Picture a factory by a river that makes paint. A shop pays the factory for the tins. The factory pays its workers and its suppliers. The smoke from the chimney lands on the town downwind. Some dye goes into the river. The town and the people who fish the river were not part of the deal.
In the price, a tin10 pounds, say
Lands next door, a tin3 pounds, say
The price of a tin counts what the buyer pays and what the seller spends. It does not count the town's washing, or the fish. Economists call that an external cost. We will call it a cost that lands next door: a cost of the deal, paid by someone who was not in it.
The buyer£10
++
The factorykeeps its costs
++
The town£3?
The tin costs £10. The smoke and dye cost the town about £3 a tin in cleaning and lost fish. Who pays that £3?
The buyer, through the £10.
Not yet. The £10 covers the factory's own costs and its profit. The town's £3 was never added to it, which is why the tin looks cheap.
The town. It is not in the price at all.
Right. The £3 is real money, spent on cleaning and lost from fishing. It is just not on anybody's receipt. That is what landing next door means.
The factory, from its profit.
Not yet. A cost the factory paid would be in its books and in its price. The smoke costs the factory nothing, which is why the chimney stays as it is.
A tax or a charge
++
A cap and a market
++
A rule
Here is the important half. Many next-door costs now do carry a bill. Smoke can be taxed. A landing can be charged by its noise. A chimney can need a permit. A fuel can be banned. The next three lessons are those bills. Where no bill exists, the price is too low and the drain runs faster.
Picture the £3 being added to the tin's price, a pound at a time. The tins sold are made up to show the shape; the smoke follows the tins.
Tins sold1,000
Left on the town, £ a year3,000
Of the £3, how much is put on the bill: £0
Nothing on the bill. The tin is £10. A thousand tins sell, and the town carries £3 on each: £3,000 a year.
Tins sold900
Left on the town, £ a year1,800
Of the £3, how much is put on the bill: £1
£1 on the bill. The tin is £11. 900 tins sell. The town still carries £2 on each: £1,800 a year.
Tins sold800
Left on the town, £ a year800
Of the £3, how much is put on the bill: £2
£2 on the bill. The tin is £12. 800 tins sell. The town still carries £1 on each: £800 a year.
Tins sold700
Left on the town, £ a year0
Of the £3, how much is put on the bill: £3
The whole £3 on the bill. The tin is £13. 700 tins sell. Every tin pays for its own smoke; the town carries nothing.
When the whole £3 is on the bill, what has changed?
The same tins sell; the town just gets paid.
Not yet. The frames show 300 fewer tins. A dearer thing is bought less. The bill changes the buying, not only who holds the money.
Nobody buys paint any more.
Not yet. Seven hundred tins still sell. The bill is £3, not £300. A next-door cost put on the bill makes a thing dearer, not impossible.
Fewer tins sell, and the ones that do pay for their own smoke.
Right. At £13 some buyers decide the tin is not worth it. Each of those is a tin's worth of smoke that never happens. The rest carry their cost instead of the town.
Move the control.
A landingcharged by its noise
++
A dirty car in London£12.50 a day
A plane over a house is the same shape. The passengers paid and the airline paid. The house under the path was never asked. Heathrow charges every take-off and landing by how loud the plane is, so the airline pays for the noise. London charges a dirty car £12.50 a day. Both are next-door costs with a bill attached.
Each card is a cost. Is it inside the deal, paid by one of its two sides, or does it land next door?
One card at a time. Tap the pile it belongs to.
Card 1 of 6
The wages a café pays its staff
Diesel fumes from a bus you are not on
The monthly price of a phone contract
Noise at midnight from a club you are not in
The smell of a chicken farm in the next village
The fuel a delivery van burns on the way to you
The wages a café pays its staff → Inside the deal
Not yet. Inside. The café is one side of every coffee sold, and wages are its own cost, built into the price of the cup.
Diesel fumes from a bus you are not on → Lands next door
Not yet. Next door. You breathe them and bought nothing. The fare covers the diesel, not your lungs.
The monthly price of a phone contract → Inside the deal
Not yet. Inside. You and the phone company are the two sides, and the price is what passes between you.
Noise at midnight from a club you are not in → Lands next door
Not yet. Next door. The ticket buyers chose the noise. The street did not, and nothing in the ticket price reaches it.
The smell of a chicken farm in the next village → Lands next door
Not yet. Next door. The farm's buyers get chicken at the farm's price. The village gets the smell, and no money.
The fuel a delivery van burns on the way to you → Inside the deal
Not yet. Inside, this one. The van's fuel is the seller's own cost and is in the delivery charge. Its fumes on the street would be next door; the fuel itself is not.
3Inside the deal
vsvs
3Lands next door
Right. Three costs sit inside the deal because one of its two sides pays them. Three land on somebody who was never asked. The van is the trap: its fuel is inside and its fumes are not. Same van, two different costs.
20 of 20
each dot is 100 people, £1.50 each
Picture the town downwind: 2,000 people, and the smoke costs each of them about £1.50 a year in cleaning. What does the chimney cost the town in a year?
pounds
People times pounds each.
Right. Three thousand pounds. Spread over 2,000 people it is small enough that nobody sends an invoice, and that is exactly why it stays off the price. Lesson 3's lake again: a cost shared thinly is a cost nobody fights.
The cafésells coffee
++
The customerssit outside
++
People walking pastsqueeze by
A café puts tables on the pavement outside. The pavement gets narrow. Which is the next-door cost, and who bears it?
A worse view, borne by the customers.
Not yet. The customers are the other side of the deal. They chose the table, and if the view was bad enough they would not have sat there.
A narrower pavement, borne by the people walking past.
Right. They were never part of the coffee deal, and they bear a cost of it every time they step into the road. Nothing in the price of a coffee reaches them.
The cost of the tables, borne by the café.
Not yet. The café chose the tables and paid for them. A cost one side of the deal chooses and pays is inside the deal, like the staff's wages.
Lesson complete
A price counts what buyer and seller pay. A cost landing next door stays outside until a bill is attached.