Externalities and Society

Tuesday, February 12th, 2008 @ 2:50 pm | Finance, Personal

Well I was reading this article the other day by a Harvard economics professor writing about a woman who after taking a job paying $10000 more, wound up with much less disposable cash. The author goes on to show that the reasons for this are the loss of free health care coverage, child benefits, housing subsidies and tax breaks.

Now what I think is important to realize is why this really happens. Externalities are effects on outside entities not involved in the transaction. There are two kinds of externalities: positive and negative. Positive externalities are created when the environment (outside world) benefits from a transaction between the supplier and consumer. For instance, renewable energy sources. The buyer of a solar panel theoretically saves money on energy and the seller also makes money on the sale. Now there is a third party, the environment benefits from the decreased use of fossil fuels and society gets cleaner air. A negative externality is the exact opposite, in countries where there are no environmental regulations factories often leave their sites polluted. The cleanup and health impacts are now placed upon the country and it’s people.

In this case everyone outside of this woman and her employer. It seems that what her previous employer was doing was using the social benefits provided by society as a subsidy to her wage. Since employer A pays much less in salary but affords the employee the same standard of living as employer B. Employer A can do this by placing negative externalities on the government and hence taxpayers.

This seems to be the business models of many big box stores, and if something was done to correct this they would immediately take huge hits to the bottom line. In my opinion, an employer who knowingly pays their employees less to take advantage of social benefits is wrong and opportunistic. Those benefits were created to help people in dire need, not subsidize the labor costs of a profitable company. If more public attention was brought to this issue I think there would be reform and the system would become more linear. The system should be designed so that an increase in salary will positively influence the financial position of the citizen.