Originally posted by KazetNagorraBuilding a bridge is an 'externality'?
Sometimes estimating the value of externalities is hard. A bridge to a sparsely populated island may not be worth it, despite the external benefit of added mobility and reduced logistic costs. Sometimes the externalities are so huge taking them into account is a no-brainer, for instance guaranteeing public primary education and providing a police force, or banning dumping nuclear waste in rivers.
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Originally posted by normbenignYou've already posted a reasonable definition (your wiki link).
Ok, save us time, and articulate the definition as you understand it. I can't agree with or argue against some undefined thing.
"In economics, an externality, or transaction spillover, is a cost or benefit that is not transmitted through prices or is incurred by a party who was not involved as either a buyer or seller of the goods or services causing the cost or benefit."
A nitpick, most definitions don't talk about transactions (as with buyers or sellers here), but about economic activity (production and consumption). I can't think of any externalities due to a change in ownership of something, they come from the usage of the product.
I also found one definition, which defined externalities as effects on third parties not taken into account in the decision to produce/consumer. Now, for competitive markets this is equivalent. A rational economic actor will not take third parties utility into account. For governments and charities, this definition does make a difference. Consider Kazets' bridge example, under the first definition there are obvious positive externalities to the islanders from having a bridge (provided it's cheap to use). However, the government would build this bridge with the purpose of providing those benefits to the islanders, so it isn't a externality under the second definition.
I believe both definitions are useful, though I prefer the first one more. Externalities are something defined to describe behaviour of free markets, so an amended definition that better takes into account government behaviour isn't that necessary to me.
By the way, can you provided me with references of Hayek/Mises/... supporting your definition of externality ?
Originally posted by BartsI am presently reading Mises "Human Action". I've been at it a couple of months. A recent chapter seemed to me to be saying that either everything is market driven, or is interventionist driven. He alleges there can be no common ground, one or the other will dominate.
You've already posted a reasonable definition (your wiki link).
"In economics, an externality, or transaction spillover, is a cost or benefit that is not transmitted through prices or is incurred by a party who was not involved as either a buyer or seller of the goods or services causing the cost or benefit."
A nitpick, most definitions don't talk about ...[text shortened]... vided me with references of Hayek/Mises/... supporting your definition of externality ?
I don't know if I quite buy that, except for my own observation that most externalities by your definitions or mine are not measurable as tangible costs or benefits that people ought to pay for or be reimbursed for.
We do know that taken as a whole the economic activity associated with the industrial revolution, created millionaires, however the external benefits of more and better products for consumers is probably greater in total than all the industrial and banking fortunes of the period. Bill Gate's personal fortune is dwarfed by the earnings of everyday people using his products and tangents from them.
It is my impression, from reading several on line articles that externalities in some schools are associated with market failure. Others treat the subject differently, just that stuff happens to others not directly connected to economic activity.
The former articles seem to use externalities to prescribe statist solutions, whereas the later seem to say that chasing them is fruitless and a waste of time.
Originally posted by normbenignI am presently reading Mises "Human Action". I've been at it a couple of months. A recent chapter seemed to me to be saying that either everything is market driven, or is interventionist driven. He alleges there can be no common ground, one or the other will dominate.
I am presently reading Mises "Human Action". I've been at it a couple of months. A recent chapter seemed to me to be saying that either everything is market driven, or is interventionist driven. He alleges there can be no common ground, one or the other will dominate.
I don't know if I quite buy that, except for my own observation that most externali ...[text shortened]... olutions, whereas the later seem to say that chasing them is fruitless and a waste of time.
Well, as long as there is any action by government it will have ripple effects on the complete economy of course, however small. I don't quite see what the use of that argument is however.
I don't know if I quite buy that, except for my own observation that most externalities by your definitions or mine are not measurable as tangible costs or benefits that people ought to pay for or be reimbursed for.
I don't see how one could argue that people ought not to take into account externalities where possible. I do agree that it is often hard to identify and quantify them. That doesn't mean nothing should be done about it, it's economically more efficient to slightly over or underestimate them than it is to do nothing about them.
