The UK government is reported on today’s FT front page (and in this FT blog http://on.ft.com/15UGVUK ) to be considering offering some recompense to (i.e. bribing) those communities who agree to the fracking of shale gas. Various alternatives, including cheaper energy bills and funding for local amenities, are apparently under consideration. Presumably, although not covered in the FT’s analysis, this would be funded by some sort of Pigovian tax on the drilling companies; thereby constituting a Conservative government recognising an economic concept that their recently feted heroine could never get her head around when she was in power, the externality.
For all her reputed intellectual abilities (which I confess always remained hidden from me) Margaret Thatcher refused to accept that there could be costs or benefits other than those captured within the Profit & Loss account. The classic example of this was her reaction to Ken Livingstone and Dave Wetzel’s ‘Fairs Fare’ initiative in 1981. Whilst the Thatcher government employed as many tactics as they could to scupper a policy for which the people of London had voted, the key plank of their argument was that only those amounts actually appearing in the accounts of London transport and the GLC could be considered when evaluating the decision to lower fares. Other issues such as reductions in congestion, environmental improvements or indeed the very existence of subsidies to motorists were rigidly excluded.
However, lets not look backwards, but rather let us consider the possibilities now the concept of externality has been conceded. I spent many years living in Hounslow in West London. Every day I had to put up with the traffic on the A4 and M4 plus that on the Chertsey Road and the North Circular, causing noise, emissions and travel disruption to the locals whilst only benefiting those who lived on one side of the borough and worked on the other. On top of that of course there was the stream of planes coming in on the flight path to Heathrow, the trains carrying nuclear waste to Sellafield for reprocessing and so on. All of these activities cause costs to those otherwise uninvolved and who did not choose to incur that cost – the definition of an externality. So, I have no doubt that at the same time as announcing compensation for fracking the government also will be unveiling plans to compensate the residents of such places as Hounslow for the inconvenience that they currently suffer for the benefit and profit of others.