Negative Externalities in Cities

Externalities are outputs or outcomes which are borne by the system external to the agent doing the activity. These external impacts can be either detrimental or beneficial to the society at large. Those which impose a cost on the external environment is called a negative externality and those which confer benefits on it are called positive externality. The benefits of a negative externality goes to the agent producing it, while the costs are invariably borne by the society at large. Obviously, negative externalities ought to be contained and penalised, while positive ones have to be encouraged and incentivized. Economics teaches us that for efficiently managing these externalities, its costs and benefits have to be internalized.

Externalities suffer from what are called market failures, and hence demands some form of government intervention. Left to themselves, the market will undersupply positive externalities and oversupply negative externalities. We will thus have unhindered and unregulated activity, inflicting huge social costs. In the absence of Government intervention, those deriving the benefits of the activity ill not compensate those bearing the costs of the activity.

All externalities have private costs and private benefits, accruing to the agent doing the activity causing it, and social costs and benefits impacting the external environment and society. In all the negative externalities, the Marginal Private Benefit (MPB) of consumption is more than the Marginal Social Benefit (MSB) of consumption, and the Marginal Private Cost (MPC) less that the Marginal Social Cost (MSC), thereby leading to an over supply of the activity with increasing costs on the society.

There are a number of negative externalities in cities, and many major urban problems and issues can be traced back to the presence of externalities. Apart from the usual accused like pollution from vehicles, we have costs imposed on the society and environment by actions like dumping garbage or litterring on roads and drain, parking vehicles on road margins, house extensions encroaching public spaces, occupation public spaces in shopping complexes, hawkers on road margins, constructing steps and ramps over drains and onto the road, using motors to draw water from the network, letting out sewerage into side drains, growing cattle in residential areas, violating zoning regulations and housing commercial and institutional establishments in residential areas, traffic congestion arising from using personal vehicles and not using public transport etc.

It is commonplace in cities to have frequent media reports lamenting about the losses incurred by way of Property Tax evasion, loss of Non Revenue Water, and various other inefficiencies. By reasonable approximation, the total evasion of Property and Vacant Land Taxes in Vijayawada Municipal Corporation (VMC) area would be at the most Rs 4-5 Cr, the loss due to NRW would be about Rs 4 Cr (taking 50% NRW), and losses from other inefficiencies would be another Rs 5 Cr. Thus all these conventional inefficiencies cost the VMC about Rs 15 Cr every year in revenues.

In constrast, let us try to quantify the costs incurred in Vijayawada due to some of the aforementioned negative externalities. We will try to quantify the cost by way of the willingness to pay principle, the incomes foregone, direct cost inflicted, opportunity cost, cost that would have to be incurred by the individual to eliminate the problem, or other means. It does not include certain other more difficult to capture costs like inconvenience and health hazard caused to the general public etc. All the costs indicated are annual
Unauthorised Parking - Rs 55 Cr
Hawkers on road margins - Rs 15 Cr
Building extensions on road margins - Rs 10 Cr
Steps and drains covering drains and public roads - Rs 3-5 Cr
Litterring of streets and drains - Rs 4-5 Cr
Using motors to draw water - Rs 12-15 Cr
Letting out sewerage into open drains - Rs 3 Cr
Violating zoning regulations - Rs 10-15 Cr
Traffi congestion - ?
Cumulatively the cost of all the aforementioned extenalities alone on the external environment and society come in the range of Rs 112-123 Cr. (The details of all these calculations are available)

Readers may dispute the standards and the assumptions used in some of these calculations, and I will not argue on that. But even considering half this amount, there is still is no competition! Unfortunately we have not even woken up to addressing this problem, leave alone solving it. We clearly have our priorities misplaced, at least economically.

Many of these problems have limited practically enforceable regulatory solutions. We will ultimately need to develop civic responsibility in our citizens to have any sustainable long term solution to these problems. But how do we go about inculcating civic responsibility itself? Information Education Campaign (IEC) and massive awareness generation is necessary for sure. That is a long campaign and will take time. Till then the only other way to address them is by internalizing these external costs. This will incentivize agents towards finding alternative solutions that will reduce or eliminate costs inflicted on the environment and the society.

All the aforementioned are serious problems whose collective costs on the society are enormous and are increasing with the trend of rapid urbanization. If we are to ensure that there is no further deterioration in the quality of urban life, leave alone improve it, it is necessary to start making those agents causing these negative externalities pay for their actions.

In all these cases, not only do the users not pay for the damage inflicted on the environment and society by their actions, there is also a resigned acceptance of these costs by the public at large. Sociologists may diagnose this as arising from lack of civic repsonsibility, and may advise development of social capital for containing these problems. But economists see them as problems of failure in internalising costs. Whatever the diagnosis, it is undoubtedly a problem that has to be addressed with the same seriousness we attach to other issues like global warming or climate change. And addressed immediately too.