I have three scenarios for you. Your job is to tell me which one involves imposing an externality (a cost on other people) and which one does not.
- A runs a factory on A's land. A pollutes an unowned piece of neighboring land called X so badly that it is now impossible for anyone to use.
- A runs a factory on A's land. A sees neighboring land X is unowned and so unilaterally grabs it up and becomes its owner. Then A pollutes X so badly that it is now impossible for anyone to use.
- A runs a factory on A's land. A sees neighboring land X is unowned and so unilaterally grabs it up and becomes its owner. A does not proceed to pollute X.
Here's my view. In all three of these cases, everyone who is not A undergoes a cost, namely their ability to potentially access and use X has been extinguished. It makes no difference to non-A people in the world whether A polluted it while it was "unowned", A grabbed it up and then polluted it, or A grabbed it up and did not pollute it. In all cases, the result is the same: that parcel of land has now become unusuable to everyone who is not-A.
More concretely, suppose I wanted to play frisbee on X and suppose the toxic pollution makes that impossible. In all three cases, my ability to play frisbee is gone. A's move in all three cases imposes that cost on me.
Whether you want to call these three scenarios "externalities" or not is ultimately semantical. But for all intents and purposes, A's moves in all three scenarios are doing the same thing to not-A people. The position of not-A people is identically altered in all three scenarios.
The troubling conclusion that people want to avoid is that (3) is the same as (1) in terms of harm imposed on not-A people. But it is.
