How Are Externalities Assessed?
Externalities are not easily assessed because, in some cases, the
full extent of their impact is unknown. Environmentalists and economists
have struggled with externalities, and the following methods of
assessment are now available:
Qualitative Treatment This
method requires environmental impacts to be described in descriptive
terms like no impact, moderate, or significant impact.
Weighting and Ranking A cross
between qualitative and quantitative methods, weights and ranks
are assigned to externalities to assess their relative environmental
Cost of Control A simpler
method which quantifies an externality by how much it costs to control
or prevent it.
Damage Function The approach
aims to determine the amount individuals are willing to pay to avoid
a damage that results from a pollutant or the compensation individuals
are willing to accept in lieu of the damages (climate change, biodiversity
Percentage Adders A predetermined
fixed percentage is added to (or subtracted from) the avoided cost
of a source option. The percent amount to be added may be determined
by law, judgment, or estimates of control or damage costs.
Monetization by Emission Used
mostly for air pollutants, an actual cost per unit amount of pollutant
is estimated from its known environmental impacts.
Multi-Attribute Tradeoff Analysis
This method attempts to analyze the tradeoff between costs and benefits
of different strategies and may use qualitative and quantitative
If all of the above is not sufficiently complicated, it should
be recognized that the whole process of assessing externalities
is highly political, and the best science does not always win the
day. Nevertheless, the notion that externalities are to be avoided
or minimized to protect the environment and quality of life is admirable,
and has produced enlightened environmental regulations in many parts
of the world. Refer to the
Related Resources + References
page for further information on externalities.