Talk:Externality

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Opening Paragraph Modified[edit]

I removed the last two sentences of the first paragraph. It was poorly-sourced and reeked of blatant anti-market bias. Saying that allocative efficiency rarely occurs on the free market because of corporate limited liability is just ludicrous. — Preceding unsigned comment added by 98.191.15.34 (talk) 14:02, 13 March 2019 (UTC)

Examples[edit]

I've reverted GoodAtEdits's changes to the article. Let's talk about it here and see if we can come to consensus on the subject. Protonk (talk) 21:25, 24 April 2018 (UTC)

I agree that we should have a discussion about it and apologize for reverting the change in haste. Obviously it is true that, because healthcare markets are subsidized, an individual's health status creates costs borne by society at large. However, in a modern society, many sectors are partially or wholly subsidized, and thus many decisions can affect society through the channel of government. As I've stated before, these examples should really be focused on the clearest cases of private market behavior imposing external costs. Here are a handful of examples of externality that are equally valid if we are to accept the logic that ill-health is an externality due to subsidized health markets:

-Good-health caused by consuming healthy foods or fitness products. Indeed, these choices can impose billions of dollars yearly in external costs due to increased life-expectancy which is then subsidized by social security and medicare.

-Birth control creates a negative externality by preventing the birth of an individual who would then contribute to the social safety net through taxes. The costs of this foregone tax revenue are not incurred by the parents or the birth control manufacturers

-Defense Lawyers are negative externalities because they increase costs of prosecution which are borne by society while accruing private benefits to the defendant and his/her lawyer

As you can see, these aren't great examples of externalities. In all cases, including the case of ill-health, the sign of the externality is ambiguous. In all cases the "reference point" is murky. To what counterfactual should a person receiving medical care be compared? An individual with net zero effect on government revenues? Themselves prior to the onset of poor health? A person whose burden on the government is equal to the societal average? It is unclear. The inability of economists to fully appreciate the interconnectness of personal decisions, and thus fully appreciate the omnipresence of externalities, is a valid critique. One that is pointed out on this same page in the Criticism section. And rightfully so!

Let's use the examples to provide clear textbook examples that have a clear and obvious sign, and that are not dependent on some particular government structure or shared understanding of community responsibility to exist.

-GoodAtEdits

Thanks for replying here. I had hoped to be able to reply today but work has intervened. If you'll be patient I'll have a comment on this tomorrow. I think we can find a lot to agree on and I think (presaging a bit) that some of the difficulties here can be resolved in ways that will improve the article. Protonk (talk) 20:51, 25 April 2018 (UTC)
I have a few comments.
  • I've removed the "ill health" section for now, partially reverting my own changes. I think that it can be supported by evidence and within the framework of externalities (as I'll explain a bit more generally below) but it's framed inadequately and not supported specifically enough by references in the article.
  • The other section, on factory farms, is close to being duplicative but is distinct enough that we can re-write it rather than remove it. I believe that to be the case for a few reasons:
  • It's a canonical example of an externality. Damages to neighbors from ranching cattle is basically the example from Coase--damage to a farmer from a rancher is the motivating thought experiment in The Problem of Social Cost.
  • The section includes an aside on water pollution but that's not necessary. We can merge that into the water pollution bullet above and keep the social costs from antibiotic resistance.
  • Antibiotics resistance is specifically mentioned in public economics textbooks as an example of an externality (see A Course in Public Economics, p 99, cited in this paper, which is great as well as here (And multiple cited sources therein)).
  • It is not true that whether or not health costs are externalities is dependent on the role of government in providing health care. If, for example, health care was provided via a single payer system it would make the analysis of the costs much easier to perform but even with private provision health care is still excludable and rivalrous. If I'm at the doctors office due to an illness you cannot see that doctor at the same time. Further, if the doctor is paid for her time (regardless of who writes the check), it is assured that the marginal cost of anyone seeing that doctor will increase. Likewise if I receive medication I'm driving up the marginal cost of that medication for anyone else. These are both true even if we grant that "private" insurance provides for a completely internalized contract between doctor and patients (I don't grant this). You can convince yourself of this by imagining a toy model of one doctor with no patients and adding patients one by one.
  • I find the argument that good health is actually bad to be too clever by half. First, poor health resulting from "individual" market transactions like smoking or buying a soda was essentially the motivator for Pigovian taxes, which one could consider a proto-model for externalities. Second, although it may be true that in a general analysis people may incur more health care costs in the long run of a healthy life than the short run of a sick one, revealed preferences certainly show that people pay for healthcare and demand it.
  • Perhaps a better argument here is that if we decide the sign on poor health is positive rather than negative we will, by definition, exclude plenty of obvious externalities such as air pollution, water pollution simply by stating that the resulting injury from the pollution isn't an injury but a benefit to society as a whole. That's a novel enough theory (Well, not *too* novel, it's been advanced by cigarette companies in the past which is some august company) but it isn't accepted by the authors we might or do cite on the page.
  • I don't think it is a productive line of discussion to rest how we treat externalities on the role of government in the purchase or provision of a good which might be made more or less scarce or more or less valuable. Why? Because authors in the field don't seem to care about it. Damage to crops from cattle can be an externality even if the government provides or buys the cattle. The important point is that the cost is external to the private transaction--the "social" in social cost is merely opposed to "private" and doesn't imply any particular mode of government. Protonk (talk) 14:30, 26 April 2018 (UTC)

