Art Carden  

By Request: Externalities

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J Scheppers asks:

From different perspectives many different external economic impacts could be reported. Is there a way to determine which reference frames are most effective in determining possible economic efficiency?

ThomasH asks, in a similar vein:

Policy in light of estimates of harm from CO2 accumulation. (If you think the evidence is now weak, in case it became stronger.)

Collective consumption, e.g government funding for space exploration if no material or economic benefits could be argued.

As I recall Douglass North saying about a zillion times when I was in grad school, we live in a world of "ubiquitous externalities." It doesn't follow that we need ubiquitous violent intervention to correct them as there are obvious Coasean solutions, but beyond this we need to think harder about how we analyze and teach externalities. Consider, for example, Buchanan and Stubblebine's classic-but-still-underappreciated article "Externality" as well as Elinor Ostrom's body of work on how societies develop institutions to provide public goods and deal with externalities.

Schepper makes a very important point because not all externalities go in one direction, and this gets ignored in a lot of policy discussions. I like seeing billboards and things like that when I'm on the highway, and I think there's a certain beauty to an industrial landscape or gouged-out quarry. Do my preferences count? If not, why not?

John Nye's excellent article "The Pigou Problem" offers an excellent discussion of some of the problems with the way we think about externalities, especially in proposals for Pigovian taxes. As Nye points out, due to a lot of other things going on, simply knowing the marginal external cost doesn't tell us the right tax.

Thomas asks about climate change. I'm with David Friedman in that I don't see why we should think global warming is self-evidently bad. I also don't think we know enough about it yet to make good policy, particularly given the massive possibilities for rent-seeking, corruption, and other bad things inherent in establishing an international anti-climate change authority. I discussed this earlier this year. If there's one policy change I would look to make right now, it would be "look for ways in which we're subsidizing meat consumption, and stop doing those things."


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COMMENTS (7 to date)
jeff writes:

I like seeing billboards and things like that when I'm on the highway, and I think there's a certain beauty to an industrial landscape or gouged-out quarry. Do my preferences count? If not, why not?

The Linden Cogeneration Plant looks kinda cool, especially at night

Sieben writes:

Stop subsidizing meat consumption?

Not that I'm in favor of anything being subsidized, but a far better idea seems to be to put people who are actually fit in charge of national health. It seems like they have a personal drive to figure out a good nutrition strategy.

No offense to all you "not-that-fat" people...

Tom West writes:

I'm with David Friedman in that I don't see why we should think global warming is self-evidently bad.

The main problem is that the winners and the losers are likely to be highly geographically separated and there is no chance that the losers will be meaningfully compensated, especially since many of the effects may well be hidden in increased wars/famine/etc. caused by resource/population pressures that is exacerbated by GW.

North America is pretty much isolated from the worst possible effects of global warming, so our incentive to do anything meaningful is pretty much nil. Worst case our standard of living drops.

If one wanted to actually give North America some skin in the game, someone could give a bunch of long range nuclear weapons to a bunch of semi-stable nations of the sort that might just be pushed over the edge by global warming.

Faced with, say, a few percent chance of annihilation if we happen to guess wrong about the effects of global warming (something that somewhat mirrors the threat of much of the less developed world now), I suspect North Americans would be willing to spend a quite a lot to mitigate the effects.

Let's face it, almost no-one is going to do anything meaningful with AGW unless they're facing an existential threat. North America isn't. Case closed.

Rob writes:
If there's one policy change I would look to make right now, it would be "look for ways in which we're subsidizing meat consumption, and stop doing those things."

Perhaps more economists should emphasize this. If it comes from the "dismal scientists", who are not easily accused of sentimentality, it may be taken more seriously than if it only comes from Greenpeace and Peta.

AS writes:
Not that I'm in favor of anything being subsidized, but a far better idea seems to be to put people who are actually fit in charge of national health. It seems like they have a personal drive to figure out a good nutrition strategy.

Why should anyone be "in charge"?

Nathan W writes:

A few years before she won the Nobel Prize, the director of the economics department where I was studing at handed me a collection of her (Ostrom's) works, and this served as my starting point for non-self directed research on my thesis. The variety of social and historical situations that she manages to model effectively and also to make relevant by analogy to other issues is mind opening, to say the least. None of her modelling structures should be too difficult to understand if you've taken second year economics, given that there is no final exam where you have to regurgitate every detail.

But I don't think her works touch on much of anything useful for capture in a policy context of a democratic country, aside from good structures to work towards describing the size of the gains which nefarious types could potentially wish to monopolize.

Levi Russell writes:

"If there's one policy change I would look to make right now, it would be 'look for ways in which we're subsidizing meat consumption, and stop doing those things.'"

This seems like a strange thing to say. At the very least, the "My Plate" campaign and anti-animal-fat presumptions of the CDC have likely pushed people to less beef/pork consumption than there otherwise would be. I suppose the beef and pork checkoff programs could be considered consumption subsidies (given that you think the marketing is effective), but I seriously doubt they're more effective than 3 decades of the "food guide pyramid" and similar endeavors to limit meat consumption.

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