An externality is “a consequence of an economic activity that affects unrelated third parties. The externality can be either positive or negative. Thus, an externality is a transaction spillover that creates a cost or a benefit not transmitted through market prices.”[1]
In slightly different words, an externality “affects the welfare of or opportunities available to an individual or group without direct payment or compensation.”[2]
Andrew Barkley and Paul W. Barkley (2013) Principles of Agricultural Economics. Routledge, London. ISBN 978-0-415-54-69-8, p. 332.
Pretty, J. et al., (2001) Policy Challenges and Priorities for Internalizing the Externalities of Modern Agriculture, Journal of Environmental Planning and Management, 44(2), 263-283, p. 265.
Based on the definitions above, negative externalities are transaction spillovers from economic activities that create uncompensated costs, negative welfare effects, or lost opportunities to third parties (individuals or groups) who were not involved with the specific market transactions.[1,2]
A negative externality is “a situation where the market price does not include the full cost of producing or consuming a good or service.”[3]
Andrew Barkley and Paul W. Barkley (2013) Principles of Agricultural Economics. Routledge, London. ISBN 978-0-415-54-69-8, p. 332.
Pretty, J. et al., (2001) Policy Challenges and Priorities for Internalizing the Externalities of Modern Agriculture, Journal of Environmental Planning and Management, 44(2), 263-283, p. 265.
Andrew Barkley and Paul W. Barkley (2013), p. 333.
Many people consider as beautiful and beneficial the landscape created by traditional farming communities – red barns, vistas of rolling hills, well-maintained gardens and fields. These benefits accrue to everyone in the community and even passers-by, though they may not be purchasers or consumers of the farm’s production.[1]
In profit-making industries, positive externalities are less common than negative ones since companies are incentivized to maintain negative externalities, keeping expenses off their balance sheets, whereas they generally attempt to monetize external benefits.
Pretty, J. et al., (2001) Policy Challenges and Priorities for Internalizing the Externalities of Modern Agriculture, Journal of Environmental Planning and Management, 44(2), 263-283, p. 268. [“…agriculture also produces positive externalities, such as landscape and aesthetic value…”]
In agriculture “negative externalities occur in chemical runoff from fields, animal waste, odor, noise, soil conservation, climate change, endangered species, deforestation, and water use for irrigating crops.”[1] Perhaps the largest negative externality is the massive amount of pain and suffering inflicted each year on 11 billion farmed animals.[2]
Andrew Barkley and Paul W. Barkley (2013) Principles of Agricultural Economics. Routledge, London. ISBN 978-0-415-54-69-8, p. 333.
Note: For total of 11.16 billion animals, see, Total Animals Slaughtered and Dying
Negative externalities can have impacts that are localized (odors from a pig farm), in geographic regions (PM2.5 pollution), or affect the entire natural world including future generations (greenhouse gas emissions).[1-4]
Often these uncompensated costs are borne by all who use the commons. The commons was originally defined as “a tract of land, usually in a centrally located spot, belonging to or used by a community as a whole.”[5] More broadly, the commons is viewed as any finite, shared resource.[6]
A concept known as The Tragedy of the Commons refers to a publicly owned resource being overused or exploited due to individual or institutional self-interests overriding the public good.[7]
Wing, S., et al., (2008). Air pollution and odor in communities near industrial swine operations. Environmental health perspectives, 116(10), 1362-1368.
Domingo, N. G., et al., (2021). Air quality–related health damages of food. PNAS, 118(20), e2013637118, p. 2. [Of the ~18,000 premature deaths due to agricultural PM2.5, about 70% or 12,700 deaths are attributable to animal agriculture.]
Pieper, M. et al., (2020). Calculation of external climate costs for food highlights inadequate pricing of animal products. Nature Communications, 11(1), 6117–6117. p. 2.
Nordhaus. (2019). Climate Change: The Ultimate Challenge for Economics. The American Economic Review, 109(6), 1991–2014. [“Global warming is the most significant of all environmental externalities. …affects the entire planet, does so for decades and even centuries…”]
commons (n.d.) In American Heritage Dictionary.com
Andrew Barkley and Paul W. Barkley (2013) Principles of Agricultural Economics. Routledge, London. ISBN 978-0-415-54-69-8, p. 331.
Andrew Barkley and Paul W. Barkley (2013), p. 331.
In most cases, production of goods will increase when some of the costs of production are externalized. When production costs are kept artificially low, for example by avoiding pollution mitigation, the selling prices are lowered in a competitive marketplace. Per the supply and demand curve, lower prices lead to higher demand.[1,2] Alternatively, if the production costs incorporate the extra expense of negative externalities, the higher prices will lead to lower demand.