We do know that taken as a whole the economic activity associated with the industrial revolution, created millionaires, however the external benefits of more and better products for consumers is probably greater in total than all the industrial and banking fortunes of the period. Bill Gate's personal fortune is dwarfed by the earnings of everyday people using his products and tangents from them.
Now you're again talking about something different from externalities. People who use Microsoft products have paid for them (well, mostly) and so have compensated Microsoft for the positive effects their products have.
It is my impression, from reading several on line articles that externalities in some schools are associated with market failure. Others treat the subject differently, just that stuff happens to others not directly connected to economic activity.
The former articles seem to use externalities to prescribe statist solutions, whereas the later seem to say that chasing them is fruitless and a waste of time.
Again, I do not know anyone who define externalities as something other than market failures. I have seen the different reactions you talk about (and some more).
1) Handling externalities is pointless, everything has externalities and it's impossible to account for all of them anyway. (See http://mises.org/daily/5085/)
This is a perfect example of the "no perfect solution" fallacy. Yes, you can list thousands and thousands of actions that have externalities and where it is pointless to subsidize or penalize them. You can list thousands of of actions that, in hindsight, had unforeseen externalities. That doesn't mean that there it's pointless to regulate obvious and large externalities.
2) Externalities are due to weak property rights, the solution to them is to allocate rights and let the market work it out. This is basically an argument from the Coase theorem.
Take the river pollution example, either the factory has the right to pollute, in which case the people downriver will pay the factory not to, or the people downriver hold the rights and the factory will pay to be allowed to pollute a little. It sounds good in theory, but misses a couple of obvious problems. First, the Coase theorem only holds in the absence of transaction costs, a rather unlikely assumption at the best of times most cases. Next, Coase assumed two players, one taking an action and one suffering (or benefitting from) the consequences. Something also obviously false in many cases, especially when talking about pollution (the main area of government intervention based on externalities), where there are many polluters and complete regions, countries and the world as a whole suffers the consequences.
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Originally posted by BartsIf in an effort to identify dubious externalities, and at the same time come up with incorrect assessments, haven't we expended wealth (effort, time, and capital) fruitlessly?
[b]I am presently reading Mises "Human Action". I've been at it a couple of months. A recent chapter seemed to me to be saying that either everything is market driven, or is interventionist driven. He alleges there can be no common ground, one or the other will dominate.
Well, as long as there is any action by government it will have ripple effects on nd complete regions, countries and the world as a whole suffers the consequences.[/b]
Give me a better example of the "perfect solution:" fallacy.
I see it as Thomas Sowell does in what he describes as his favorite book among many, "A Conflict of Visions". In it he examines positions of philosophers and divides them into two visions, one constrained and the other unconstrained.
The latter sees solutions, perfect solutions, the former sees at best ways and means of improvement recognizing man's limitations at foreseeing the future.
"Now you're again talking about something different from externalities. People who use Microsoft products have paid for them (well, mostly) and so have compensated Microsoft for the positive effects their products have."
There are people who have never touched a computer who benefit by positive externalities of Microsoft and the computer revolution. Some will argue negative externalities include work lost due to automation and computer controls. When young Gates purchased an obscure hobbyist disc operating system and got the idea to license it instead of selling it, we can't possibly measure the externalities that radiated from that transaction between him and IBM.
I recall a river incident that is perhaps illustrative. During the early 70s I was living in Massachusetts, and Bud built a brewery up north of Manchester, NH. It was on the Merrimack River, specifically to have a clean water supply. The upstream area was sparsely settled, so the future looked bright. Except the brewery and warehouse needed lots of employees, and the employees needed housing, so sparsely settled didn't last long. One big project brought others and soon the water was as crappy as if they built the brewery in Boston on the Charles.
Their own success created an unforeseen externality, and costs of installing a water purification system to continue making good beer. It is beyond the scope of any entrepreneur to predict exactly all of the consequences of the project. Some good and bad things happen that aren't part of the bargain, nor are the fault of the bargainers.
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Originally posted by normbenignIf in an effort to identify dubious externalities, and at the same time come up with incorrect assessments, haven't we expended wealth (effort, time, and capital) fruitlessly?
