Externalities: A bridge too far
Posted February 12, 2008on:
CPW sent me a link to the following blog post on Econlog. In the post Bryan Caplan mentions an economist from Princeton (Roland Benabou), who argues that externalities provide a bridge between an economists conception of the world, and non-economists concepts. Although this may be a tad over the top (as non-economists place more value in normative statements than economists would ideally), I believe this is an important point insofar as it allows us to generalise our models, to take into account more possible states of the world.
Bryan Caplan puts forward four points of difference that he believes will still exist between economists and non-economists, however I think they were a touch over-cooked, here’s why:
Note: I will paraphrase the points, so they are in my words. If you think I messed it up, and that the author meant something else, tell me.
- The concept relies on economists idea of ‘willingness to pay’, where non-economists believe in fairness, intrinsic value, equality etc
Surely the economists conception of willingness to pay can also be related to ‘fairness’ and ‘intrinsic value’. As peoples willingness to pay is determined by the value they receive from that specific outcome, I can’t see how it is actually separate from the concept of fairness etc. If people actually value these things, they will be willing to pay to preserve/create them. This makes sense if people gain value from ‘doing the right thing’.
However, you may argue that if people have an intrinsic value for the environment, and the individuals contribution does very little they may free-ride. You would be right! In this case we require some institutional struction (eg government, moral code) to enforce payment, and solve the potential prisoners dilemma problem.
- We solve externalities with a tax or subsidy. Regulation is inappropriate, however the public will still want it.
Not true. As we have discussed often on this blog, banning something is like setting the price infinitely high (or possibly lower in the face of a black market!), and so is like a great big tax, (just with no revenues from removing money from the economy). If it is optimal for society to consume very little or none of a good, it may be administratively cheaper to ban it than it is to tax it, making that preferable.
It is likely that their is a bias towards regulation in society, however we can not help society move past this bias without understanding why they view regulation as appropriate. The truth is that many people in society see the ‘costs’ associated with goods, before they see any benefit – as a result, they believe more good fit into the category where regulation is more efficient than really do.
- Externalities are non-excludable costs and benefits, as a result there are a lot of issues that do not fit into the externality frame.
If we include ‘intrinsic values’ into a persons willingness to pay, then we can make anything an externality. Of course this all depends on value judgments. However, stating that such social values do not exist involves making a value judgment – namely that the value of such things is zero. Sometimes economists are too happy to make this judgment without positioning it as either a ‘simplifying assumption’ (this is what I like to do) or a full scale normative statement.
- Externalities can effect government as well, and have a cost to solve. As a result, not all externalities are worth ‘solving’.
Yes. However, people in society may not understand the full cost associated with a given policy. If economists can frame an issue in general externality associated terms, and then do a cost-benefit analysis, we can derive whether a policy is worth-while. The fact that some externalities may not be efficient does not mean we are wrong to ask about them (eg fat tax)
Ultimately, the purpose of this blog is too explore issues such as externalities. Any concept that ‘generalises’ economic models is useful insofar as it gives us more scope to turn around and work out what assumptions we have to make in order to find a certain result. Although talking about externalities may not make economists and non-economists say exactly the same things, it may help us see eye to eye on more issues.