Are Externalities an Intellectually Sound Bridge Between Us and Them?
When Princeton’s Roland Benabou visited GMU a couple weeks ago, he made an argument I’ve occasionally heard before: Non-economists would disagree with economists less, and respect our views more, if we put more emphasis on the concept of externalities. When economists talk about markets, the argument goes, we usually seem tone deaf to non-economists’ concerns. If we put more emphasis on the concept of externalities, non-economists could see that it is easy to translate their concerns into our language – and that we have every reason to take their concerns seriously.
As a rhetorical strategy, Benabou’s probably right. Non-economists are much more anti-market than economists. If we told them that the economic way of thinking is consistent with (or better yet, justifies!) their anti-market prejudices, we’d be more popular.
But is this an intellectually sound way to bridge the divide between economists and non-economists? I think not. If we explain the concept of externalities properly, non-economists will continue to give us the cold shoulder. Here’s why.
1. The concept of externalities relies entirely on economists’ standard notion of willingness to pay. If people are willing to pay to preserve a rare species of monkey, there may be an externality. If no one cares, there’s no externality. The upshot is that the concept continues to slight non-economists’ concerns about fairness, intrinsic value, equality, etc.
2. If an externality exists, the economically efficient solution is normally a tax or subsidy. That’s it. But non-economists are usually looking for an excuse for government to ban or nationalize. At minimum, non-economists want to use hands-on regulation – not just add a tax and say “OK, problem solved.”
Someone who uses an externalities argument to justify e.g. existing (or stricter!) EPA regulation doesn’t really understand the argument.
3. The concept of externalities focuses on non-excludable costs and benefits. The upshot is that we can go down the list of e.g. environmentalist causes and pick out a major subset that probably don’t qualify as externalities problems. Recycling? If people are paid the market value of what they recycle, it’s hard to see the externality. National parks? If user fees can’t sustain them, you have to fall back on a lame “existence value externality” story.
4. Most fundamentally, externalities can afflict any social institution – markets, governments, non-profits, etc. So there’s nothing inherently anti-market about the concept. You can use externalities arguments to complain about auto emissions. But you can just as easily use the concept to complain about voter irrationality. If the externalities of government decision-making are severe enough, externalities provide an efficiency argument for living with market failure rather than doing something about it.
Bottom line: If economists are upfront about all of this – and we should be – the concept of externalities is not going to make us many friends. Economics has a lot of unpalatable lessons to teach. Our job is to teach them nonetheless.