Monday, April 12, 2010

Externalities


'Externalities' is a term that modern economics uses to describe the impact of a business that is not captured in the bottom line. 

For eg: the pollution created by a steel manufacturer is a negative externality since it's harming the environment and not really captured in its net profitability. The business of rearing bees has positive externalities since it improves pollination in the local communities. Economics relies on the fact that Governments and non-profits help reduce negative externalities through penalties, incentive schemes and rehabilitation plans.  

Assuming that we can actually estimate all our externalities, Economic theory shows that if you have a product that has more negative externalities, you're better off running it as a business since you will produce more. But if you have more positive externalities, you will end up selling less of your product! 

With this in mind, is Social Enterprise (using the free market to do 'Good') really a solution to 'fix' the worlds problems?

(More to Follow...)

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