The Ethics of Externalities
Is it ethical for companies to ignore the negative externalities that result from their business operations?
In tutorial four, we discussed a study that showed how market interactions could erode moral values. In summary, the study determined that an increase in competition in the market led to a rise in market players’ willingness to ignore the negative impacts of their deals on a third party. I don’t directly agree with the finding of the study but, the premise of the study brings up an interesting question: Is it ethical for companies to ignore the negative externalities that result from their business operations?
In business school, we are taught that negative externalities, when not accounted for, result in market failure. Governments can “force” companies to account for these negative externalities through taxes and regulations. Take the Tobacco industry, we all know that smoking is bad for you. Cigarettes have multiple negative externalities that are harmful to society. Second-hand smoke results in thousands of deaths each year. Further, on average, smokers die 10 years earlier than nonsmokers, and health complications from smoking result in $170 Billion in medical costs every year. In the US, federal, state, and local governments levy taxes on cigarettes, which studies have shown lead to a reduction in smoking. While these taxes have led to a decrease in smoking in Canada, local governments have taken it a step further, suing tobacco companies to recover health care costs. Cigarettes are an undeniable example of a product with negative externalities. But what happens when the case is less clear? How do governments decide when action is needed? When does a negative externality reach a point where the government must intervene?
For instance, Alcohol tax rates are inversely correlated with the number of Alcohol-related harms, including drunk driving, crime, and child maltreatment. But while “forty-seven state governments raised cigarette taxes 117 times between 2001 and 2014” […] “the thirty-seven state governments that did not raise alcohol taxes from 2000 to 2014.” — McLaughlin Even though both products result in negative externalities, cigarettes were treated much more harshly than Alcohol.
The variation in treatment between Alcohol and Cigarettes highlights the issues that I have with the study on morals and markets. While some actions are clearly unethical, many actions fall into a gray area. I would argue that the experiments conducted in the study did not present a clearly unethical decision but a decision that fell into a grey area. The study in question used the death of a mouse as the negative externality that would result from a transaction. Many people consider mice as pests, and therefore I do not believe that mice were a good indicator of how markets can erode morals.
Further, the issue I have with this study highlights the difficulty with answering the question: is it ethical for companies to ignore the negative externalities that result from their business operations? When negative externalities fall into a grey area, when is inaction unethical? Many people know that some of the clothing they buy could be produced is sweatshops using child labor. Sweatshops “often have poor working conditions, unfair wages, unreasonable hours, child labor, and a lack of benefits for workers” — Source. While some people make an effort to support companies that do not use sweatshops, many people do not. To further complicate this issue, some academics have written papers in defense of sweatshops saying that sweatshops reduce poverty. Some have gone as far as to say that is “is not necessarily ethical [to boycott sweatshops], especially without making provisions for alternative sources of income for the poor.” — Banerjee
Since the ethicality of many actions is widely debated, I think it is essential that companies strive to act morally, are transparent about their business practices, and let consumers and governments decide how they should be treated for their actions.
Additional Readings:
Certified B Corporations are businesses that meet the highest standards of verified social and environmental performance, public transparency, and legal accountability to balance profit and purpose. — B Corp
