{"id":142,"date":"2012-02-24T21:55:26","date_gmt":"2012-02-24T21:55:26","guid":{"rendered":"http:\/\/morganredfield.com\/blog\/?p=142"},"modified":"2022-03-22T01:10:51","modified_gmt":"2022-03-22T01:10:51","slug":"entropy-and-externalities","status":"publish","type":"post","link":"https:\/\/morganredfield.com\/blog\/2012\/02\/entropy-and-externalities\/","title":{"rendered":"Entropy and Externalities"},"content":{"rendered":"

There’s a concept in economics called the externality<\/a> that my environmentalist friends like to talk a lot about. An externality is a cost that exists for some enterprise, but it’s a cost on somebody other than the enterprise itself. The classic environmentalist example is that environmental damage is an externality for oil companies. Oil companies get a lot of money for extracting oil, and they sometimes don’t bother to take care of the environment as they do that. This is because environmental damage affects the local community, but not the oil company’s profits.<\/p>\n

In many ways, it seems to me that an externality in economics is similar to entropy<\/a> in physics. Entropy in a closed system never decreases, it’s only by ignoring some part of the system that you can say that you’re increasing order. So too with externalities. Those costs created by the enterprise still exist and still need to be paid for. The only reason that a company (or person, or government) can console themselves about not paying for those costs is that they’re not a part of the closed system that is the company and its customers and suppliers.<\/p>\n

As the concept of externalities has come to be better understood by governments, there have been attempts to make destructive companies take responsibility for their actions. This seems like what I used to do in my physics classes by redrawing system boundaries to account for entropy. Redrawing system boundaries for economic externalities\u00a0is usually done by creating laws that require companies to pay for any damage that they may create. One good example of this is Montana, where mining companies have been required to create trusts<\/a> that are responsible for cleaning up after them.<\/p>\n

What’s interesting to me is that the owners and CEOs of possibly damaging companies sometimes realize that they live inside the wider system that encompasses whatever damage is caused by their company. One example of that is Sunoco<\/a>, which is the only oil company to sign on to the Ceres Principle<\/a>.<\/p>\n

I wonder if a better understanding of physics would cause people to realize the impact of such externalities to other parts of their lives. Even companies that work to mitigate externalities don’t do all that they could. Perhaps CEOs of potentially harmful companies should be required to take a course in thermodynamics to get a good understanding of entropy and system boundaries.<\/p>\n","protected":false},"excerpt":{"rendered":"

There’s a concept in economics called the externality that my environmentalist friends like to talk a lot about. An externality is a cost that exists for some enterprise, but it’s a cost on somebody other than the enterprise itself. The classic environmentalist example is that environmental damage is an externality for oil companies. Oil companies … Continue reading “Entropy and Externalities”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[9,45,44],"class_list":["post-142","post","type-post","status-publish","format-standard","hentry","category-uncategorized","tag-economics","tag-environmentalism","tag-physics"],"yoast_head":"\nEntropy and Externalities - Theory and Practice<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/morganredfield.com\/blog\/2012\/02\/entropy-and-externalities\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Entropy and Externalities - Theory and Practice\" \/>\n<meta property=\"og:description\" content=\"There’s a concept in economics called the externality that my environmentalist friends like to talk a lot about. 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