Happy Dolls: A Selection from Jared Diamond’s Upheaval (2019)

“Suppose that you operate a factory that produces a type of doll called Happy Dolls. Suppose that it costs you $20 to make a ton of Happy Dolls, while other dolls cost $30 per ton to make, and that you can sell your Happy Dolls for $60 per ton. That profit margin of $60 minus $20 makes Happy Doll manufacturing very profitable, and lets it outcompete rival doll manufacturers.

Unfortunately, your manufacturing process to make Happy Dolls yields as a by-product lots of black sludge, which isn’t a by-product of the manufacturing processes of rival dolls. You dump the black sludge onto the wheat fields of all of your neighbors, thereby decreasing their wheat production. Every ton of Happy Dolls that you produce costs your neighbors $70 of lost wheat income because of your black sludge.

As a result, your neighbors sue you and insist that you pay them $70 for the lost wheat income caused by each ton of your Happy Dolls. You object to your neighbors’ demand, making many excuses: you deny that Happy Doll manufacturing produces black sludge, although your company’s own scientists have been warning you of that by-product for decades; you say that black sludge hasn’t been proven to be harmful; black sludge has been arising naturally for millions of years; more research is needed before we can judge how much of the black sludge on your neighbors’ fields arises from your Happy Doll manufacturing plant; and Happy Dolls are essential to civilization and our high standard of living, so victims of black sludge should just shut up and stop complaining.

But when the lawsuit goes to trial, the judge and jury say that this case is a no-brainer: of course you have to pay $70 for every ton of your Happy Dolls, in order to compensate your neighbors for their diminished wheat production. The result is that your Happy Dolls have a true cost not of $20 per ton, but of $20 plus $70 = $90 per ton to manufacture. Happy Dolls are no longer a great profit machine: it isn’t economical for you to manufacture them at $90 per ton if you can sell them for only $60 per ton. Now, your competitors’ dolls costing $30 per ton to produce outcompete Happy Dolls, rather than vice versa.

Fossil fuels, like Happy Dolls in our hypothetical example, cause damages as well as yield benefits. The difference is that the CO2 from fossil fuel burning is much less visible than is black sludge; and that fossil fuel producers and users don’t yet have to pay the costs of the harm that they cause to other people, whereas our hypothetical doll manufacturers do. But there is increasing insistence that fossil fuel producers or users should be forced to pay up just like Happy Doll makers, e.g., by a tax on carbon emissions or by another method. That insistence is one factor behind the current search for alternative energy sources other than fossil fuels.”—Jared Diamond, Upheaval: Turning Points for Nations in Crisis (2019)