How The Haze Is A Negative Externality We Have No Solution For

In the past few days, it has been impossible not to think about the haze. The presence of the haze is frustrating for a few reasons. Being used to good, fresh air, our bodies are not used to the change in the air quality. Outdoor activities have to be curbed, with organized runs being cancelled.

However, the biggest reason why it is frustrating (for us at least) is simply because it isn’t any fault of our own, and that there isn’t a thing we can do about it.

Introducing “Externality” 

“Externality” as defined by Wikipedia, is an economic term used to describe the effect of a cost or benefit which affects a party who did not chose to incur that cost or benefit.

In layperson understanding, it means that an individual, or a collective group of people, suffers or enjoy, from an action being carried out by someone else that has nothing to do with them.

Positive Externality 

Externality can be both positive and negative. An example of a positive externality would be the purchase of a fire extinguisher by a homeowner. The homeowner benefits from the purchase, as it enables him to extinguish any potential fire before it becomes too big to control and possibly, affect both his his home and the home of his neighbour.

At the same time, his neighbours benefit from it as well because of the added protection provided by this fire extinguisher. Though they were not involved in the decision to purchase the extinguisher and did not spend any money to help purchase it, they enjoy the additional benefit provided by it.

Negative Externality – The Haze

The haze is a great example of a negative externality. In this instance, farmers and private companies in Indonesia decided that the environmental impact caused by the burning of forest is worth the cost, compared to doing it the slower, costlier, legal way.

This of course, wouldn’t be that big an issue for the rest of us if these farmers, and the companies supporting them, were stuck in their own dome, inhaling the haze which they have caused, without affecting the rest of Indonesia and the region.

The motivation of these actions, which causes negative externalities, usually arises when private marginal cost (i.e. the cost to the individual or group causing the action) is different from social marginal cost (i.e. the cost to the rest of society).

Farmers, and the companies supporting them, are motivated by economic profits. They employ cost effective but environmentally inefficient deforestation methods. They bear a small cost for it in the form of poorer air quality around the area they live in, and the possibility of a fine if caught. When they weigh this against the benefits that they will enjoy, which comes in the form of a fatter paycheck, they decide it is worth burning down the forest.

Not included in their equation are the costs (poor air quality) that the rest of Indonesia and the Asean region will have to bear. Monetary costs are incurred as well. These cost can range from money spent buying N95 masks, medical expenses incurred due to falling ill from the haze, the cost airforce to assist in the firefighting efforts, to even the extra bit of shampoo and facial wash you use in your shower.

Not Being Able To Add These Cost Into The Equation

If you have read the book Freakonomics, you will understand that people respond to incentive and deterrance.

In order to promote the right actions, incentive and deterrance have to be introduced to level out between the differences in private marginal cost and social marginal cost.

For example, a simple solution could be to charge the companies the monetary cost incurred by the rest of society for their actions in causing the haze. We may work out the extra cost families incurred due to the haze at $50 per person, and multiple it by the 50 million people affected around the region for a total bill of $2.5 billion, which would then be sent to these companies. If the bill exceeds the extra profits that these companies will gain, their actions will stop.

In reality, it is difficult, if not impossible, to execute such a solution. People will deny their involvement in the actions, and similar to drug dealing, anyone who is actually caught would usually just be a poor runner doing the dirty work, rather than the actual mastermind. Also, cross border politics will weigh in heavily and it isn’t practical for the Singapore Government to just send an invoice demanding payment for the trouble caused by the haze to the Indonesia Government.

The truth is, old habits die-hard. Illegal deforestation has been happening since the 1990s and it is estimated that about 73% of all deforestation are done illegally in Indonesia.

Not withstanding heavy political pressure, it is likely that this problem will continue to persist, unless, someone finds a way for us to add in the collective costs which the haze have cause to all of us into the equation.

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