In economics, an externality is a spillover of an economic transaction which has an impact on a party not immediately involved in the transaction. The significance of externalities arises when a consumer in a free market makes an economic transaction out of his own self-interest which has an effect on either individuals around him or on society as a whole.
Externalities can be positive or negative. An example of a positive externality would be someone having their house fireproofed, as that act makes all of her neighbors safer, therefore benefiting those not involved in the economic transaction. An example of a negative externality would be a company polluting the air or a river, imposing costs on other people in healthcare or in cleaning up the pollution.
Now in a free market, if there is a difference between individual benefit and social benefit (individual demand and social demand), or between social cost and invdividual cost (social supply and individual supply), then a purely free market outcome will not meet pareto efficiency.
So how would a free-market (anarcho-capitalist/minarchist economy) account for externalities? or would they?
A new and fair division of the goods and rights of this world should be the main object of those who conduct human affairs.
negative externalities are either criminal or irrelevant, and positive externalities are either happy accidents (bonuses) or irrelevant.
Where there is no property there is no justice; a proposition as certain as any demonstration in Euclid
Fools! not to see that what they madly desire would be a calamity to them as no hands but their own could bring
well the point is they can result in inefficient outcomes.
inefficient by what standard? some theoretical possibility?
inefficient in the sense that a change in the allocation of goods could make one party better off without making any other party worse off. It's called pareto efficiency.
you might have a problem in making interpersonal comparisons of utililty to prove the point conclusively.
regardless, have you factored in the costs which would be incurred in forcing a transition to the claimed point of 'optimum efficiency'.?
this is one of those, watcher changes what is whatched dilemmas,,,,,,
majorthreat:So how would a free-market (anarcho-capitalist/minarchist economy) account for externalities? or would they?
Most negative externalities can be handled by property rights. For example, a polluter can be forced to compensate the victims of pollution because this is a violation of their property rights.
Positive externalities can be dealt with by mutual agreement. For example, if the residents of a given area would all benefit from the funding of a defense militia for that area, then they would all be able to agree to contribute money to that end. It may be objected that the free-rider problem remains, but it's hard to believe that the creation of an institution with the power to coerce payment out of supposed free-riders would increase economic efficiency (aside from the ethical issue). This institution would have to determine how much the suspected free-rider actually values the public good, and how could they possibly do this?
The only externalities that remain unaddressed are those that are so vague that they are unquantifiable (such as "an educated workforce"), and the so-called "market externality." For the first kind, if individuals can't figure out how to deal with them, then how can the government? For market externalities, this occurs when the value of property held by a person is affected by external changes in supply and/or demand. This shouldn't be too much of a problem, because most people buy things because of the value it has to them or to others in the present, not because of the value it has to other people in the future. Those who speculatively purchase assets long-term with the intention of selling them later at a higher price should know that they are engaging in risky business.
majorthreat:inefficient in the sense that a change in the allocation of goods could make one party better off without making any other party worse off. It's called pareto efficiency.
If people can figure out that such a change is possible, then they will do it, because none of them are worse off for it.
In all of this, however, remember that if a truly free market is shown to lead to inefficiencies, then this does not justify violating the free market. All we can say is "So much the worse for efficiency." Morality always comes first, and economists and entrepreneurs can figure out how to achieve maximum efficiency within the bounds of natural rights and non-aggression.
majorthreat: inefficient in the sense that a change in the allocation of goods could make one party better off without making any other party worse off. It's called pareto efficiency.
Is a pareto efficiency even possible? It seem to ignore the fact that value is subjective, and that there is potential value in services.
faber est suae quisque fortunae
JackCuyler:nefficient in the sense that a change in the allocation of goods could make one party better off without making any other party worse off. It's called pareto efficiency.
If the pareto efficiency existed then there would be no reason to trade. Trade ensues because of a reverse double inequality of value.Example:
A has a pocketwatch
B has a tie
A values the tie more then his pocketwatch
B values a pocketwatch more then his tie
A trades with B
A has his tie
B has his pocketwatch
No pareto efficiency.
'Men do not change, they unmask themselves' - Germaine de Stael
Laughing Man: If the pareto efficiency existed then there would be no reason to trade. Trade ensues because of a reverse double inequality of value.Example: A has a pocketwatch B has a tie A values the tie more then his pocketwatch B values a pocketwatch more then his tie A trades with B A has his tie B has his pocketwatch No pareto efficiency.
That perfectly illustrates my point abount subjective value. As for the value of services:
A has a broken watch.
A has a necktie
B has the ability to repair watches.
A values a working more than his broken watch and his his tie combined.
