You are reading Economic Forces, a free weekly newsletter on economics, especially price theory, without the politics. You can support our newsletter by signing up here: People love talking about externalities and appealing to externality-type arguments. However, I think that sometimes people confuse what we might call general equilibrium effects with externalities. Sometimes these general equilibrium effects are referred to as “pecuniary externalities”, which might further exacerbates the confusion.
- Pollution not only harms the fisheries downstream, it harms a lot more and many more. Sometime in the future the continuing pollution will have more effects and a clean-up wil bee needed. Those are complicated and expensive. Containing pollution at the source is usually the best and - in the long run - cheapest way. Co.'s should not be allowed to choose the for them cheapest option (pumping out polluted discharge) because that usually means more costs for the tax payers (and often lasting environmental damage).
- Maybe people would not mind to pay it bit more if the co. in question produced cancer meds instead of bitcoin. Also, paying more for something its not possible for everyone, see the examples of people not heating/cooling their habitat and dropping dead as a result.
- Someone buying a last piece of candy is of course a non-issue. Buy what if it was an OTC med that someone really needed as he/she had run out (think allergy meds/D), and the previous buyer still had some ?
Property rights clarifies. You do not have property rights over a chocolate bar in a shop until you have bought it. You do not have property rights for things you might like to buy to continue to be available.
So for clarification on my part; the first second and third examples listed are not “externalities” but are actually under the “general equilibrium.”
Josh: Perhaps definition is even narrower than that. It's not *just* that the utility or production function is "influenced." But that effect has to be strong enough to generate a dissatisfaction that either party would be willing, via action, to remove. Someone with body odor may sit next to me in class. The cost of moving is low. I therefore get up and move (pay the price) to escape the externality.
Someone who smells sits next to me on a plane.... the cost of moving is basically prohibitive. Therefore, I'm stuck with the element that is a negative variable in my utility function. But I can't move seats. So I either tolerate it or get off the plane. This is just another way of stating the Coase Theorem. But how are either of these "external costs" inefficient in an allocative sense? They aren't. Therefore, in equilibrium, there is no "externality." At least not a pareto-relevant externality.