Im sure this has probably been discussed here before, but I am new. SO I was wondering if somebody could explain for me the austrian perspective on externalities? Thanks in advance for any and all help.
https://mises.org/journals/jls/9_1/9_1_2.pdf
Clayton -
In general, the negative externalities of voluntary human activity are wildly overblown, while positive externalities are usually ignored completely.
Negative externalities are costs not borne by the actors responsible for their imposition. In economic terms, externalities are the costs that are not internalized to the relevant individuals. The non-statist free market solution to externalities is two-fold: property rights and emergent governance.
1. Property rights.
When you give someone a right to something as their property, you are internalizing the costs imposed on that property to that individual. If you could define and enforce property rights for everything on Earth, you could internalize all the externalities and they would no longer exist. However, that is neither possible nor desirable. Some externalities are minimal, and it's important to note that government interventionism is a net negative for externalities largely due to its operation outside of individual property rights. Government militaries, for example, are by far the largest polluters on the planet. On the whole, the negative externalities imposed on society by government interventionism and state property are greater than any of the externalities it is supposed to have internalized through voting/defining property rights. The net effect of government is negative.
Without government intervention, people naturally define systems of property rights when it is in their interest to do so. Economist Harold Demsetz famously studied American Indians in Quebec and in the Southwest. The Indians in Quebec spontaneously developed private hunting rights systems when they gained access to trade in the Beaver pelt market. This was because they had significant opportunity cost due to the tragedy of the commons and the rise in profit attainable by hunting beavers. Thus, they created property rights systems to internalize the externalities when the profit incentive to do so increased. The same is true of other externalities. When they get large enough so that the opportunity cost is greater than the cost of setting up and enforcing property rights, property rights systems will emerge.
2. Emergent governance
This is similar to the emergence of property rights systems and happens for the same reason, but it is not private property rights per se. Recent Nobel laureate Elinor Ostrom became famous for case-studies of communities and cities where they established systems of common resource sharing, rules and norms enforced without a government that functioned as governance over the common resource. Thus the externality was internalized by the society through emergent rule systems that came from the bottom-up to deal with the externalities.
There is much more to these solutions and I'd encourage you to look up the literature on the subject if you want a more thorough answer.
THe problem of externalities has nothing to do with free market capitalism, it is instead a technical problem of enforcing property rights. The state cannot solve this due to being an externality itself, so it is not an argument against free markets but property right enforcement.
They're a bitch, without them the price system would be a bit more perfect and market fundamentalism slightly more justified. Nonetheless, they exist.
"You don't need a weatherman to know which way the wind blows"
Bob Dylan
Well it seems to me that if the best austrians can put up is that "they exsist" then Im going to have to stop believing in free markets...
That cant be the best answer, right?
You kinda have to ask yourself, what isn't an externality? I don't see how any exchange could not cause any extarnailty, whether good or bad. But the part of reflecting the "full cost" or "benefit" is completely subjective. For example, air pollution. Air pollution might hurt "society," but what about the company that collects air pollution and uses chemistry to provide chemicals that the market wants? Air pollution would be a positive externality to that company.
To paraphrase Marc Faber: We're all doomed, but that doesn't mean that we can't make money in the process. Rabbi Lapin: "Let's make bricks!" Stephan Kinsella: "Say you and I both want to make a German chocolate cake."
They exist but there's no reason that the free market can't fix/provide them. If such was the case then the government would not be able to solve them either.
Well it seems to me that if the best austrians can put up is that "they exsist" then Im going to have to stop believing in free markets... That cant be the best answer, right?
That guy is not an Austrian or even "free market".
They exist but there's no reason that the free market can't fix/provide them.
There sort of is, by definition.
"There sort of is, by definition."
In which case, according to that definition, I do not believe that there is such a thing as an externality.
Oh ok, so everytime I act, any effect that action has an any person is transmitted through the price mechanism. That sure does sound reasonable.
You guys are nuts.
"Oh ok, so everytime I act, any effect that action has an any person is transmitted through the price mechanism. That sure does sound reasonable.
You guys are nuts. "
Exactly what I meant, definatly.
Externalities, like air pollution and stuff? Lack of property rights. I can't spike your water supply so why can I spike your air? Failure of state courts to uphold property rights of poor ppl vs big industry. Nuff said.
Hayekianxyz: "You guys are nuts."
How scholarly of you.
"SO I was wondering if somebody could explain for me the austrian perspective on externalities?"
By:
1. Enforcing property rights
2. privatizing all public domains.
Most of the externalities currently attributed to markets are actually the result of Public/government policy. They are products of socialism and not Capitalism.
Here, I suggest you begin by watching Walter Block discuss free market environmentalism.
http://www.youtube.com/watch?v=DrTsaSUFfpo&feature=related
"Hayekianxyz: "You guys are nuts."
"How scholarly of you."
Indeed... I also think that a suitable response would be that every time I perform an action the government rushes in and makes sure that theres not an externality or they tax/nationalize it
Hayekianxyz just trolls, he sounds very sure until you actually ask him something, then he either does not respond or calls you nuts!
Maybe you should provide an actual example of an externality then it will be easier to discuss.