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.
Hayekianxyz: "You guys are nuts."
How scholarly of you.
What is it going to take for you people to realize that he's just trolling. Go ahead, and challenge him on his "different point of view". Let's see what substance you'll get out of him.
CalmWalker: 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?
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?
why are you looking to believe in something? read some mises and decide how to approach externalities, don't depend on people on this forum
Yeah. He should probably be banned because his posts get stupider by the day and it's becoming increasingly apparent that his profile is fake or at least his intentions are.
privatize property, and then externalities are for the most part internalized. All property has an "advocate" who will defend it, and can seek compensation for rights violations.
"Externality" is a "public good" concept, which is the focus of this short journal:
The Fallacy of Public Goods Theory and the Production of Security
Clayton beat me.
We discussed leaded fuel earlier. All other air pollution, smog, greenhouse gases, destroying the ozone layer. Water pollution, like BP. Land pollution is also common.
"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.
"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.
Ok, well, it's not perfect, but here's a quick Wikipedia definition for you (emphasis mine):
In economics, an externality (or transaction spillover) is a cost or benefit, not transmitted through prices[1], incurred by a party who did not agree to the action causing the cost or benefit. A benefit in this case is called a positive externality or external benefit, while a cost is called a negative externality or external cost.
So when you say externalities don't exist, you really are implying that all costs and benefits of a given action will be transmitted through the price mechanism. Perhaps "nuts" was a little strong, but if you really don't believe that there are any external effects from market transactions, I must say I find it a little strange.
Well, I suppose calling somebody nuts isn't exactly scholarly, but then again, it's not as if I'm the only one lacking decorum around here. Most challenges to Mises.org orthodoxy are met with charges of ignorance, stupidity and malevolence.
Externalities are both positive and negative. If I manicure my lawn, my next door neighbor benefits without paying. If I don't dump my trash from my picnic on the ground at the park, but put it in the dumpster instead, all subsequent visitors of the park benefit without paying. And so on. Even breathing imposes "costs" on others for which the are not recompensed since, in the long run, my expulsion of CO2 reduces the available oxygen for future residents of this planet who may have to pay for air if the population were to become that large. My breathing hastens that day.
"You don't need a weatherman to know which way the wind blows"
Bob Dylan
"So when you say externalities don't exist, you really are implying that all costs and benefits of a given action will be transmitted through the price mechanism. Perhaps "nuts" was a little strong, but if you really don't believe that there are any external effects from market transactions, I must say I find it a little strange."
Which was according to my original definition, they do indeed exist, but there is nothing in that definition which says that the free market cannot rectify the externalities which it causes, or produce postive externalities. If however you expand this definition to say that it is impossible for the market to rectify the original failure then I do not believe that externalities exist.
I might believe that a hedgehog exists, but I don't believe that a flying hedgehog exists. I think that externalities exist, but I don't think that externalities which cannot be rectified by the market exist (or do on anywhere near the scale you claim they do, there might be a small externality or two which aren't important enough for people to wish to rectify)
They seem hard to regulate because by adding a cost to one thing, you add a cost to another.
Acting in kind to as many folks as possible has given me a plethora of more positive than negatative externalities.
Be behaved fellows and good day to all'y'all.
Individualism Rocks
The government is the biggest externality. The cost of every one of its actions is always incurred by others.
DD5: The government is the biggest externality. The cost of every one of its actions is always incurred by others.
You mean the cost of government action is borne out by everyone living under the jurisdiction of said government?