B values the tie more than whatever else he would be doing for the period of time needed to fix A's watch.
A trades the tie for the B's watch fixing service.
A has his workign watch.
B has his tie.
You must also realize that an imperfection in the market does not connote any ability in the government to
a) accurately know it
b) correct it
or
c) respond to it without causing problems that are even worse
Free markets are not perfect (nothing is); they are merely optimal.
Austrian Theory of the Business Cycle in 9 steps (Soliciting comments)
Pareto efficiency is a transaction where both individuals benefit from the transaction is left none the worse off. The typical Austrian objection to it is that it does not address the question of how original titles of ownership came to be.
Gee, who knew! Externalities reduce to problems of transaction costs. Either individuals will decide to deal with them or they will decide the solutions are not worth the cost. Property rights will internalise them for the most part by allowing owners to sue for damages if they so will (if the "externality" is actually harm, e.g. a factory emiting pollution over and above what it's homesteaded the right to.) There's certainly no reason for a massive externality like the government.
Freedom of markets is positively correlated with the degree of evolution in any society...
JackCuyler: That perfectly illustrates my point abount subjective value. As for the value of services: A has a broken watch. A has a necktie B has the ability to repair watches. A values a working more than his broken watch and his his tie combined. B values the tie more than whatever else he would be doing for the period of time needed to fix A's watch. A trades the tie for the B's watch fixing service. A has his workign watch. B has his tie. No pareto efficiency.
This illustrates pareto efficiency quite well actually. In that final scenario, both are content with their items right? No change in the allocation of goods from that final scenario can make any person (either A or B) better off, without making the other person worse off. If you give A the tie, B is made worse off. If you give B the watch, A is made worse off. That outcome is pareto efficient.
And yes I'm aware that the concept of pareto efficiency does not take into account the ethical aspect of a possible reallocatoin of goods; it's a purely economic tool, used to measure the efficiency of economic outcomes, not necessarily the equity or justice of them.
Zavoi:Most negative externalities can be handled by property rights. For example, a polluter can be forced to compensate the victims of pollution because this is a violation of their property rights.
Well I don't think my fireproofing example could be done this way. Or consider a situation where someone refuses to pay (or can't pay) for a private fire service, putting everyone around her at danger.
Zavoi: Positive externalities can be dealt with by mutual agreement. For example, if the residents of a given area would all benefit from the funding of a defense militia for that area, then they would all be able to agree to contribute money to that end. It may be objected that the free-rider problem remains, but it's hard to believe that the creation of an institution with the power to coerce payment out of supposed free-riders would increase economic efficiency (aside from the ethical issue). This institution would have to determine how much the suspected free-rider actually values the public good, and how could they possibly do this?
Consider things like public roads or bridges. Public roads increase economic activity, especially for those businesses located on a highly traveled one. If roads are privatized and people all of a sudden have to pay for their use, they won't utilize them as much, and possible economic activity will be lost. In this case, a public road could be more efficient for the economy as a whole.
that being said yes I recognize the ethical issues with such a proposition.
Zavoi: The only externalities that remain unaddressed are those that are so vague that they are unquantifiable (such as "an educated workforce"), and the so-called "market externality." For the first kind, if individuals can't figure out how to deal with them, then how can the government? For market externalities, this occurs when the value of property held by a person is affected by external changes in supply and/or demand. This shouldn't be too much of a problem, because most people buy things because of the value it has to them or to others in the present, not because of the value it has to other people in the future. Those who speculatively purchase assets long-term with the intention of selling them later at a higher price should know that they are engaging in risky business.
Or things like systemic risk in financial markets.
Zavoi: In all of this, however, remember that if a truly free market is shown to lead to inefficiencies, then this does not justify violating the free market. All we can say is "So much the worse for efficiency." Morality always comes first, and economists and entrepreneurs can figure out how to achieve maximum efficiency within the bounds of natural rights and non-aggression.
right. I'm no utilitarian/consequentialist, so I recognize that rights/ethical duties cannot be circumvented just to achieve a desirable end (desirable for whomever).
majorthreat:Consider things like public roads or bridges. Public roads increase economic activity, especially for those businesses located on a highly traveled one.
Sure, at the expense of reducing "economic activity" is other areas. How's that for "negative externalities"?
majorthreat:If roads are privatized and people all of a sudden have to pay for their use,
People pay for the use of publicroads. People who don't even use public roads are forced to pay for them.
majorthreat:they won't utilize them as much,
What does that mean? How do you measure "utilization"?
majorthreat:and possible economic activity will be lost. In this case, a public road could be more efficient for the economy as a whole.
How would you know?
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."