[ExI] External costs

[Dan]

Weighing in on this without reading all the posts...

Externalities or external costs are not made up for purely ideological reasons.  However, a problem arises in specifying just what are costs.  After all, costs are subjective and one can't make objective comparisons between different individuals when it comes to costs (or to value in general; costs merely being values foregone in action*).  The problem with modern, neoclassical talk about externalities -- even when informed by Coase -- is that it tends to think the policy-maker or economist can tabulate up the costs, make valid interpersonal comparisons, and formulate the correct -- e.g., welfare-maximizing -- decisions.

Also, the scenario of polluting a river can be resolved, in a truly  free market, by having property rights in the river.  Having a government agency decide what constitutes pollution and the costs involved is just purely arbitrary.  (It's also not a good proxy for private ownership of the river.)  In fact, in general, problems of _negative_** externalities can be dealt with by assigning property rights (and assigning according to just appropriation -- not by government fiat).

Regards,

Dan

*  Which values?  This depends on the actor and her view of the world -- hence the subjectivity.  For the sake of modeling and to tease out results, of course, economists can assume certain types of actors.  But, in applying these idealizations to real world situations, one must be careful -- careful especially not to pretend that real world actors are exactly like postulated ideal ones and also not to fault real world actors and institutions for not fitting some simplified model favored by a particular theorist.

**  Positive externalities are not really a problem, since they violate no one's rights and the source of a positive externality can always decide to not provide it -- if it costs said source too much.  Note that many economists often see this as a problem -- since they fear certain positive externalities will be underproduced due to free riders and the inability of the sources to recapture costs.  (They usually call these public goods problems.)  This, however, assumes that the right level of production can be known and that interferring in the market to obtain that level does not have serious unintended consequences.  Were economists and policy-makers able to solve the problem of determining the right level of production, I submit, socialist command economies would work.  That this is not the case -- and there are strong theoretical reasons for believing it's impossible as well as historical data to illustrate the follow -- should be obvious to all
 intelligent people by now.