Blog 57: Negative Externality by Xavier Lo, FIA, FRM, MBA

Think about a time when you were on public transport [交通工具]. You stayed up late the night before and just want a peaceful, quiet time on the way to work. It seems like everyone is also sharing the same thoughts as you, when suddenly some guy just blasts his heavy rock music out loud on his phone. This is an example of Negative Externality [負外部效應].

Externality [外部效應], by definition, is just the indirect impact [間接影響] you have on others by doing certain things. Not all externalities are bad though. For example, if you take the vaccine [疫苗] nowadays, you’re indirectly helping the people who aren’t vaccinated as there is herd immunity [群體免疫]. However, negative externalities are the focus here as you make other people feel worse such as second-hand smoke [二手煙] or noise pollution [噪音]. Even examples such as choosing to drive a car can be a negative externality, as you increase traffic jams and make it more likely for a car accident [撞車] to happen.

How about at the office? What negative externalities are there? Well, there are limited number of items in my company’s vending machine [售賣機/汽水機]. Some employees like to stock up on snacks which leaves none for others. In terms of actual insurance, remember moral hazard [道德風險] from a previous blog? For health insurance, companies charge more premium for people who do dangerous activities [危險活動] like skydiving. However, insurers won’t know this unless the customer actively declares, and the customer probably won’t as it makes their premium cheaper. Again, insurers aren’t stupid, they know this is a problem, hence charges extra for ALL customers – so the safe customers [安全客] bear the cost.

The theme I’m trying to bring out here is that negative externalities exist everywhere. You might be guilty of this too. However, just be aware of these and think more deeply about your own actions. The world will make more sense and be a better place!