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Externalized costs
Old 07-26-2014, 04:03 AM   #1
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Externalized costs

I wonder how much of the returns that we get from stocks and bonds are a result of the externalized costs that our companies cause to the world at large.

The classic externalized cost is environmental pollution. If my company dumps toxics that will cost 10 million to clean up and then fail to spend that money on cleanup then they get a competitive advantage. That increases my return at the expense of the taxpayers who end up cleaning it up. Perhaps the increase is only 1 million in toxic dumping fees saved.

There aren't of course exact figures since this isn't tracked with anything approaching precision. I am interested in people's gut estimates. Say the long term rate of stocks is 10%. Is the externalized costs on the order of 1% or 5%?




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Old 07-26-2014, 06:22 AM   #2
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With MO and PM probably a lot.

But over a last 15 years they made killings for people who own them.
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Old 07-26-2014, 08:16 AM   #3
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If my company dumps toxics that will cost 10 million to clean up
That's why companies invest in foreign companies in places like China, Mexico, India and other third world countries to get their goods. So we will never have to bear any of that cost. Most pollution is so far away, we never see it, and it never affects us in the USA.

The companies are either there themselves, or use the foreign company as a supplier. If all products had a tariff that would equalize the product cost due to OSHA, Clean Air Act, EEOC, Mining laws, child and prison labor, etc., it would be MUCH more expensive to do business in other lands.

Until then, we just use disposable people and make the hazardous goods for our benefit. Do you think the Chinese government really cares about miners trapped in a coal mine, or people working in hazardous conditions?

I will let the rest of the world worry about the morality of 'stuff'. As far as I am concerned, they can kill baby seals just for their eyelashes as long as my portfolio goes up.
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Old 07-26-2014, 11:39 AM   #4
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........... As far as I am concerned, they can kill baby seals just for their eyelashes as long as my portfolio goes up.
I'm really sorry to hear this.
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Old 07-26-2014, 12:01 PM   #5
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We can't change the rest of the world, travelover. We can't stop China from burning coal. We can't stop China from being a super-polluter. We can't stop campesinos from cutting down the rain forest in Brazil. We can't stop slavery in the Middle East. We can't stop Japan and Mexico from over-fishing the Pacific. We can't stop Europe from polluting the Med. We can't even stop Victoria, BC from dumping raw sewage into Puget Sound. As Issac Asimov said, If we cannot stop population growth, the world [the world biosphere and humanity] is doomed. World population has doubled since he said that. And there is no credible scenario for any of this improving. And you have angst about baby seals? Homo Sapiens is destroying the planet and itself and it can't be stopped. I feel guilty about having had children.

DW won't let me invest in tobacco companies. Good thing she doesn't mind dirty oil and weapons manufacturers.
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Old 07-26-2014, 12:12 PM   #6
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We can't change the rest of the world, travelover. ...........
I'm not naive, but I do admire this quote from Margaret Mead:

"Never doubt that a small group of thoughtful, committed, citizens can change the world. Indeed, it is the only thing that ever has."
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Old 07-26-2014, 12:41 PM   #7
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Missing from the question posited by OP is the flip side of externalized costs. Additional benefits bequeathed unto society by the profit seeking corporations above the sales price of their goods and services (the "consumer surplus" in economics).

When us rational actors purchase something, we get at least as much utility as the purchase price (otherwise we wouldn't buy it).

When Ford makes a car and sells it to me for $16,000, I might value the benefits of the car at $20,000 because I can drive all over, it has a sweet mp3 player, and the sleek styling makes me feel good.

Assuming companies aren't able to implement perfect price discrimination, thereby sucking up all the consumer surplus (the benefits I'm talking about above the purchase price), there will be a net positive benefit to society from commerce. Some of that benefit will be offset by the negatives of externalities.

