ABSTRACT
Globalization has meant opening markets worldwide to free trade in goods and services. Cross-border transactions also involve investment, travel, communication, entertainment, insurance, migration and more. However, not all interactions among economic agents go through the market and deal with goods and services. As market interactions increase globally, unintended non-market interactions among economic agents, externalities in economic parlance, increase pari passu. These externalities can be positive or negative or both according to the issues. The goods and services involved in these externalities may be intangible and are then more of the nature of conditions, such as enhanced security. For example, the quasi-universal availability of banking machines improves travel security around the planet but, at the same time, increases the level of global travel, which may have negative environmental effects. Avian flu, a negative externality (it is not transmitted through market transactions), has worldwide relevance; so has the quasi-eradication of smallpox, a positive externality. Economic development increases opportunities while accelerating the burning of fossil fuels and the build-up of the concentration of greenhouse gases in the atmosphere. Many risks increase with globalization. For example, the decline of biodiversity worldwide leaves us more exposed to diseases, whether affecting plants, animals or humans. Security issues, whether financial or environmental health-or conflict-related, are global but cannot be resolved through markets or through markets alone. Neither the costs nor the benefits of externalities are reflected in the prices or profits of market transactions. The speed at which these non-market interactions occur has also greatly increased. We need policies and non-market institutions to complement the markets and manage these externalities issues in a timely fashion through preference-revealing and political bargaining not only for efficiency but also for fairness. If the scale of these externalities can be managed, those affected most by them should have a say in their regulation and provision according to the principle of subsidiarity or of fiscal equivalence. The principle of subsidiarity means that regulations and actions should be implemented at the lowest level of administration possible, presumably closest to the citizens concerned, in other words the stakeholders. The principle of fiscal equivalence says that those who benefit from the externalities should be the ones who contribute the resources needed for their management (Kaul and Mendoza, 2003). Numerous international institutions have been created to handle externalities, including heightened risks. Many more institutions are on their way.
