The textbook notion of externalities is expansive. Potentially totalitarian, in fact. Suppose, for example, that you dislike seeing Bahais. The very fact that you have these bigoted feelings instantly implies that Bahais “impose a negative externality” on you purely by appearing in your field of view.
Indeed, an anti-Bahai zealot could dislike the very existence of Bahais. If so, this implies that Bahais “impose a negative externality” merely by being in the world. If you think this is an absurd overextension of the concept, the notion of “existence externalities” is already well-established in environmental econ. If you despoil the natural beauty of Alaska with an oil pipeline, you don’t just impose negative externalities on those who see the pipeline. You impose negative externalities on everyone who dislikes the idea of marring Alaska’s natural beauty.
While the concept of externalities is potentially totalitarian, it need not be so in practice. It all depends on how strongly human beings refuse to mind their own business. Someone might say “I can’t stand Bahais,” yet be quite tolerant in practice. Actions speak louder than words, as I keep insisting. If a self-identified Bahai-hater willingly shops in a Bahai-owned store in order to save 2% on his grocery bill, we discover that his negative externality is actually minimal.
In the past, I’ve invoked the “actions speak louder than words” maxim to dismiss a wide range of popular complaints. If you really hated Los Angeles, you’d move to another city. If you really hated the cultural effects of immigration, you’d move to a low-immigration area of the country. Yes, a few people actually do move. Perhaps the negative externalities they endure are as bad as they state. Yet the rest of the complainers are clearly exaggerating.
Suppose, however, that a person demonstrably pays a large premium to avoid Bahais. The first month, he shells out $200 on Bahai-avoidance. Even so, it is premature to declare that he’ll pay $2400 to avoid Bahais for a full year. Why? Because of hedonic adaptation; or in laymen’s terms, because people get used to stuff. In the real world, that which initially horrifies you tends to gradually loses its sting. So even if seeing Bahais inflicts a $200 negative externality the first month, that could easily fall to $100 by the third month, $50 by the sixth month, and $5 by the twelfth month.
Hedonic adaptation is especially likely if the negative externality is inert, and almost certain if the negative externality is unobserved. If Bahais actually do something bad to you day after day, you might resent them day after day. If, however, the Bahais are just doing their own thing, even an anti-Bahai bigot will struggle to maintain his ire as he walks past. And if the anti-Bahai bigot doesn’t personally encounter any Bahais, maintaining his outrage at their very existence is nigh-impossible. Out of sight, out of mind.
Real-world example: When I was young, many people vocally expressed antipathy for gays. In fact, people presumed that everyone who wasn’t gay would share their antipathy. In this social environment, coming out of the closet created negative externalities. As more and more people came out of the closet, however, the strength of the antipathy eroded. People gradually got used to being around gays. As a result, the negative externality gradually went away.
Nowadays, I bet that even self-conscious homophobes feel less aversion to gays than the average person in 1982. When you encounter gays all the time, you get accustomed to them – and the antipathy evaporates. The last forty years effectively gave the country’s homophobes a heavy dose of exposure therapy. As usual, the exposure therapy worked.
Does this mean that we can ignore all negative externalities because we’ll “just get used to them”? No, that’s too strong. What it means is that before taking expensive (and intrusive!) efforts to mitigate externalities, we can and should ask, “Is this the kind of externality people will get used to if we do nothing?”
READER COMMENTS
robc
Feb 17 2022 at 10:56am
My theory on the four steps to fixing externalities.
First, coasean bargaining. You can pay the Bahai to stay away from you. Or the lower cost solution may be to move to a low Bahai population area. This won’t always work for all externalities, but it is the first thing to try.
Second, do nothing. Hedonic adaptation works. Not always, but in many cases, as Bryan makes clear.
The nice things about the first two steps is they are totally free for anyone to use. No government involvement.
Three, pigovian taxation. Anyone who jumps directly to this is a short-sited simpleton. There are so many problems with figuring out how to do this right that doing nothing is clearly superior in most cases.
Four, regulation. Duh. Its last for a reason. If and only if the other three cannot solve the issue, then regulation may be needed.
Philo
Feb 17 2022 at 12:27pm
By definition, wise regulation would always work; and, if it would do a lot of good, compared with laissez-faire, it might be “needed” (a term that seems too strong if it would do only a little good). But unwise regulation would be not good, but bad. So: strictly speaking, what is needed is never regulation but wise regulation (or none at all). And when we get regulation, how often is it wise? I regard wise regulation as mostly a sort of theoretical curiosity, like Maxwell’s Demon.
