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Environmental Externalities

May 9, 2010 • 306 Views

There is oil under Murchison Falls National Park. Home to rare birds, lions, elephants, and giraffes, this Ugandan nature park is a tourist mecca. The Ugandan government, though, prefers oil to tourists as a revenue stream. 

Thinking as economists, we can identify negative and positive externalities of the decision to let Tullow Oil, PLC explore and drill. On the negative side, wildlife in the park is being adversely affected and villagers’ revenue from tourism is diminished. However, because oil will bring in more money than tourism, Uganda’s economic growth should accelerate and generate a ripple of benefits. 

Economics is always about cost and benefit. Environmentalists say the choice is money or wildlife. I wonder, though, whether the “money” side involves a better life for many people if the Ugandan government appropriately manages foreign investment. Still, we have an “on the one hand but then on the other” situation–the reason President Harry Truman (1945-1953) said he was searching for a one-handed economist.

The Economic Lesson

Whenever a transaction between two parties affects a third, uninvolved individual or group, economists see an externality.

Comments? Other externalities?

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