strongly related to health inequalities, with certain populations bearing a disproportionate amount of those costs. That unequal distribution is not accounted for in a model based on externalities. Some participants wondered if there is another model or approach that could be used that accounts for distribution. The implications of building a framework based on a broader view of costs are unclear.
James Hammitt offered an explanation. The concept of externality falls under the purview of welfare economics, which is an attempt to quantify the well-being of people. When quantifying the costs and benefits associated with an activity, welfare economists quantify in dollar amounts those costs and benefits as perceived by the individuals actually benefiting or being harmed and then add those quantities across society. If some policy action is expected to have society-level benefits that exceed society-level costs, in principle those people who gain from the policy could “transfer” some of their gains to those who are harmed so that everyone would be better off after the transfer is made. In other words, Hammitt said, “you can think of it as expanding the size of the social pie.” If externalities can be corrected through policy, that is, if they can be internalized, then “we can make the pie bigger.” But how that pie is divided across people is a separate question. He said, “If we don’t like the distributional effects of that, we can redistribute using other mechanisms. Rather than foregoing the opportunity to increase the size of the social pie, we should go ahead and increase it, and then redistribute it.” Not implementing a policy that imposes costs on a subset of the subpopulation while providing benefits that exceed costs overall is, in his opinion, an “extreme position.” There are more efficient ways to redistribute well-being than to not implement a policy because it will increase the cost to a subset of the population. In the case of a food policy that increases overall well-being but increases the cost of food to poor people, he said, “It is much better to deal with the poverty directly.”
Anna Alberini added that, although economists are primarily concerned with the size of the pie, few agencies conduct cost-benefit analyses without also conducting regulatory impact analyses to deal with those distributional issues. She said, “Considerations of this kind do indeed take place.”
Still, some participants wondered whether there might be other economic strategies, such as ecological economic models, that could provide other ways to frame the discussion. Helen Jensen responded that, yes, there are other approaches, but none of those approaches take away from the basic understanding of externality. Jayson Lusk warned, “If we are not going to use the externality argument, there needs to be some rational argument for what the basis is of some policy recommendation.” He explained that externalities represent an opportunity for interventions that allow people to benefit by their own account. The alternative is paternalism. He said, “With children, most people are more open to using paternalism as a jus-