By Request: Externalities
By Art Carden
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.”