Economics Questions

Re: Externalities

thelion — Wed, 12 May 2010 04:52:56 GMT

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.

Re: Externalities

G8R HED — Tue, 11 May 2010 12:29:23 GMT

Re: Externalities

The Late Andrew Ryan — Mon, 10 May 2010 20:24:05 GMT

"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?

Re: Externalities

hayekianxyz — Mon, 10 May 2010 15:29:57 GMT

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?

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.

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, 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. 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 the ballot in terms of preferences is unjustified.

Re: Externalities

cret — Mon, 10 May 2010 08:08:20 GMT

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.

Re: Externalities

cret — Mon, 10 May 2010 08:03:41 GMT

what is public policy ?? how does it differ from govt policy??

Re: Externalities

The Late Andrew Ryan — Sun, 09 May 2010 17:38:04 GMT

"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.

Re: Externalities

hayekianxyz — Sun, 09 May 2010 17:04:04 GMT

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.

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 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.

Re: Externalities

bloomj31 — Sun, 09 May 2010 16:35:39 GMT

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.

Re: Externalities

DD5 — Sun, 09 May 2010 16:32:55 GMT

"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.

Re: Externalities

bloomj31 — Sun, 09 May 2010 16:24:23 GMT

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?

Re: Externalities

DD5 — Sun, 09 May 2010 16:18:54 GMT

The government is the biggest externality. The cost of every one of its actions is always incurred by others.

Re: Externalities

Bank Run — Sun, 09 May 2010 15:51:56 GMT

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.

Re: Externalities

bloomj31 — Sun, 09 May 2010 15:37:45 GMT

They seem hard to regulate because by adding a cost to one thing, you add a cost to another.

Re: Externalities

The Late Andrew Ryan — Sun, 09 May 2010 15:32:59 GMT

"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)