The Cost of AI: Not So Hidden Externalities

Recently, AI data centers have been being built up at an astonishing pace across the country, with extreme negative effects, from pollution to residential problems. In three separate cities this summer, residents filed law suits against data centers for the noise pollution. This noise comes from massive industrial fans that are used to keep the memory chips from melting. It emits a constant, low frequency noise that can be heard and felt by neighbors up to a mile away. The subsequent effects are residents complaining of chronic sleep deprivation, headaches, and internal ear pressure. Furthermore, AI data centers build gas-powered power plants to provide energy for these centers. The New York Times reports that these could produce as much pollution as about half of all passenger vehicles in the United States, alongside a report of plants in Pennsylvania that will burn roughly the same as 15-million gasoline cars in one year. These numbers are staggering, and both the environmental and noise pollution have created extreme negative externalities for residents and the globe.

Looking at this from the Coasian perspective, in theory, it is possible for the residents and the data centers to bargain. Some data centers have begun to build in forests, using the trees as a natural sound buffer. But that comes at the cost of deforestation, habitat loss, and other negative environmental factors. The executive for Hyperscale Data has offered to buy homes at property value and provide a subsidy for the cost of moving, but that comes with the effect of uprooting the lives of hundreds to thousands of people. Unfortunately for residents near data centers, AI data centers have the bargaining power. In the 1980s, Reagan disbanded the EPA's Office of Noise Abatement and Control and local regulation is not built to encapsulate the problem of the noise from data centers. This means that it would likely require the residents of these neighborhoods to collaborate and pay the data center to minimize the noise. Getting so many people, though, to agree, would be nearly impossible. As such, the best possible solution would be to get the government to implement certain regulations, either by having a decibel limit or requiring the data centers to internalize the costs by paying out settlements. 

My Dumplings, Your Problem

As college students rushing between classes, jobs, activities, and (hopefully) a social life, we look for time-saving shortcuts wherever we can. The food we eat is one of many examples. While my fridge boasts empty shelf space, closing my freezer requires a skillful maneuver to prevent packs of dumplings from falling out. When the time comes to eat, I routinely select three-minute microwave meals, rather than an hour-long cooking endeavor. My experience mirrors that of many college-age decision-makers, but it also reflects the broader American public's quest for convenience. The CDC found that “During August 2021–August 2023, the mean percentage of total calories consumed from ultra-processed foods (UPFs) among those age 1 year and older was 55.0%.” UPFs have been found to have a causal effect on obesity and are correlated with higher rates of cardiovascular disease, type 2 diabetes, and all-cause mortality. From an individual perspective, my frozen dumpling habit may seem like a simple tradeoff between increased personal convenience and a higher risk for negative health consequences. 

The problem, however, is that I do not bear the full cost of that decision. In America, healthcare costs are shared through private insurance programs, employer health plans, and taxpayer-funded programs, including Medicare and Medicaid. With these redistributive systems in place, some of the medical costs associated with an individual’s diet-related diseases are borne by other people. This is a classic negative externality in consumption, which leads to overconsumption of UPFs in the unregulated market. Of course, I welcome my classmates to engage in Coasian bargaining with me. I am prepared to dramatically reduce my frozen dumpling consumption if someone (or a group of people) would like to provide me with a private chef. Unfortunately, because the healthcare costs of my dumpling consumption are small, extremely dispersed, and unlikely to arise for at least a decade, I have yet to receive a decent offer.

Maybe the government should consider funding a private chef…. But until then I’ll say a little thanks to all you taxpayers when I microwave my dinner tonight.

The Coase Theorem Heats Up

    The air conditioning in my apartment has been broken for the past week, and as outside temperatures reach nearly 100 degrees, this malfunction has created almost unbearable living conditions. As I sit in the sickening heat waiting for the maintenance crew to come, I have begun to reflect on what a bargaining remedy for this may look like in Coase's world. In this instance, my three roommates and I are the victims of harm and MSCUVA is the producer of harm, and luckily for us, property rights are clearly defined. MSCUVA owns the property that we are paying to reside in, and they are therefore liable for upholding the terms of the lease agreement we signed, which includes a functioning air conditioning unit. In addition, as Coase did, I will assume there are no transaction costs for negotiating this matter.

    I know that even though MSCUVA is liable, they should only replace our unit if the marginal social cost of doing so is lower than the marginal social benefit. That is, if my roommates and I would be willing to bear the heat in this apartment for a payment lower than the cost of a new air conditioning unit, we could negotiate to receive payment instead of AC, and that would be the socially efficient outcome. According to my research, a central AC unit costs around $16,000, which would be a maximum payment of $4,000 to each roommate if we chose to negotiate instead. While this is a very large sum of money, my roommates and I value functioning AC (especially in Virginia heat) at a much higher price. This means that the cost of replacing our AC is lower than what we would need to be paid to tolerate no AC (MSC<MSB), so they should go through with our replacement request. To extend the Coase Theorem further, I know the efficient solution does not change based on who has property rights. Though the act of spending $4,000 feels quite scary, as I sit in this heat, I can confidently say that if the liability fell onto my roommates and I, I would spend almost any sum of money to get out of this heat. So again, the marginal social benefit of purchasing a new unit is greater than the marginal social cost, and maintenance should hurry up and get here!!

