> One of the problems with externalities is that they are
>external to any market (hence the name externality) and as such putting a
>dollar value on these costs for any kind of "accounting" analysis is going
>to be very difficult at best.  Not that it shouldn't be attempted, but it
>is not very easy at all.
>
>Steve

No this is false. An externality is a cost that is 'external' to a firm, not
to a market. The market is too vague of a term here. The market includes the
customer who may purchase a defective product and therefore the cost of the
defective product is not an externality to the market because of product
liability laws. You lose one customer, then you lose that customer for ever.
The customer is part of the 'value stream' which pulls along the product
from the date of innovation until the point of final use. The market here
also includes potential customers who may be dissuaded by the customer's
dissatisfaction with a defective product. So the external cost is really
only external to the firm, not the market because of demand - dare I use
that term - constraint re reliability, utility, etc.

There are many ways of costing which can be used to determine the cost of
externalities. It is not difficult at all because there are many ways of
pricing those externalities. Externalities are not referred to costs that
are external to any market. External costs are only potential costs that are
indirect in nature to the firm. Therefore an external cost may in the future
be a direct cost that is internal to the firm. Ozone depleting chemicals for
Dow were just one such external cost that became internal when the Dow
decided that it would engage in what is called 'stewardship' which is what
the American Chemical Association has adopted and so has the USEPA and the
European Union. There is a lot of information on this in "Fuessler,
EcoInnovation", if I remember correctly. Product stewardship, or cradle to
grave stewarship, take back legislation, and other forms of 'value chain'
management are derived from the notion that any thing which is potentially a
waste should be stewarded. This means that any thing that is made should be
'de-toxified' before it is 'released' or 'transferred' into the enviroment.
Many of the dry cleaners used to 'release' the chemicals into the drains
that feed into the sewage systems of the largest cities in the world. There
was a lot of outrage when this was publicized and as a result there is a
collection system that takes this stuff, and there are now chemical free dry
cleaning systems. There are lots of examples of costing externalities before
they become externalities, which is the whole purpose for life cycle
assessments and conducting 'value chain' studies.

Ontario Hydro takes the 'damage function approach' and what they do is use a
'market-price model' as one specific method. This is in essence done by
'using information on market prices of, for example, crops that have been
damaged or lost due to toxic emissions.'

Allied Signal Aerospace Corp., in Kansas City uses 'legacy costing' which is
a method that determines costs of minimizing environmental impact
[prevention costs], to assess environmental impacts, to remediate damage
caused by failure to avoid environmental insult [failure costs], and
'failure costs can be further classified as either voluntary failure costs
or involuntary failure costs'. [Lawrence and Butler]"

The way it works is quite simple. Say that BC Hydro wants to remove brush
from hydro transmission rights of way and corridors. They could spray
roundup and 2,4-D and save money directly. However they also know that the
corridors have high runoff, deer populations, and berries. In that past the
company was sued in court and on several occassions there were high
insurance costs paid in a case involving a worker who was harmed by the
herbicide Roundup. Because the work was contracted the contractor paid the
insurance costs and the court costs, but the contractor was force out of
business, leaving BC Hydro high and dry so to speak of any costs themselves.

The cost of the entire herbicide program did not absorb the cost of the
human health damage, and the runoff and drift that damaged a salmon stream.
However BC Hydro determined that this cost was real, and monetized, so used
this cost to determine if there was a suitable alternative. They found that
the use of sheep were slightly higher than herbiciding and also determined
that the court costs and insurance costs would be nil for the sheep. The
entire insurance and legal costs added to the cost of using the herbicide
was vastly greater than the sheep. To avoid any contingency costs associated
with a further incident, planners at BC Hydro decided to avoid the
herbiciding option on the basis of reducing the risk to them of being
directly liable for environmental costs which were in the initial case
external to BC Hydro.

In terms of toxics, all 'externalities' are potentially 'internalized' at
some point in time. The most significant toxics release and transfers are
from the forest products industry in the manufacture of oriented strand
board and particle board. These products release vast amounts of methanol
and ureaformaldehyde into the hydrosphere, soil, and atmosphere. The
releases into modern homes is tremendous...

John Foster