08 June 2010


Externalities are impacts from economic activity that don't enter the market. They can be negative or positive. The negatives attract a lot of attention, especially if they are visible. George Monbiot writes eloquently of the environmental costs of the oil pollution in the Gulf of Mexico. Less obvious are the social impacts, positive and negative, of business. The Gulf of Mexico pollution is truly appalling. But not all its non-market costs result in additional profits to BP. Some of it takes the form of lower oil costs. Through those, most of us benefit and so are complicit. Ideally, externalities would be internalised: costs of products would embody the social and environmental impacts of their production; and not just the visible impacts. But that's just too complex an exercise.

Social Policy Bonds might help in dealing with the most catastrophic of the negative externalities arising from our way of life. They could target the largest, most obvious potential disasters, and reward people for making sure such disasters do not occur. Because they do not prejudge how a negative externality shall be eliminated, they would reward the most efficient ways of avoiding disaster. And only the desired outcome, rather than the exact nature of the disaster, need be specified. The health of plants, animals and humans could all be targeted: investors in the bonds would have incentives to mitigate any sort of threat. Click on the link to read more about Disaster Prevention Bonds.

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