Art Carden  

Look Out the Window, or, Stop and Smell the Bacon

Another Inflation Bet... Age and Common Sense...

Ronald Coase famously advised economists to "look out the window" every so often. It's advice I (try to) take to heart. Here's an example. On Monday afternoon, I was standing behind our building waiting for a few people and "enjoying" the smell of the dumpsters behind the cafeteria next door. An obvious externality that calls for a Pigovian solution if a Coasean solution is unavailable, right?

Not obviously. I can't dig up the cite at the moment, but I recall David Friedman being insistent about making sure the accounting is complete. It's probably rare that an activity produces only positive or only negative externalities. While walking from my car to my office, I noticed something else: the air smelled like bacon. The negative externality of the dumpster smell has to be balanced against the positive externality of the bacon smell. Perhaps that's the implicit Coasean bargain: put up with a slight stench if the wind's right and you're standing right behind your building in the afternoon, and you'll get the pleasant smell of tasty bacon in the morning.

The upshot for public policy is this: we can't make policy designed to fix externalities without taking all the relevant externalities into consideration. For more, here's John Nye's essay in Regulation on "The Pigou Problem." And, while Googling David Friedman and externalities, I was reminded that the Concise Encyclopedia of Economics article on externalities was written by none other than our very own Bryan Caplan.

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COMMENTS (7 to date)

Apparently, not everyone considers the smell of bacon a positive externality.

SF Bacon Restaurant Must Close Due to Aroma of Bacon

David Friedman writes:

I have made the point you mention in a number of blog posts dealing with global warming, for instance this one. It originally struck me, more than forty years ago, in the context of population issues, and was reflected in a piece I wrote then for the Population Council.

I discussed the general problem in a talk I gave at Oxford earlier this year.

Krishnan writes:

Re: Fritzinger - good point - Not every smell that many may consider "positive" is positive - then again, this is coming out of SF/City ... I imagine somewhere, someone will object to some smell ...

Jim Rose writes:

did the smell of bacon make others feel hungry and buy at the shop rather than elsewhere?

jc writes:

Re: Krishnan

And not every smell that many consider "negative" is negative (or at least not *as* negative as some think), e.g., the U.S. Army's failed attempt at creating a non-lethal stink bomb based on a smell they assumed would be universally repugnant (but wasn't). At the end of the day, the "official U.S. Army issue latrine scent" that armed these bombs didn't generalize to as many contexts as they hoped. :)

(Is this story apocryphal? I don't know. It does still make a point.)

Nick Bormann writes:

I think a serious answer to this would depend on measuring the timespan experiencing dumpster smells (which, aside, would be present whether the restaurant served bacon or not) versus the enjoyment of smelling bacon.

Really, it seems like Dr. Carden is falling victim to a twisted variant of the nirvana fallacy: I like bacon but not garbage, so I compare with a restaurant that made only bacon, no garbage.

jc writes:

Re: Art

A bit off topic, but since we're speaking about regulation...

I seem to remember North being fairly contemptuous of libertarianism, laissez-faire, and assumptions of rationally self-interested actors (including politicians in Public Choice arenas). If my recollection is accurate:

(A) Does he equate laissez-faire with anarcho-capitalism or forms of governance where government laws, regulations, and muscle do not specify and enforce property rights? (With him thinking nobody else can effectively do this but government?)

(B) Is his primary beef with, say, public choice (or neoclassical econ in general) the failure to inject ideology into (in McCloskey's vernacular) the decision making heuristics of Max U? In other words, yes, people are self interested (e.g., they logically wish to reduce transaction costs and extract rents), but there is also a cultural component, i.e., Mokyr's right to emphasize the power of ideas.

I've always gotten the impression that North is more libertarian than your average American, but would hate to admit this (perhaps his Marxist roots bubble up to the surface from time to time and he goes back and forth). Sometimes, though, I wonder if I've gotten him all wrong...

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