The Naval Podcast – Externalities: Calculating the Hidden Costs of Products

Check out Naval’s Episode Page & Show Notes

This podcast clip is part of a conversation between Naval Ravikant and Babak Nivi. Unless otherwise noted, quotes are from Naval. For reference, check out Naval’s famous How to Get Rich tweet storm.

Key Takeaways

• An externality is an additional cost imposed by whatever product is being produced or consumed that is not accounted for in the price of the product
  • This cost then be thrown back into the price. For example:
    • If people are polluting the environment, perhaps they should be charged for what it costs to clean up the pollution and return the environment to a pristine state
    • If the price is high enough, pollution will stop
• Compare the above to encouraging people not to take showers during a drought or banning plastic bags
  • It’d be much better to raise the price of fresh water – the average consumer would pay pennies more, but the almond farmers (who consume tons of water) would cut back severely
  • “Properly pricing externalities can save resources in a tremendous way. It’s a good framework to use when you want to do things like save the environment, rather than doing feel-good things that won’t actually amount to anything.”