[ExI] External costs (was Re: are all cultures equivalent?)

[Rafal Smigrodzki]

On Mon, Apr 13, 2009 at 9:51 AM, Brent Neal <brentn at freeshell.org> wrote:
> On 13 Apr, 2009, at 4:54, Rafal Smigrodzki wrote:
>
>> ### "Externalities" is just the kind of baloney that economists
>> invented when their own research started going too far against their
>> own prejudices. The anti-market bias afflicts most economists, too,
>> they just learned how to clothe their antipathy in jargon.
>>
>> Rafal
>
>
> Externalities, or externalized costs, are very real, not made-up jargon.

### I admit my comment was a bit over-the-top. Externalities are not
entirely made up, there is a certain fact of the matter that is
described by the term, yes, however, there is a big gap between the
totally innocuous fact and the grandiose and confused schemes whipped
up to deal with it. See below.

-----------------

 Let
> me give you an example: Let's say I own a bit of land upstream from you. I
> can poop in the river and for me, waste disposal is free. Much cheaper than
> digging a latrine or building some hippie composting system. The water just
> carries it downstream.  Of course, by doing so, I've imposed some costs on
> you.  You now have to install a catch system to remove my waste from your
> drinking water, and boil everything to kill the coliform bacteria. Of
> course, it doesn't matter to ME, since I've externalized that cost. :)
>
> Economically, it makes a lot of sense for me to push that cost onto you.
> What can compete with free, after all? But it doesn't mean that its the
> right thing to do, so you are well within your rights to make sure there is
> a Clean Water Act preventing me from pooping in the river and thus making
> sure that I'm paying for my own waste disposal, rather than using the
> fortunate happenstance of the river to force you to pay for it.
>
> There's a very good reason economists care about externalities, one that
> seems obvious to me: precision. If you don't account for external costs,
> then there is no consistency in your measurement system. It's like using a
> balance without taring it each time. You have no idea how one thing compares
> to anything in terms of its real cost, because you're not measuring the same
> thing each time.  Which, contrary to your assertion, means that
> understanding externalities is vital to market economics - how can an agent
> in the market make the best choice if there is no precise or accurate
> counting of the cost?
>
### Yes, you need to know all costs to reliably rank policies by
efficiency. But as I said above, externalities are a very simple issue
that gets abused well beyond its significance. There is an
"externality" of some sort to absolutely anything that at least one
human being may care about - even my breathing will be seen as an
externality by the global warming lunatic fringe crowd, since my mere
physiological existence imposes a certain carbon footprint. Almost any
interaction between any two parties, whether commercial or not,
produces some externalities impinging in some way on somebody else.
This is uncontroversial. But this simple observation is used as an ad
hoc justification for convoluted scheming that is completely
unjustified by the facts. In the example you give above, yes, there is
an externality imposed by shitting in the stream, at least as long as
somebody who cares lives downstream. It can be dealt with by
describing the property rights relevant to the stream, and letting
involved parties hammer out deals. As per Coase's theorem, an
efficient outcome can be achieved as long as transaction costs are
sufficiently low. Yet, most economists, just like regular folks, have
an anti-market bias which is only partially mitigated by their
exposure to the workings of the economy, and they seize the
externality as a pretext to support harebrained schemes, like carbon
offsets, fishing quotas, environmental legislation, and yes, the Clean
Water Act, instead of pointing to the tried-and-true method, free
trade.

Rafal