Jose Pablo
Feb 17 2022 at 4:01pm
“Wise regulation” is very much like “honest politicians” (maybe both are related after all): a lot of people is hopping they exist but nobody has really saw them ever.
Coase had a very interesting “position”on this topic:
(From an interview to Reason. Emphasis mine)
Coase: (…) I don’t reject any policy without considering what its results are. If someone says there’s going to be regulation, I don’t say that regulation will be bad. Let’s see. What we discover is that most regulation does produce, or has produced in recent times, a worse result. But I wouldn’t like to say that all regulation would have this effect because one can think of circumstances in which it doesn’t.
Reason: Can you give us an example of what you consider to be a good regulation and then an example of what you consider to be a not-so-good regulation?
Coase: This is a very interesting question because one can’t give an answer to it. When I was editor of The Journal of Law and Economics, we published a whole series of studies of regulation and its effects. Almost all the studies–perhaps all the studies–suggested that the results of regulation had been bad, that the prices were higher, that the product was worse adapted to the needs of consumers, than it otherwise would have been. I was not willing to accept the view that all regulation was bound to produce these results. Therefore, what was my explanation for the results we had? I argued that the most probable explanation was that the government now operates on such a massive scale that it had reached the stage of what economists call negative marginal returns. Anything additional it does, it messes up.
The whole interview
https://reason.com/1997/01/01/looking-for-results/
robc
Feb 17 2022 at 4:48pm
I have always thought that Coase was studying it too late. We are deep into the diminishing returns portion of regulations. Past the peak where any additional regulations are necessarily negative.
If he could go back and study regulations in 1780 instead of 1980, he could have probably picked out the good from the bad, although that might have even been too late.
Jose Pablo
Feb 17 2022 at 5:05pm
Interesting point Robc. The Founding Fathers would have agreed with you.
According to Scaglia they “designed” the “Government” (as in “a bunch of different “bodies” elected in diverse ways and with different mandates and veto powers”) to prevent, to the maximum possible extent, the enacting of additional regulation … and it was 1789!!
https://www.youtube.com/watch?v=Ggz_gd–UO0
What a failure they were on this regard!!!
Jose Pablo
Feb 17 2022 at 4:13pm
I fully agree on the first two. As you suggest unfortunately coasean bargaining requires a clear assignment of rights and non-frictional markets and this can be tricky.
I don’t see the difference between Pigouvian taxes and regulation since Pigouvian taxes are, in fact, a form of regulation. The idea that it is a kind of “market friendly regulation” is totally nonsense. It is mainly a political solution, shaped by political considerations and driven by politicians. “Markets” are an afterthought in its design (in practice, not in the blackboard).
It could work if the people priced out of the “Pigouvianly taxed” goods or services are a disenfranchised minority with very limited political cloud (like heavy drinkers or smokers) but can never be used successfully to price out of the “Pigouvianly taxed” goods a majority of voters. If you try to use Pigouvian taxes for that, the fact that it is mainly “politically driven regulation” will become very clear very soon.
Alabamian
Feb 17 2022 at 1:47pm
Is this the same Prof. Caplan?
But if you require everyone to wear masks all the time, you impose a large negative externality on all ten young workers.
I also seem to remember the argument being made that masking represented an incalculably large externality because it means we can’t see people’s expressions. . .
To be clear, I agree that it is too easy to give an argument a false patina of rigor by shoehorning your desired outcomes into a utilitarian calculation with a term labelled “Really ‘Large’ Externalities.” And that should caution us from believing that utilitarian calculations are in some way special or necessarily more rigorous. But I do find it curious to see when and how those vagaries are used and by whom.
Andrew_FL
Feb 17 2022 at 1:47pm
Which part of the country are you supposed to move to if you don’t like the way immigrants vote
Thomas Lee Hutcheson
Feb 17 2022 at 9:16pm
Florida? South Texas?
Andrew_FL
Feb 19 2022 at 4:30pm
We have a national government
Jon Murphy
Feb 20 2022 at 9:53am
Thomas: given the high share of immigrants both those places have, I’m not sure they would be good to move to
Jon Murphy
Feb 20 2022 at 7:54am
If you don’t like the way a certain group votes, you need to move somewhere where there is no voting whatsoever.