As for the externalities themselves, I'd say every company is guilty to some degree. Carbon emissions, pollution, consumption of non-renewables, etc.
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Old 07-26-2014, 01:51 PM   #8
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As for the externalities themselves, I'd say every company is guilty to some degree. Carbon emissions, pollution, consumption of non-renewables, etc.
.......and child labour, and badly built factories that collapse, trapping workers inside, etc.
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Old 07-26-2014, 02:22 PM   #9
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The real trick is to externalize as much in costs as possible, so as to maximize short term profits. That in turn is what earns the CEO and C-suite team the high praise and incentive bonus, and of course improves the near term stock returns.

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Externalized costs are those costs that are diverted outside the enterprise in order to free itself of certain charges. ... Traditionally, a good policy consists of such reasoning as "all expenditures paid by others constitute an advantage for us."
- "Mastering Hidden Costs and Socio-economic Performance", edited by Henri Savall and Véronique Zardet, IAP, 2008

Leveraging externalized costs, whether by offshoring labor or by siting polluting industries just upwind or upstream of jurisdictional borders, can have a huge benefit in the short term. In the longer term, it's Somebody Else's Problem.
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Old 07-26-2014, 02:37 PM   #10
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I wonder how much of the returns that we get from stocks and bonds are a result of the externalized costs that our companies cause to the world at large.
Are you looking to reasons to feel bad? Worry about something you can influence.
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Missing from the question posited by OP is the flip side of externalized costs. Additional benefits bequeathed unto society by the profit seeking corporations above the sales price of their goods and services (the "consumer surplus" in economics).
Precisely. Every product that is sold (and which people buy willingly) represents a "net good," benefiting both the person that bought it and the person that sold it. I'd guess that, on whole, the size of this "net good" swamps the externalities that are foist onto others. Plus, quantifying these externalities is notoriously tricky.

One challenge with "public spending" is that, since the resources and the services aren't exchanged freely, there's no guarantee that a net benefit results from every exchange.

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As for the externalities themselves, I'd say every company is guilty to some degree. Carbon emissions, pollution, consumption of non-renewables, etc.
Not just companies, but governments and people, too. Everybody who exhales CO2 is getting a free ride and contributing to uncompensated externalities.
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Old 07-26-2014, 04:04 PM   #11
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I'm not naive, but I do admire this quote from Margaret Mead:

"Never doubt that a small group of thoughtful, committed, citizens can change the world. Indeed, it is the only thing that ever has."
I like that quote, too. We just try to do what we can. If we we planned to stay in our house long term I'd remove the lawn and put in all drought tolerant plants.

Since we semi-ERed we have had more time to research sustainable living ideas. We've enjoyed lowering the electricity bill, walking when we can, installing low flow shower heads, and replacing many of the single use products with resusable ones. Over a potential 40 - 50 year retirement the money saved adds up to quite a bit, too.
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Old 07-26-2014, 06:29 PM   #12
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I don't subscribe to all of it but this is a pretty good presentation on externalities, the idea of sustainability is probably going to become more important, either on a wider society level or eventually on a madmax level


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Old 07-26-2014, 07:57 PM   #13
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That's why companies invest in foreign companies in places like China, Mexico, India and other third world countries to get their goods. So we will never have to bear any of that cost. Most pollution is so far away, we never see it, and it never affects us in the USA.
I thought you were going to put Texas on your list. Suppose some of the plastics made in Texas and Louisiana were actually made in California. San Diego probably would have a lower cost of living if some petrochemical facilities were re-located there.
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Old 07-30-2014, 05:25 AM   #14
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We can't change the rest of the world, travelover. We can't stop China from burning coal. We can't stop China from being a super-polluter. We can't stop campesinos from cutting down the rain forest in Brazil. We can't stop slavery in the Middle East. We can't stop Japan and Mexico from over-fishing the Pacific. We can't stop Europe from polluting the Med. We can't even stop Victoria, BC from dumping raw sewage into Puget Sound.
Yeah, those damn foreigners, right? If only every country was as ecologically responsible as the good ol' US of A.

