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.
"You mean the cost of government action is borne out by everyone living under the jurisdiction of said government?"
Government is a system by which the costs of every action, benefit, etc.. are externalized on others. So it's silly to talk about problems of externality that government must solve.
Why? Just because it creates externalities doesn't mean it can't use force to try and solve others. You might argue that the government must then solve its own externality problem, but there's little political will for that.
The Late Andrew Ryan, I think it's probably a good idea to focus on what we mean by markets, once again from Wikipedia (admittedly not the most scholarly of sources, but once again the definition seems adequate):
In mainstream economics, the concept of a market is any structure that allows buyers and sellers to exchange any type of goods, services and information. The exchange of goods or services for money is a transaction. Market participants consist of all the buyers and sellers of a good who influence its price.
Now, perhaps you were using a broader definition of markets, whereby all "voluntary" action would be considered part of markets. But whilst this all-encompassing definition of markets would perhaps be more correct, there are doubts that remain that, and that definition of markets is definitely not the predominant one.
Now, as the story goes, the market alleviates shortages and surpluses through relative price adjustments. If, due to the collapse on the mine, there is a shortage of tin, prices will rise, those with the highest willingness to pay will get what tin remains and other consumers will have to curb their usage of it. But when the effects of a good aren't taken account of by the price mechanism, I'm really not sure how you would argue that said mechanism will alleviate the relevant problem. In fact, in one sense the price mechanism is precisely the problem, it gives incentives for producers to make more of the good than is efficient.
Simply asserting that "the market can deal with them" and then going on to say, and if the market can't deal with them "then they don't exist" makes the market fundamentalist caricature so much more realistic.
You see, the problem with not even learning the principles of so called "mainstream economics" is that you end up, intentionally or otherwise, making absurd claims about you think they believe. Nobody doubts that externalities are the result of transactions costs and improperly defined property rights. That's what the Coase theorem is all about, if the previous two problems don't exist, then all externalities will be internalized.
But those problems do exist, and defining property rights can sometimes be technologically impossible or economically inefficient. It's not clear how own would delineate ownership of fish in the ocean or how one would identify whose smoke production harmed whose crops. On a similar note, for reasons of economies of scale, it might well be inefficient to create parcels of private property out of formerly common property.
"You don't need a weatherman to know which way the wind blows"
Bob Dylan
"The Late Andrew Ryan, I think it's probably a good idea to focus on what we mean by markets"
I do indeed give a broader definition of markets to mean any form of human exchange however I do understand the need to define the difference between "traditional" or "financial" markes and "untraditional" types of markets such as charity and other more mutualistic interactions. I claim that financial markets are perfectly capable of producing negative externalities but its perfectly possible for other market interactions to rectify them.
"Simply asserting that "the market can deal with them" and then going on to say, and if the market can't deal with them "then they don't exist" makes the market fundamentalist caricature so much more realistic."
I would consider that the idea that "the government can deal with them" is also rather foolish, but also I feel that you're slightly misunderstanding what I mean. I mean that if an externality exists and the democratic state can rectify it then the market, or all individuals being free to act to fulfill their own value preferences if you will, will also have enough support to provide it in one way or another. The market will almost certianly work to rectify externalities because if it's percieved as a problem then large numbers of people will seek to fix the percieved problem.
what is public policy ?? how does it differ from govt policy??
perhaps leaves on a tree in your yard fall or blow into the yard of someone else.
i guess your tree creates an externality...its your tree on your property but the leaves that fall from it as a result of its growth are an externality in someone elses property. who may not want extra leaves.
sometis agreemanets can be made on teh market concernijg externalities...othertimes disagreements will occur. first use or appropriation with poperty rights likely come into play then.
I claim that financial markets are perfectly capable of producing negative externalities but its perfectly possible for other market interactions to rectify them.
That's a fair enough claim I suppose, and presumably one you have the empirics and theory to support?
"That's a fair enough claim I suppose, and presumably one you have the empirics and theory to support?"
Empirically you can see it in just about every private organization on earth that has some cause such as to fix poverty/stop global warming ECT, and this is with many problems that are perceived to be being dealt with by current state actions, or that are perceived to be able to be solved by state actions should the correct amount of lobbying be put into it, or the correct politician be put in office. This is to say that man does not attempt to solve a problem if he does not perceive a problem. In today's world the state is perceived to solve a large number of problems, and therefore any private effort is either limited or does not occur at all, and this is on the assumption that it isn't crowded out in the first place.
"Well, all political actors, even those elected in a democracy have some degree of discretion. But, presumably this sort of problem would be solved by bureaucracies, who are by definition unelected political actors. Don't get me wrong, I'm not saying bureaucrats don't face perverse incentives or knowledge deficiencies,"
I think I must be missing your point... Why would bureaucracies solve anything?
"but the argument you're making is a silly rhetorical trick that, as is wont to happen around here, gets put in place of a serious argument."
I'm sorry if that's what it appears I'm doing (although to me it also partly seems that you're avoiding expanding upon your explination) but I have no intention of any tricks of that nature if you could point to exactly where I do this then I think I might understand you better, if you're talking about my comparison of the market to the democratic state then I'll address that below. I can understand the reason why you'd jump to that conclusion though, as far as I can tell I'm one of the few people on this forum who understands exactly how belligerent many are towards you while still claiming that you're doing the same... It's not easy being a dissenter...
"Even if your argument was factually correct, in that elected officials were those responsible for implementing the necessary policy, I'd argue that assumption of a symmetry between the market the ballot in terms of preferences is unjustified."
Why? Your very concern about the presence of externalities in the absence of state actions shows a desire, a will, a demand for externalities being dealt with, are you and the other statists really so stubborn that you would never look to either provide/accept/help to fund free market actions to deal with externalities?
"Oh, I wish I could pray the way this dog looks at the meat" - Martin Luther
Rothbard argued, “A and B decide to pay for the building of a dam for their uses; C benefits though he did notpay. A and B educate themselves at their expense and C benefits by being able to deal with educated people, etc. This is the problem of the Free Rider. Yet it is difficult to understand what the hullabaloo is all about. Am I to be specially taxed because I enjoy the sight of my neighbor's garden without paying for it? A's and B's purchase of a good reveals that they are willing to pay for it; if it indirectly benefits C as well, no one is the loser. If C feels that he would be deprived of the benefit if only A and B paid, then he is free to contribute too. In any case, all the individuals consult their own preferences in the matter. In fact, we are all free riders on the investment, and the technological development, of our ancestors. Must we wear sackcloth and ashes, or submit ourselves to State dictation, because of this happy fact?” (Rothbard 1956:259).
Rothbard, Murray. 1956. Toward a Reconstruction of Utility and Welfare Economics. On Freedom and Free Enterprise: Essays in Honor of Ludwig von Mises. Princeton: D. Van Nostrand.