Economics is tied heavily to chain restaurants. We have the Big Mac index (which is an incredibly accurate estimate of exchange rates) and the Waffle House index (which is used by FEMA to assess how bad a disaster is). So, to turn to the chain restaurants as allegory is almost natural for economists.
Recent headlines about Chick-fil-A and their opposition to gay marriage have brought about calls for boycotts, and defense of the company, but I have not seen a very important word yet, “externalities.” In fact, when I used a search engine to find the string of “Chick-fil-A” and “externalities” together, there was only one result, a blog from CanadianBusiness.com and it has nothing to do with the current cultural topic.
So what is an “externality” – and why does HumanWikipedia think I should know this word?
An externality is an effect of a transaction beyond what happens to the seller and the buyer. Here are a few examples to help understand what happens during a transaction:
- The buyer receives the product and the seller receives payment – these are internalities of the transaction.
- The seller does something special, like refusing to use trans-fat while preparing the food to be sold – this too is an internality, because it affects only the buyer and seller.
- The seller causes pollution, depletes natural resources, or in some other way affects the world, sometimes at no additional cost or as a cost-saving measure – this is an externality because it does not get reflected in the price. Even if it is disclosed to the buyer, the fractional cost of pollution or any other such thing to one person is often misjudged in market transactions to yield inefficient results.
- The seller is likely to re-spend the money in the local economy – this is an externality. The big examples here are Walmart vs local stores or buying American vs foreign products. When you buy from a local company, there are benefits to the customer besides the value of the product, because some of the money they spent will go back into the local economy and increase the wealth of the community.
- The seller donates revenue to outside groups – this is an externality because cost, price, quality, and value of the good do not change, but other effects occur because of the exchange.
This last point is what goes on when buying from Chick-fil-A. They donate a portion of their revenue to various causes, many of which oppose gay marriage. They also donate to many other, much less controversial, causes.
The link earlier defending the company and urging people to not boycott uses some misleading prose:
Should they swear off the legendary chicken sandwiches to support gay rights? Or could they eat one of the filets anyway, knowing their dollars would be but a drop in the bucket for a chain that has more than $4 billion in annual sales and donated a pittance to groups they may disagree with?
Quick, substitute this issue with pollution. Should we stop supporting a company that pollutes when they are just a drop in the bucket of world pollution? Maybe – at least it should be part of our purchasing decision.
I, personally, don’t care what you do about Chick-fil-A or about polluting companies, but disclosure is important. Pollution disclosure is available, but you don’t see a part of every packaging saying “This product cost X pollution units to produce” and a sign at the entrance of every store saying “This store adds, on average, X pollution units per item sold.” You sometimes see that “part of the proceeds of this item will go to support _____” on a package, but you don’t see what exactly those groups do. This was a hot-button topic recently with the ties between Planned Parenthood and The Susan G. Komen Foundation.
If you had been skimming over this article, start reading again here.
If you buy a chicken sandwich, fountain drink and side for $5 from Chick-fil-A, where does that money go? Maybe $1 of it is for the cost of food, labor and overhead. The rest is split between the corporation and the owner of that restaurant – let’s say 50/50, so the company gets $2, which it then uses to pay the executives, stock holders, charitable donations, and other parties. The company had $3.14 billion in revenue in 2009 and donated about $2 million to anti-gay marriage groups through their charitable arm (WinShape) that year. That means about 1/3 of a penny of your $5 meal would have gone to these groups.
Does that affect whether you buy lunch there? Chicken farms cause less pollution per pound of meat than beef farms – would you substitute this chicken sandwich for a hamburger? The point I am trying to get at is consumers should know more about the transactions they make – both the internal and the external forces at work. It is good to know where your money goes after it has been spent and what the true cost of any item is based on your values.