I'll try to respond briefly to your points now, might circle back after I've reflected more on your arguments:

  • Regarding factory farms, you've more or less convinced me. It could be presented more clearly, but it is appropriate.
  • In your 6th bullet point, you are describing pecuniery externalities. We have a separate bullet point to discuss these externalities. It does not make sense to separately list every excludable and rivalrous good. We could just as easily discuss attending an amusement park as being a negative externality since seats on a roller cosater are excludable and rivalrous.
  • "Revealed preferences certainly show that people pay for healthcare and demand it". This completely misses the point. It is entirely consistent that people would demand excess healthcare in a setting where long life expectancy was subsidized. This does not negate the fact that these long life expectancies are subsidized by agents external to the market. If ill-health is an externality due to increased healthcare costs borne by society (I've already argued against your pecuniary line of reasoning), then it must be the case that long healthy lives are subsidized my the elderly care costs borne by society. These examples are nearly identical in construction.
  • "I don't think it is a productive line of discussion to rest how we treat externalities on the role of government". I agree, which is why I think we should opt for examples where the the externality would exist even without the presence of government.GoodAtEdits (talk) 15:17, 26 April 2018 (UTC)
  • on the 6th bullet point I think you're right. I could make a stronger case for revealed preferences but I think the sub-point, that declaring the sign ambiguous would hazard accepted and acceptable externalities simply by definition, is stronger.
  • As for the role of government, I agree in part but I think we're driving in different directions. I feel the externalities mentioned above would exist even with wholly 'private' provisions for whatever market we're concerned with. So it's superfluous to say that we should find examples which work without government because they all do. Protonk (talk) 15:20, 26 April 2018 (UTC)

I guess I just remain unconvinced that ill-health externalities would exist with wholly private provisions of healthcare (aside from pecuniary ones). My point was never to argue that good health is bad, I brought it up only to demonstrate how objectionable it is to allow an action's effect on government revenues to define it as an externality (which I believe was your initial argument on my talk page). If your argument is that ill-health is an externality in a perfectly private market, I haven't really seen a compelling argument. Agents should internalize the health consequences of their choices. If your argument is that ill-health is an externality because healthcare costs are socialized, I agree, but think that then the good health example is equally valid and that it's better to just list neither in the examples section. GoodAtEdits (talk) 16:06, 26 April 2018 (UTC)

ill health[edit]

I don't think I can do any more research today but it might be worth it to hash out in a subsection what we can agree on with respect to health related externalities, because if the two of us are having a disagreement about this the text is probably not very clear to the reader. What I'd like to be able to do is condense and support the examples we have and frame them in wording which we can both agree on. I think that's possible and necessary since whatever the two of us may think, the literature (google scholar search isn't the most dispositive but shows that at least people are talking about it) certainly attends to the subject. Protonk (talk) 17:42, 26 April 2018 (UTC)

Bribing example as a critique of Coasian bargaining[edit]

Additionally, firms could potentially bribe each other since there is little to no government interaction under the Coase theorem.[1] For example, if one oil firm has a high pollution rate and its neighboring firm is bothered by the pollution, then the latter firm may move depending on incentives. Thus, if the oil firm were to bribe the second firm, the first oil firm would suffer no negative consequences because the government would not know about the bribing.

