the group/individual that is benefiting from the transaction rather than their/his people. Broad, Cavanagh and Bello state that a democratic representative government is best in controlling externalities as it is citizens of the state that decide what action/transaction is acceptable. In addition, the authors state that when government approaches to development are failing in such places as Africa, Asia and Latin America, it is up to citizen organizations to lead the charge in establishing sustainable development policies. Across the world organizations are taking on problems such as ecological destruction, inequitable control over resources and land, and governments’ inability to advance the quality of life. These programs and the experienced garnered by these grassroots groups will form the foundation for new development strategies in this next century. Democracy is the vehicle for developing nations to traverse the divide into the developed world. Democracy is founded on freedom of thought, religion and speech. In order to foster those ideals the developing world needs a foundation of education. This should be the role of the developing world: to foster the ability to learn and to provide resources to further educational systems in the developing world. A large task that will have to be a topic address on another day.