Jose Pablo
Feb 21 2022 at 10:12am
Or even better, to a place where your “vote” on any “political” decision has a veto right attached to it.
Jon Murphy
Feb 21 2022 at 6:42pm
Does any such place exist?
Jose Pablo
Feb 22 2022 at 9:41am
Not yet.
Same way that not such place in which all men were created equal and had the unalienable rights of Life, Liberty and the pursuit of Happiness, existed before 1776
… I hope
Thomas Lee Hutcheson
Feb 17 2022 at 9:24pm
Of course we will “get used to” the effects of increasing CO2 in the atmosphere with all sorts of adaptions to the fires floods, windstorms that are already baked into the next decades. These are the costs of past CO2 increases. The question is what set of cost-effective measures should we take to reduce future net CO2 emissions.
Jose Pablo
Feb 19 2022 at 6:19pm
That is a brutal oversimplification.
The questions are:
1.- How do we know how much CO2 is being emitted
https://e360.yale.edu/features/paris-conundrum-how-to-know-how-much-carbon-is-being-emitted
answer: we have no clue
2.- What’s the effect of CO2 emissions on temperature increase?
We have models with orders of magnitude (like in we are not sure whether it is one or ten) when it comes to answering this question
3.- What’s the effect of temperature increase in our quality of live?
Apart from knowing that we will be saving some money on heating and expending some more money on AC, what is the effect of increasing temperatures in the way we live? We do not even have a reliable model on this.
4.- What are the sacrifices we (INDIVIDUALLY) are willing to take to reduce CO2 emission (an output we do not know how to measure, that we don’t know what effect it has on temperature increases, temperature increases we don’t know what effect it has on our day-to-day life)
[If my anecdotal experiences with my very environmentally conscious kids is of any help, they are not even willing to switch off the lights when they exit their rooms … apparently the problem is not their individual behavior, but the way electricity is produced … translation: it is always “other people” the ones that have to “sacrifice”, and the key question is how the government get OTHER people to behave properly]
and yes, maybe,
5.- What is the way of getting the less possible “individual sacrifice” in exchange for the most reduction in unmeasurable CO2 emissions with totally unknown effects on our day-to-day life.
Knut P. Heen
Feb 22 2022 at 5:57am
It is well known that the relationship between CO2-concentration and temperature increase is concave. This is the reason people say doubling of CO2 leads to x degrees increase. There is some disagreement about x, but not the logarithmic relationship.
A concave relationship implies that the worst is behind us (given the fact that CO2-concentration has been increasing linearly for a long time, about 2 ppm per year). We started at 280 ppm. Doubling is 560 ppm. We are halfway now at 420 ppm. In other words, more than 50 percent of the x has already occurred. When we reach 560 ppm, we need another doubling to 1120 pm to increase the temperature by another x.
The public debate indicates that most people think the relationship is either linear or convex.
Jose Pablo
Feb 22 2022 at 2:04pm
Exactly! … we seem to be in the realm where “well known relationships” (your statement) are not “what most people think”.
Many people even think that pigouvian taxes are a “market solution” and not “pure arbitrary regulation”
We don’t “know” a lot of relevant things on this issue. At least not the same way that we “know” how to land a spacecraft in Mars or even the way we “know” the weather tomorrow in South Florida (pretty lousy predictions by the way). It is closer to the way we “know” the relationship between minimun wages and employment (if even that).
“Knowledge” is a pretty polysemic word after all
Peter
Feb 18 2022 at 2:48pm
Great post! I like the idea that actions speak louder than words. What I’ve been wondering for a while, though, is: What does this tell us about the fact that relatively few libertarians have signed up for the Free State Project? Does that mean that libertarians actually don’t care about liberty all that much?
Would love to hear you guys’ thoughts on this.
robc
Feb 19 2022 at 1:13pm
They picked the wrong state. Wyoming was the obvious choice.
Jose Pablo
Feb 20 2022 at 3:15pm
or the US Virgin Islands …
robc
Feb 21 2022 at 8:30am
Good point. Even smaller population and much better weather than NH.
I just moved to Northern Colorado, so Wyoming weather would have been okay with me.
Mark Brophy
Feb 23 2022 at 10:51am
Real estate prices in Phoenix and Tampa increased by 30% in the past year and Paradise Valley doubled in 3 years. Clearly, people are leaving California and New York.
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