If in an effort to identify dubious externalities, and at the same time come up with incorrect assessments, haven't we expended wealth (effort, time, and capital) fruitlessly?
Give me a better example of the "perfect solution:" fallacy.
I see it as Thomas Sowell does in what he describes as his favorite book among many, "A Conflict of Visions". In things happen that aren't part of the bargain, nor are the fault of the bargainers.
Give me a better example of the "perfect solution:" fallacy.
I see it as Thomas Sowell does in what he describes as his favorite book among many, "A Conflict of Visions". In it he examines positions of philosophers and divides them into two visions, one constrained and the other unconstrained.
The latter sees solutions, perfect solutions, the former sees at best ways and means of improvement recognizing man's limitations at foreseeing the future.
We can not stop all crime - so police is useless, is a "no perfect solution fallacy". It is rejecting something useful because it will not work perfectly. This is exactly what you seem to be doing in regards to externalities. You correctly note that there are externalities which are very hard to measure and internalize and use that to reject tackling any externality.
Edit; One of the advertisements on the site just read "There are thousands of kids in foster care who don't need perfection, they need you". Quite topical when we're talking about a "no perfect solution fallacy"
I'm a bit at a loss what you're trying to say with the "constrained vs. unconstrained". Are you saying that I think internalizing externalities is a perfect solution and you are pointing out it's flaws ? Or are you saying that I have a "constrained vision" while you have the perfect solution (let the market handle it) .
There are people who have never touched a computer who benefit by positive externalities of Microsoft and the computer revolution. Some will argue negative externalities include work lost due to automation and computer controls. When young Gates purchased an obscure hobbyist disc operating system and got the idea to license it instead of selling it, we can't possibly measure the externalities that radiated from that transaction between him and IBM.
I recall a river incident that is perhaps illustrative. During the early 70s I was living in Massachusetts, and Bud built a brewery up north of Manchester, NH. It was on the Merrimack River, specifically to have a clean water supply. The upstream area was sparsely settled, so the future looked bright. Except the brewery and warehouse needed lots of employees, and the employees needed housing, so sparsely settled didn't last long. One big project brought others and soon the water was as crappy as if they built the brewery in Boston on the Charles.
Their own success created an unforeseen externality, and costs of installing a water purification system to continue making good beer. It is beyond the scope of any entrepreneur to predict exactly all of the consequences of the project. Some good and bad things happen that aren't part of the bargain, nor are the fault of the bargainers.
Again, what you write has very little to do with externalities in the economic sense of the word. Effect of an action =/= Externality of that action.
Originally posted by Barts"We can not stop all crime - so police is useless, is a "no perfect solution fallacy"."
[b]If in an effort to identify dubious externalities, and at the same time come up with incorrect assessments, haven't we expended wealth (effort, time, and capital) fruitlessly?
Give me a better example of the "perfect solution:" fallacy.
I see it as Thomas Sowell does in what he describes as his favorite book among many, "A Conflict of Visions". In it ...[text shortened]... c sense of the word. Effect of an action =/= Externality of that action.
In Mises praxology, it is never all or nothing. Since we can't stop all crime, thinking and acting man decides which crimes we have the best chances of stopping, and which are a waste of resources.
The no perfect solution is only a fallacy if the conclusion is that we do nothing. That may not even be a fallacy, if the cost of the solution is worse than the problem to be solved.
Sowell's visions theory, is that unconstrained people believe that problems all have perfect solutions. Anything is justified to reach that perfect solution. The ends justify the means.
The constrained view is that there may not be a perfect solution which is economically feasible. We may mitigate the problem, but a total solution is currently unlikely.
For example, cities have always been located on rivers if not on coastlines. Water transport is always least expensive. The bigger the city, the worse the downstream water quality. The great lakes water system runs from Minnisota to the St. Lawrence river with the US and Canada on opposite sides. I see the problem of externalities along this waterway as insoluble. There doesn't seem to be a total solution, so both sides agree to watch a resource that is vital to both countries as well as to the states, provinces, cities and towns along the way.