Country Rankings | Environmental Performance Index

List of countries by energy consumption per capita - Wikipedia, the free encyclopedia

List of countries by carbon dioxide emissions - Wikipedia, the free encyclopedia

Top 10 Countries Killing the Planet | Care2 Healthy Living

Home - Action For Our Planet
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Old 07-30-2014, 09:01 AM   #15
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Yeah, those damn foreigners, right? If only every country was as ecologically responsible as the good ol' US of A.
Every country has it's flaws.

The problem is, here in the US we like to encourage population growth and independence. Population growth is a huge environmental issue, but we need it to support Social Security...

The US is a wide country with a lot of space. People like to retire early and travel. We like to have a home in FL and another one in the North. We like to save our money for our easy life style at early retirement, save our assets, and not pay full price for healthcare.

There are 1000s of ways each country could do better. Once the World decided they wanted to live better than a cave man, it starts to eat away at the environment.
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Old 07-30-2014, 10:47 AM   #16
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Yeah, those damn foreigners, right? If only every country was as ecologically responsible as the good ol' US of A.
I don't remember mentioning the United States. Do you think that a more advanced country--perhaps, say, Denmark? Germany?--could save the rain forest, eliminate slavery and save the Med? The US can't, but maybe it takes moral purity. Wait, isn't Germany abandoning the best nuclear power in the world for...wait for it...coal?
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Old 07-30-2014, 11:10 AM   #17
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I don't remember mentioning the United States.
My point exactly. You spoke about all the issues that the US cannot fix without mentioning those that you could. Like, overfishing. You correctly pointed out that Mexico and Japan "are over-fishing the Pacific". According to the Yale study I posted a link to, those two countries are tied for 48th out of 178 countries in the category "Fisheries". The US? Rank 96.

United States of America | Environmental Performance Index

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Do you think that a more advanced country--perhaps, say, Denmark? Germany?--could save the rain forest, eliminate slavery and save the Med?
Of course not. I think everybody should focus on fixing the things they have in hand, rather than pointing fingers at others.

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Wait, isn't Germany abandoning the best nuclear power in the world for...wait for it...coal?
We are, and this decision is heavily debated. Personally, I don't like it. But hey, I didn't try to take the moral high ground in this discussion.
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Old 07-30-2014, 11:18 AM   #18
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Every country has it's flaws.
Again, that's exactly my point. I guess it just rubbed me the wrong way that Ed listed a lot of countries with sustainability issues, but deliberately left out the #2 polluter in the world.

I'm not saying that my home country, or any country, is better. I just think it is wrong to point out the specks in others' eyes, without at least acknowledging there might be some areas of improvement for oneself.

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We like to save our money for our easy life style at early retirement, save our assets, and not pay full price for healthcare.
I certainly don't blame anybody for that.
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Old 07-30-2014, 11:34 AM   #19
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1) Global population is forecast to level off relatively soon: "The dominant voices in that expert consensus foresee a peaking of the global population in the second part of the present century, followed by a slow decline — a pleasant soft-landing to a slowly decaying quasi-stationary state, underpinned by spreading and ultimately generalized economic affluence." Source: http://goo.gl/x2tDg (United Nations)

2) Developing countries are going through the same phases today that developed countries went through earlier. I'd wager 100% of our ancestors going back just a few generations worked as children doing unsafe, unpleasant tasks. One of my great-grandfathers started his work life as a young adolescent in the coal mines.

Almost 2 billion people have been lifted out of poverty in the last 20 years as citizens of developing countries poured from the country to the city. Source: The world’s next great leap forward: Towards the end of poverty | The Economist (Economist) Soon, those emerging middle classes will demand better working conditions, healthcare, cleaner air and water - all the things our ancestors demanded as their lots improved.

3) TLR: The universe is unfolding as it should. Source: (Harold & Kumar Go To White Castle)
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Old 07-30-2014, 01:20 PM   #20
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Again, that's exactly my point. I guess it just rubbed me the wrong way that Ed listed a lot of countries with sustainability issues, but deliberately left out the #2 polluter in the world. ...
Isn't it a LOT more complex than that? Isn't the #2 polluter also representing many more people than those other countries?

Yes, they may also have higher per capita rates in some cases, but then we also need to look at per capita contributions - as I said, it is complex.

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