2 Letters Are The Reason For Our Greatest Global Challenges: NX (Negative Externalities)

A negative externality is when you pay for a transaction from which you don’t directly benefit. For example if I sit next to you, smoke a cigar and blow the smoke in your face. I might draw pleasure from the experience but you probably won’t.

Negative externalities produce market failures. Let’s say I own a factory that blows CO2 into the atmosphere. I reap the rewards from this factory via profits. However, the CO2 pollutes the city where my factory is located. All residents of the city pay the price.

If this negative externality is not counted, if the cost to the population (increased healthcare costs,┬áproperty values, wildlife habitat, reduction of recreation possibilities etc.) are not priced into the products I produce in the factory, the population has to pay for the difference. This means the price of my products is not accurate. It further means that a competitor offering a “clean” product cannot compete. This creates a market failure. Energy markets are a great example. Energy sources that produce a massive amount of negative externalities like fossile fuels appear less expensive than renewable sources only because negative externalities are not counted. Since their market price is inaccurate, not counting the NX (negative externatlities) results in a market failure. If the NX were counted the market would react by prioritizing the renewable energy sources. Therefore not counting NX is the equivalent of a planned market failure. Climate change is accelerated by this market failure.

From a macro economic perspective the hero index of an economy is high when the positive externalities outweigh negative externalities.

HX = PX > NX

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