|Source: Big Picture Agriculture|
Kay MacDonald over at Big Picture Agriculture has this graphic showing the "Dead Zone" in the Gulf of Mexico just off the coasts of Texas and Louisiana and the following comment:
"This year’s Deadzone in our Gulf of Mexico waters will be about the size of Connecticut. It is estimated that the Dead Zone causes losses of $82 million per year to the seafood and tourism industries.
Much of it is caused by corn cropland fertilizer runoff that ends up going down the Mississippi River. Corn used to fuel cars – cropland used to feed cars, not people. In contrast, a healthy Gulf of Mexico sans Dead Zone would be capable of growing more shrimp, crabs, clams, and fish which humans love to eat."This clearly illustrates an important concept in AP Microeconomics: Negative Externality.
Negative externalities occur when the production of a good imposes a cost (or costs) on third parties not involved in producing or consuming the good.
Farmers grow corn. The fertilizer used in the process becomes part of the run-off from irrigation and/or rains that make their way to streams and rivers then eventually the Gulf of Mexico in this instance. The chemicals in the fertilizer destroy/damage the aquatic ecosystem that allow shrimp and other sea creatures to thrive.
Each farmers contribution to the problem is small but in the aggregate all farmers along the waterways that feed the Gulf of Mexico cause approximately $82 million dollars in lost revenues to fisherman of all types along the Gulf Coast.
This loss in revenue (a cost) is borne by the fisherman ("Third Parties") and not by the farmers and/or consumers of corn.
There are potentially 3 solutions to this problem:
(1) tax the producers and/or consumers of corn up to at least the amount of the damage--$82 million.
(2) impose a regulation forcing farmers to prevent the run-off hence the damage to the Gulf
(3) Farmers collectively agree to pay the fisherman $82 million for the damage they cause ("Coase" solution).
All 3 of these "internalize" the monetary value of externality and require the parties to the actual transaction to bear the full cost of the damage they impose.
Seems fair, doesn't it?