July 17, 2006

Externalities and subsidies

Externalities are side effects not reflected in market prices. Pesticide use generates negative externalities - water pollution, for example. Forest preservation generates positive externalities - a more stable water flow downstream, for example. Standard economic theory says that markets left alone tend to produce too many activities with negative externalities and too few with positive externalities, and that in order to correct this governments should tax the former and subsidize the latter.

Governments do not obbey standard economic theory. Developed countries spent $283 billion in farm subsidies in 2005 (hat tip to Conservation Finance). For comparison, governments worldwide spend less than $7 billion each year on nature reserves (James, A. N., Gaston, K. J. and Balmford, A. 2001. BioScience 51, 43-52). In some European protected areas that contain farms more government money goes to the farms than to wildlife preservation.

Fisheries subsidies amount to at least $15 billion per year worldwide. Governments spend on the order of $0.1 billion on
marine protected areas.

1 comment:

  1. And one of the effects of EU fisheries subsidies is to encourage the consumption of bushmeat in West Africa, see http://conservationfinance.wordpress.com/2006/07/01/bushmeat-and-fish/