Posts Tagged ‘ pollution ’

The failure of externalities

Professor Aneel Karnani’s article, The Case Against Corporate Social Responsibility (Wall Street Journal, August 23rd, 2010), stirred up a lot of discussion in the CSR community, to which Professor Karnani responded in an email posted on Elaine Cohen’s excellent blog, csr-reporting.blogspot.com.

I thought it was most revealing that Professor Karnani refers to “externalities” such as pollution as a market failure.  The real failure is that our “capitalistic” market economy does not include the direct environmental cost (or social cost, for that matter) of industry in its accounting, thus allowing the conflict between private profit interests and public interests to arise.

All of the direct costs of business and industry, whether it’s a labour or materials cost, an emissions control cost, or other, should be internalized; this is the ‘responsibility’ part of CSR.  A company should not be able to generate profit by transferring a cost burden to a third party.  Through licencing and other regulatory mechanisms, companies acquire the privilege of exploiting a public natural resource.  Over time, our society has allowed industry to act as if such permissions also grant an implicit right to pollute (or otherwise transfer costs out of their profit equation).  Corporate responsibility is necessary, in part, to remind all stakeholders that the onus is and should be on the polluter to pay.

The private interest profit motive will be aligned with public interests of environmental and social health when such “externalities” are seen for what they are: internal costs of doing business.

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