[extropy-chat] Externalities

Mike Linksvayer ml at gondwanaland.com
Mon Jul 18 00:32:00 UTC 2005


Hal Finney wrote:
> There was a seminal paper by Groves and Ledyard for allocating public
> goods that could probably also work with negative externalities (which
> are like negative public goods).  There has been more work on this and
> it is a somewhat active area of research.

This one?

http://www.kellogg.northwestern.edu/research/math/papers/144.pdf

Not amenable to skimming (by me anyway), but it seems that they
have a mechanism for communicating preferences for public goods to
the government where the incentive is to communicate your true
preferences.  Taxation might be based on revealed preferences as
well in their system.  The gist of how it would work is perhaps
captured in on page 23 (my summary):

A message to the government consists of the amounts an individual
would like to add or subtract to others' requests for each public
good.  These messages determine resource allocation towards public
goods.  The same messages also determine individual taxes, which
are somehow proportional to the cost of the public goods requested
and the deviation from the average of others' requests.

Anyone know of a readable summary of how this (which I've probably
horribly misunderstood) would work in practice and of subsequent
research?

> It's also possible that a futures market could work, similar to Idea
> Futures.  People could buy real estate futures that were conditional on
> either the activity being started or not.  Then the price differential
> between the futures contracts would be an objective measure of the
> loss in property values due to the activity, which would then determine
> compensation levels.

That's a neat application.

Chris Hibbert wrote:
> Dominant Assurance Contracts

DACs could be used to create deed restrictions (I'll give up my
right to run a daycare center on my property if the neighbors can
raise $X).  I don't immediately see how they can be used to compensate
for negative externalities, which in many cases will be more efficient
than preventing (e.g., deed restriction) or mitigating (e.g., spend
more to make offshore platform less likely to fail) negative
externalities.


I don't recall where I read about it, but one scheme to facilitate
development and compensate for negative externalities goes something
like this:

Ask each resident or property owner how much they would have to be
paid to allow a (e.g.) nuclear plant to be built within some distances
from their locations, say 1km, 10km, 50km.  Given this information
nuclear plant entrepreneur can decide where to build the plant and
pay each entity the amount asked given the distance of the chosen
location.  I don't recall how this system got people to reveal their
true preferences or dealt with liars and holdouts (I require a
payment of $1 trillion for construction of a nuclear power plant
anywhere on earth).

Anyone know where I might have read this?

Hal Finney:
> The truth is, the NIMBYs have a point.  They should be compensated,
> when all the rest of us gain an advantage by doing harm to them.
> Doing this will be more fair, it will improve economic efficiency,
> and it will reduce resistance to much needed development projects.

They have a point, but one that is easily overemphasized.  Just
about anything one does is going to have negative externalities for
someone.  My guess is that a solid foundation of property rights
that prevent nuisance negative externality claims is far more
important than ensuring that significant negative externalities are
compensated for.  More efficient means of determining and compensating
for negative externalities would still be nice.

I'd liken this point to one I like to make about public goods
(admittedly just my intuition, but a very strong one) -- their
underprovision is overestimated, while rent seeking that goes along
with providing public goods through coercive means is severely
underestimated.  Still, more efficient means of providing public
goods and determining which ones to provide (e.g., DACs, perhaps
futarchy and "incentive compatible" mechanisms) are always welcome.

-- 
  Mike Linksvayer
  http://gondwanaland.com/ml/



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