Externalities

An externality is a cost or benefit caused by a producer that is not financially incurred or received by that producer. An externality can be both positive or negative and can stem from either the production or consumption of a good or service. The costs and benefits can be both private—to an individual or an organization—or social, meaning it can affect society as a whole. In business, if an entity is looking to maximise profit it will aim to privatise profits and socialise the losses.

It's easy to come to the opinion that there is an evil villain capitalist making lots of money and pumping negative externalities into the environment. Whilst this may be true in some cases perhaps the relativity of ethics can excuse some of the culprits. If you did not have something on the lowest Maslow Hierarchy rung would you not jeopardise the anonymous other?

Externality Minimisation

Quantifying externalities is very difficult as many externalities are quantitative. For instance strip mining a coal field would ruin a beautiful view of nature which would last for as long as humans are alive, so would this not be priceless? A better thought experiment is the humble cup of coffee.

The Cup of Coffee

The humble cup of coffee is a brilliant example as to the issues in business associated with externality minimisation. First we should set the scene and ask: What would be the most ethical (including environmentally friendly') way to serve someone coffee in a cafe?

To answer this question you would first need to define what the maximum, most ethical would be. To do this you would need to break down what the business does.

Cup

Styrofoam (worst 0 points) ---> plastic (better 1 point)-----> Cardboard (best 2 points) ----> where does the cardboard come from?

Lid

Plastic (worst 0 points) ----> Paper (better 1 point) ----> Compostable (best 2 points) ---> does it actually get composted?

Coffee

Slave labour sourced (worst 0 points) ----> Organic (better 1 point) -----> Fair trade (best 2 points) ---> are these standard properly regulated?

Labour

Logistics

A company which is most ethical would want to have the highest addition of points. However, there is often a direct correlation as to the higher amount of points the more costly the solution, i.e. organic will always cost more the non-organic just on the principle that it is more niche.

For Externality Minimisation (FEM)

Any business before inception should figure out its entire externality and profits should be primarily routed to externality minimisation before anything else. This type of business is called a For Externality Minimisation (FEM) business and is one of the forming principles of the tenet.