Tietenberg, T., & Lewis, L. (2018). The Economic Approach: Property Rights, Externalities, and Environmental Problems, Ch. 2, Environmental and Natural Resource Economics 11th ed. Routledge, pp. 25-26. [“…conclusions about market allocations of commodities causing pollution externalities: 1. The output of the commodity is too large. 2. Too much pollution is produced. 3. The prices of products responsible for pollution are too low.”]
Thomas Helbling (2010) Externalities: What happens when prices do capture all costs, Finance and Development, International Monetary Fund, p. 38. https://www.imf.org/external/pubs/ft/fandd/basics/pdf/helbling-externalities.pdf [“…so goods with negative externalities are overproduced when only private costs are involved and not costs incurred by others.”]
The largest commodity producers (Tyson, JBS, Cargill, WH Group, etc.) will generally take advantage of all available cost reduction strategies in the fight for cost leadership. If one producer maintains higher ethical or legal standards than its competitors, they risk losing both market share and profits to competitors.[1,2]
To initiate significant changes, all large producers must be incentivized to internalize negative externalities. Those incentives can take the form of laws with serious consequences, heightened consumer awareness, changes in the preferences of major purchasers, or reputational risks (or all acting in tandem, as they often do).[3,4]
Lisa Held (May 22, 2024) What Happened to Antibiotic-Free Chicken? Civil Eats. https://civileats.com/2024/05/22/what-happened-to-antibiotic-free-chicken/ [This is one of many examples of large animal-sourced food companies promising by some future date to internalize specific negative externalities, then later claiming that a multitude of factors (economic, regulatory, supply-side) made their promised transition untenable.]
Amos, N. et al., (2023) The Business Benchmark on Farm Animal Welfare 2023 Report. Business Benchmark on Farm Animal Welfare. [Larger producers usually have worse animal welfare scores, especially in countries with lower consumer engagement on animal welfare issues. See Figures 1.1 and 1.3]
Kenny Torella (June 3, 2023) California has the country’s strongest animal welfare law. Now it just needs to be enforced, Vox. https://www.vox.com/future-perfect/23745935/proposition-12-pigs-pork-california-eggs-veal-hens
Note: a broad alliance with a long-term and well-funded campaign directed at a specific target (i.e., battery cages for egg-laying hens) combining all these factors (laws, consumer awareness, preferences of major purchasers, and reputational risks) can eventually pressure the largest suppliers, who will generally be the most intransigent. (More than 40% of egg-laying hens are now out of battery cages, with the figure steadily rising. (see, Poultry Housing Conditions and Space Allotments) See also, The Humane League Cage-Free Eggspose, https://thehumaneleague.org/article/2024-eggspose and The Humane Society of the U.S. blog, March 1, 2024, https://www.humanesociety.org/blog/40-percent-hens-eggs-cage-free-united-states
Smaller firms fighting in a commodity market are generally losing market share and look to create some type of differentiation, real or perceived, by identifying a niche quality that consumers value, essentially exiting (with all or some products) the larger commodity market.[1,2]
Some of these potential differentiations may come in the form of internalizing negative externalities. Higher levels of animal welfare or environmental stewardship are viable strategies if those differentiations are valued by purchasers or consumers.[3,4]
Following a differentiation strategy, smaller companies that once were selling commodities can achieve higher profit margins, though usually at smaller volume. In some cases, companies aim merely to create a perception of meeting higher standards, through labeling or advertising, or harvesting the goodwill of a regional brand.
Sabrina C. Thornton (2022) Differentiating the Indifferent: Dealing with Commoditization Paradox Through Innovation. In Commodity Marketing: Strategies, Concepts, and Cases, Enke, M. et al., (eds.) Springer, ISBN 978-3-030-90656-6, p. 265. [“To sustain the competitiveness and profitability of a product, firms could employ either cost leadership strategy to ensure a low-cost advantage, or a differentiation strategy that focuses on creating unique value in order to warrant a price premium.”]
Bamberger, B., et al., (2022). Commodity Differentiation: A Cross-Industry Approach. In Commodity Marketing: Strategies, Concepts, and Cases, See Figure 3, p. 26 and Table 1, pp. 27-28.
For example, Perdue Farms has pursued (with the encouragement of animal advocacy groups) a differentiation strategy. With ~6-7% broiler market share, well behind the industry leaders Tyson (~20%), Pilgrim’s Pride (~16%) and Wayne-Sanderson (~11%), and owning recognized name brands, they are staking out a position that includes “no antibiotics” along with somewhat higher animal welfare standards for a portion of production. See, efforts to differentiate based on animal treatment and labeling [Perdue Farms, Inc., (March 16, 2023) Re: Petition to USDA Regarding FSIS’s “Pasture Raised” claims.]
Many farmers have abandoned the factory farm model to create more humane and sustainable farms, thereby leaving the commodity market and entering a niche market with products highly valued by a small share of consumers. See, for example: White Oak Pastures. https://whiteoakpastures.com/pages/our-team