- 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.
Yes. I think that is correct. I think the property rights approach identified with the UCLA school would emphasize that the sort of problems typically characterized as "social cost" really refer to scenarios in which property rights are violated or property rights are absent.
But I think that just sends the question one step farther down the chain. The UCLA school argument about property rights is that their creation is a means to internalize externalities and allow control. But when should we create property rights, or, to be more positivistic, when do we? I think then we get the Coasian argument, that I think you've written about, that any externality really has to be defined by the what sort of social optimum we're trying to get to and what sort of mechanism could best achieve that. I think alot about the "ancient lights doctrine" in England, where any land had a right to unfettered light, and someone else building next to it would be infringing that right. In the Coasian sense that's definitely a production externality on the other house that can no longer build, but of course it's also a clear externality on the person whose land is in shadow if there was a new building. Or think of traffic even in a privately owned-toll lane (but without HOT tolls). That's more like the candy-bar example, a rivalorous use of private goods, but most economists also define someone's contribution to traffic as an externality, and the goal of HOT lanes is to help internalize that. I think in the end we have to have a very loose definition of externality, as something that imposes social costs, and where the transaction costs to internalize those among private parties are too high, but where there is an alternative mechanism that could internalize them. The "harm" of the externality has to be defined by its potential policy "remedy," because, otherwise, we could appropriately define everything as externalities. It's the same argument we've had about Mill's harm principle for ages, basically, any "harm" to others has to be defined by what policy can do to prevent it, and if the costs of the prevention are too high relative to the benefits. Otherwise, the number of harms we cause the world daily are almost infinite.
The candy bar is just an example of rivalry in consumption. Ford's entry into the electric car market and bitcoin mining's entry into the electricity market have general equilibrium effects in the sense that they affect relative prices of inputs and therefore the allocation of those inputs.
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.
I think that this illustrates another issue that I left unaddressed. Textbook examples tend to focus on the production side. I think the reason is that externalities on the production side seem to be things that fit fairly intuitively with the textbook definition. Pollution is an obvious example. On the consumption side, this whole idea of social cost gets a lot murkier.
I agree textbooks focus on production. Stigler only talks about production external economies. But is that just because we fall into thinking production is more objective?
There seem to be two approaches to thinking about externalities: the property rights approach and the technological/pecuniary distinction.
In both cases, I think production examples are easier to apply. For example, use the factory-fishery example. It is easy to start with "who owns the rights to the river and why does this matter?"
The technological/pecuniary distinction is difficult to apply to consumption, in my opinion, although people like Sobel have tried to do it.
- 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.
Yes. I think that is correct. I think the property rights approach identified with the UCLA school would emphasize that the sort of problems typically characterized as "social cost" really refer to scenarios in which property rights are violated or property rights are absent.
But I think that just sends the question one step farther down the chain. The UCLA school argument about property rights is that their creation is a means to internalize externalities and allow control. But when should we create property rights, or, to be more positivistic, when do we? I think then we get the Coasian argument, that I think you've written about, that any externality really has to be defined by the what sort of social optimum we're trying to get to and what sort of mechanism could best achieve that. I think alot about the "ancient lights doctrine" in England, where any land had a right to unfettered light, and someone else building next to it would be infringing that right. In the Coasian sense that's definitely a production externality on the other house that can no longer build, but of course it's also a clear externality on the person whose land is in shadow if there was a new building. Or think of traffic even in a privately owned-toll lane (but without HOT tolls). That's more like the candy-bar example, a rivalorous use of private goods, but most economists also define someone's contribution to traffic as an externality, and the goal of HOT lanes is to help internalize that. I think in the end we have to have a very loose definition of externality, as something that imposes social costs, and where the transaction costs to internalize those among private parties are too high, but where there is an alternative mechanism that could internalize them. The "harm" of the externality has to be defined by its potential policy "remedy," because, otherwise, we could appropriately define everything as externalities. It's the same argument we've had about Mill's harm principle for ages, basically, any "harm" to others has to be defined by what policy can do to prevent it, and if the costs of the prevention are too high relative to the benefits. Otherwise, the number of harms we cause the world daily are almost infinite.
So for clarification on my part; the first second and third examples listed are not “externalities” but are actually under the “general equilibrium.”
The candy bar is just an example of rivalry in consumption. Ford's entry into the electric car market and bitcoin mining's entry into the electricity market have general equilibrium effects in the sense that they affect relative prices of inputs and therefore the allocation of those inputs.
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.
I think that this illustrates another issue that I left unaddressed. Textbook examples tend to focus on the production side. I think the reason is that externalities on the production side seem to be things that fit fairly intuitively with the textbook definition. Pollution is an obvious example. On the consumption side, this whole idea of social cost gets a lot murkier.
I agree textbooks focus on production. Stigler only talks about production external economies. But is that just because we fall into thinking production is more objective?
There seem to be two approaches to thinking about externalities: the property rights approach and the technological/pecuniary distinction.
In both cases, I think production examples are easier to apply. For example, use the factory-fishery example. It is easy to start with "who owns the rights to the river and why does this matter?"
The technological/pecuniary distinction is difficult to apply to consumption, in my opinion, although people like Sobel have tried to do it.
*In this example. Obviously... there may be other hypotheticals where equilibrium outcomes leave us with externalities.