Rational Management Responses to External Effects

Abstract

This paper is a discussion of the external or side effects of business and rational responses to these external effects for profit-maximizing firms. Some people would argue that the rational response for the profit-maximizing firm is to do nothing about its external effects until required by law; whereas others, as we in this paper, argue that the rational response for the profit-maximizing firm is to take some action. The first section of the paper deals with the meaning of externalities, of which pollution is a fundamental type, and the phases of a solution to such problems. In the second section, the paper deals with rational responses for the profit-maximizing firm regarding its externalities, in which many aspects of the popular arguments against the rationality and the practicability of independent corrective action by a firm are examined.