Why is Zimt so expensive? (Hint: It isn't.)

As expressed in a previous blog post, the purpose of Zimt is not to make chocolate. 

There are a number of topics that I’d like to delve into and, this one provides a great overview for the premise of these. It’s a topic that, unless you’re an economist (or just someone who can’t stop won’t stop analyzing),  you likely don’t think about too much- at least not in a broad sense. 

Externalities are costs or benefits (spillover effects) to a third party, who is not directly involved in the primary market transaction), resulting from either the production and/or consumption of a good or service.  Externalities can be positive or negative, depending upon whether or not they create an overall benefit (positive) or cost (negative) to society. They are one of four causes of market failures (and are also called ‘Spillover Costs’- the costs spill over to someone who is not the producer or intended consumer). 

There are two parties normally considered in a transaction: the producer, and the consumer. What externalities take into account is the less often considered third party- they are not related to the transaction, but are impacted by it out of their control.

Externalities are most often negative, that is, they create a net detriment to society. (The Free Market ignores the costs associated with the production of the product or service). One very common example of a negative externality is pollution-  pollution is generated through activities an organization or individual deems to be worthwhile to facilitate a gain for themselves. However, they do not take into account the negative impacts that this activity, which generates pollution, has on the environment. 

Commonly accepted ways to mitigate the effects of negative externalities are often left up to the government- this includes legislation and taxation to limit individuals activities that create negative externalities. This tax, called a Pigovian tax, is considered to be equal to the value of the negative externality- that is, the government essentially taxes the organization in the amount of the externality, to force them to assume the full cost of it

Taxation is very unpopular, however, and so the government does not enforce sufficient taxation on the public/organizations, in fear that they will be unpopular in upcoming elections and will no longer be in power. This is one reason, other than The Golden Rule, which really should be reason enough, for individuals to think about their actions and their consequences, beyond what they are able to see.

Also- much of what negative externalities impact are called ‘public utilities' nobody owns them (like the oceans), nobody holds private rights over them. Nobody can file a lawsuit against the party that negatively impacts the public utility, yet it impacts third parties who rely on this. For example, ships can go and pollute in the ocean, and governments can dump their waste in the ocean. Yet, this is horrible for the third party (marine wildlife, for example), as they cannot claim any ownership over the seas that humanity, who has far too much control, will take seriously. The third party is left helpless.

Types of Negative Externalities: Consumption vs Production

Negative Consumption Externalities: social benefit of consumption is less than the private benefit of consumption. The consumer benefits more than society from the consumption of this good or service.  One is noise pollution- nobody wants to listen to your crap music so turn it down and keep your windows up. 

Negative Production Externalities: my favourite example is of farm animal production. The producer (farmer, let’s leave it at that to keep things simple. If we get into talking about slaughterhouse workers, one could argue that the negative psychological implications of the job does not provide a net benefit to the processor, on an individual basis), and then the consumer (maybe you?!). But, there are many third party recipients of the unfortunate implications of animal product production- excessive use of antibiotics create large populations of antibiotic-resistant bacteria. These are not contained to the farm and spread to cause disease in other animals. Concentrated animal wastes cause contamination of rivers and streams, making the water unsafe or even toxic for consumption by humans and other animals who may have benefitted from it. 


Please note- production is a necessary step in creating supply to cater to market demand. If you don’t demand it, there is no incentive for a company to produce it. 

 

 

Essentially:

  1. our actions don’t just impact us. 
  2. political parties are scared to regulate our actions, because we won’t elect them (this is true for organizations and individual citizens)

But we really shouldn’t rely on the government to do the right thing- they’re just people, after all, and they don’t always (often?) act in an honourable fashion. Wouldn’t you want to be better than that? 

So let’s get into it- what are all the things that Zimt is doing (and not doing), to reduce our negative externalities. And what can you do yourself.



Emma