A Range of Solutions for Addressing Negative Externalities

A new study finds close to 13% of childhood asthma is caused by the use of gas stoves. There are a couple of ways policymakers can address negative consumption externalities.

By now you’ve likely seen a summary of the recent study on the negative health impacts of gas stoves and the sudden onslaught of people protective of their favorite cooking appliance. A paper published in the International Journal of Environmental Research and Public Health estimates that emissions from gas stoves are responsible for approximately 12.7% of childhood asthma in the United States. There has been some criticism of the empirical methods used in this study, however, multiple prior studies have linked gas stove emissions with health issues. A meta-analysis in 2013 looking at 41 previously published papers found gas stove ownership increases asthma rates by about 30%.

Despite the potential negative impact on people’s health, gas stoves are still a popular choice for many Americans. Across the U.S., nearly 4-in-10 homes own a gas stove, but that rate varies dramatically across the country. While there are benefits to cooking with gas, people may not be fully informed about the external costs. Popular examples of negative externalities focus on external costs related to the production of a good, like pollution coming from a factory. The external costs associated with gas stoves, however, represent a negative consumption externality.

Negative externalities, both the consumption and production kind, exist when the social cost of the item is not internalized by the consumer and/or producer. When this happens, the market price won't reflect those additional costs either. In the case of negative production externalities, the social cost of producing one more item is greater than the private cost of producing that additional item. Since firms don’t factor in the additional social cost, they produce more than the socially optimal amount.

A negative consumption externality, on the other hand, exists when a cost is imposed on a third party as the result of an individual’s consumption of a good or service. The personal benefits overstate the social benefits since people aren’t considering the cost imposed on others. The net benefit to society is lower than people realize, and people will consume “too much” of an item because they don’t fully internalize those external costs. Some of the common examples of negative consumption externalities include the health risks associated with smoking or fast food.

The negative health (and environmental) impacts of gas stoves aren’t new, but the most recent study reintroduces the challenges policymakers face when determining the best way to address externalities. The optimal outcome is typically not to eliminate the externality-generating activity, but rather to reduce the amount of activity to a point that recognizes the social cost the activity creates. Individuals may be able to solve small-scale externality issues on their own without government intervention, but whenever a lot of people are involved, or when negotiations could be costly, government intervention may be necessary.

There are a variety of popular textbook remedies for negative externalities, all with varying levels of government involvement. The most authoritarian approach, and the one that people have feared the most, is a nationwide ban on the purchase of gas stoves. This policy is unlikely to be adopted. While there are costs associated with the use of gas stoves, people also receive benefits from their use. The goal of effective policy is to reduce the activity generating the externality, not eliminate it. Realistically, regulators may instead propose some other requirements that mitigate the health effects of gas stove usage like more powerful air vents or emissions monitoring devices.

A more likely policy would be the implementation of a special tax on the purchase of gas stoves. Ideally, that tax would be equivalent to the additional social cost imposed by gas stoves. This would increase the final price of gas stoves toward a price that accounts for both the cost of production and the added health cost imposed on society. This new tax would reduce the demand for gas stoves and move us closer to the socially optimal level. These particular taxes are known as Pigouvian taxes, named after the British economist Arthur Pigou. This policy would allow people to continue buying gas stoves, but only if their benefit is larger than the social cost of the stove. That new tax revenue can then be recirculated toward other policy objectives, like funding for safer alternatives.

A third policy option incentivizes consumers to purchase an electric stove instead of a gas stove. This option was actually introduced last year under the Inflation Reduction Act and provided households with up to an $840 tax credit if they purchase a new electric stove. This approach indirectly targets the externality by subsidizing the cost of alternative appliances for households. This policy should, theoretically, increase demand for electric stoves and decrease demand for gas stoves. It produces the same outcome as applying a Pigouvian tax to gas stoves and may be more palatable to voters. The main issue is that it requires funding.

Realistically, there is no single solution to this issue that would satisfy everyone. At the end of it all, policymakers will be faced with a value judgment on which approach (or combination of approaches) generates an outcome closest to the socially optimal one. We may very well see some combination of the three policies used.

We may see a ban on the installation of gas stoves in rental units or stricter ventilation requirements when gas stoves are installed. A smaller tax could be imposed on the sale of new gas stoves, which would then fund the tax credits for people purchasing new electric stoves. Since the issues with gas stoves aren’t exactly breaking news (despite what some politicians would have you believe), it's also likely that there are no significant changes beyond what administration is satisfied with the subsidies provided in the Inflation Reduction Act.

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• Approximately 25 million people in the U.S. have asthma. This is equivalent to about 1 in 13 people [U.S. Centers for Disease Control and Prevention]

• An estimated 2% of households have no stovetop cooking ability at all [People’s Policy Project]

• The majority of U.S. households (89%) have a cooktop attached to an oven [U.S. Energy Information Agency]

• Of the people who would not consider purchasing an electric stove, 50% of respondents noted that they had used an electric stove in the past and it did not work as well as gas alternatives [Morning Consult]