Mining the Boundary Waters; Rising Externalities

This spring, Congress and President Trump passed a resolution to open the areas around the Boundary Waters for mining. Environmentalists are concerned for the health of the ecosystem, as mining is known to create problems in surrounding areas, and Industrialists are happy that this huge supply of copper is available for the market.

Our discussion of Coase had me thinking about this issue from a liability perspective. It seems like for a long while, the "right" to clean land and water was held by the Environmentalists in the sense that no mining was allowed. Suddenly, the right was taken away and handed to Industrialists. 

Likely, there was, and is, opportunity for bargaining. When Environmentalists had the Right, mining companies coveted it, and probably would have been willing to pay for the right to mine above and beyond traditional production costs. The government deemed this transaction too dangerous to occur and raised the bargaining costs to an impossible level. All this time, solar and other battery needs have increasingly boosted demand for the precious materials in the Boundary Waters so that the amount Industrialists were willing to pay increased, as did the externality that Environmentalists were putting on mining companies. The opportunity cost for the government was also rising, as tax dollars were being left uncollected from copper sales. This demonstrates the reciprocal nature of an externality, and one that eventually became too large to bear.

This Right shifted, and suddenly Environmentalists are in the position of having to bargain to prevent the mining companies from polluting the water, as the mining companies own the right to mine. One can see how this might be a issue, as environmental causes often suffer from a Free Rider problem and thus cannot raise money to bargain to the socially optimal quantity. This is an interesting case on property rights being moved around, and them NOT ending up in the same place as Coase's theorem part II would have, as the government, and Free Rider problems, make transactions impossible.

Keeping the “National” in National Parks

As many will know, our national park system has come under recent threat and repeated attacks from the Trump administration and government officials. Attempts to dismantle the park system have taken many different forms. Most recently, bulldozing began in Big Bend National Park, Texas, to make way for President Trump's long-sought-after border wall. This has since been halted amid ongoing legal battles. At the same time, funding for the National Park Service has been cut and redistributed to other bureaucratic agencies, and the agency has faced significant staffing reductions that threaten its ability to properly maintain and protect the parks under its care. It's not just our national parks facing these threats, but other federally protected lands as well. Notably, in Utah, the protections for two national monuments and sacred Native American lands were removed to pave the way for private development. Other similar actions are being examined in Yosemite National Park and parts of Alaska, to give a few concrete examples. You need not go far to find more.

The motivation behind these latter actions, in particular, is clear: to open up previously protected federal lands to private companies for resource extraction and development. The profit incentive that these swaths of land offer is salivating, and developers are lined up to capitalize on such an unprecedented opportunity. One could argue that while the Trump Administration's actions do indeed present an exceptional opportunity for private profit, they also offer an overall net welfare gain to consumers as well. After all, the resources extracted from these lands would undoubtedly serve to increase supplies of scarce precious metals and minerals, potentially lowering costs and bolstering supply chains starved for resources. I argue, however, that the Trump administration's actions will ultimately result in a net loss in consumer welfare. I strongly believe that the utility consumers derive from our national park system is far greater than the utility a private developer could offer through increased supplies of natural resources like copper or silver. My argument is two fold. On one hand, I believe that the increase in mineral supply caused by these sites would be negligible, with little effect on supply or prices. On the other hand, I'm a firm believer in the less-tangible utility we as consumers derive from our national park system. As Professor Coppock discussed today in class, utility is often misunderstood as being purely monetary in nature. Utility, however, comes from far more than just money. In the case of our national parks, it comes from the natural beauty they have to offer, their vast and rich ecosystems, their carbon sequestration, and much, much more. Utility and welfare are more than money and more than profit. As such, we ought to protect our national parks to preserve the vast amounts of utility they offer.

For Crying Out Loud, Another Roller Coaster?

At Universal Studios Hollywood, a new, state of the art roller coaster has just finished construction. While the roller coaster has created a lot of hype for the amusement park, the screams generated from the ride are impacting how neighbors can use their property: a classic externality. As stated in Coase, however, there is a reciprocal nature to the problem. The reduction in sound will impose costs on Universal just as the current screams impose costs on the neighbors. In an attempt to internalize these costs, developers tried to reduce noise by installing “scream screens,” facing the cart away from private residences, and installing a 940-foot sound wall, but these efforts were still not enough to reduce the bloodcurdling screams from impacting neighbors.

When attempting to estimate the actual costs these screams are imposing on neighbors, the housing market of the surrounding area can be a good place to start. If these screams are inhibiting the use of this expensive property, the value of these homes could decrease, a cost that Universal does not bear. Correspondingly, there are other costs that are harder to measure numerically, like impeding on homeowners' ability to concentrate, which can be crucial as seen in Sturges v. Bridgman. On the other hand, if Universal had to drastically alter the ride, there could be lost revenue and angry consumers. It is also important to consider that the estimated $200 million dollar construction budget includes some of the sound prevention methods already considered, indicating that the sound technology is expensive and not a trivial cost.

From a Coasian perspective, Universal Studios Hollywood and the surrounding neighbors could attempt to resolve the issue privately. This could be done by Universal compensating the surrounding neighbors for the loss of home value, or the neighbors could pay Universal to shut down the roller coaster. In both situations, the number of parties creates issues and drives up transaction costs. If the neighbors agree to pay, there will inevitably be free riders who did not pay, but enjoy the quiet, and if Universal pays, there could be a holdout problem. Therefore, it is likely that government intervention will be required, unless Universal internalizes all of the screams independently.