I believe that the first statement is an inaccurate summary of the article and that the second statement is just not clear. The cited article's main idea is as follows

In the absence of liability laws, threats could become revenue generators. This, in turn, could lead to possible resource misallocation, since incentives could exist for channeling resources into the invention of threatening possible actions or production processes

It basically contrasts the absence and presence of liability laws. I am not sure but I believe that this paragraph can just be removed from the article. --Alaexis¿question? 18:21, 16 October 2018 (UTC)

References

  1. ^ Marney, G.A. (1971). "The 'Coase Theorem:' A Reexamination." Quarterly Journal of Economics.Vol. 85 No. 4. 718–23.

Is congestion an externality?[edit]

Congestion is mentioned as a social cost (presumably an externality) in the page on Frank Knight. More broadly you could say that consumption of a scarce resource always gives rise to external costs because it reduces the amount available for other people. It's external to the transaction but not to the market. Economically it seems completely different from (say) pollution which imposes costs not reflected by the market.

Ought the definition to make the distinction clearer? Colin.champion (talk) 15:00, 20 September 2019 (UTC)

Yes, I'm sure the definition is wrong. It implies that externalities exist whenever the marginal cost function is non-constant, since one person's purchase makes the good more or less affordable to other people. This isn't an interesting property and isn't problematic for market mechanisms. On the other hand the question of whether traffic congestion is external isn't well formed: people don't pay to drive, so there's no market for it to be external to. You could model driving as taking place in a pollution market in which the price has been set to zero by government subsidy, in which case congestion is external and pollution internal, or (more naturally) you could see it as taking place in a subsidised market for road use, leading to the opposite conclusion. Knight seems to have been led astray by a badly chosen example. Colin.champion (talk) 07:15, 23 September 2019 (UTC)

Can I suggest a reworded (and abbreviated) lead para? Though informal, I think the definition is more nearly correct. It is useful to bring in reference to context (especially the First Theorem of Welfare Economics) since this is assumed throughout the article. Some of the material I omitted would need to retained elsewhere. (I'm far from being an expert on the subject, so I'm reluctant to jump in and edit myself.)

In economics, an externality is the cost or benefit associated with a transaction which is not reflected in the market mechanisms governing its price. The commonest example is pollution, as when the price of coal is determined by the costs of its extraction and sale without taking account of the pollution it causes. External costs can also be negative (i.e. be benefits), as when the purchaser of a tree isn't rewarded for the benefits it confers on other people.

Externalities are important in economics because their existence is one of the ways in which the assumption of market completeness can be violated. According to the First Theorem of Welfare Economics, market completeness is a condition for competitive markets to yield a Pareto optimal solution to economic problems, so the existence of externalities is an indication that markets may behave harmfully. Since the absence of transaction costs is another condition, the simple solution of internalizing all costs is likely to substitute one inefficiency for another. An alternative solution is the imposition of Pigovian taxes, which require a polluter to pay a sum through taxes equal to the price his pollution would incur if it was charged through the market.

Colin.champion (talk) 08:17, 24 September 2019 (UTC)

Second Paragraph Grammar[edit]

"Externalities can be both positive or negative." This isn't meaningful to me as written because using "both ... or" isn't normal English usage. In my understanding, the grammatical/meaningful options are "Externalities can be positive or negative" OR "Externalities can be either positive or negative" OR "Externalities can be both positive and negative", although the latter suggests they would be positive and negative at the same time. Perhaps this could be corrected by someone with more knowledge of what the real meaning might be than I have? Cantabile3 (talk) 22:26, 6 October 2019 (UTC)

@Cantabile3: I'm sure you're right, and I've changed 'both' to 'either'. I have a suspicion that no one is taking responsibility for the lead para. Colin.champion (talk) 12:28, 13 October 2019 (UTC)
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