[ExI] External costs

[dan_ust at yahoo.com]

--- On Tue, 4/21/09, Rafal Smigrodzki <rafal.smigrodzki at gmail.com> wrote:
> On Mon, Apr 20, 2009 at 1:26 PM, Dan <dan_ust at yahoo.com>
> wrote:
> 
>> **  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.
> 
> ### Not sure about that. This is one of the strongest
> arguments
> against anarchocapitalism that I know. The free rider
> problem in the
> provision of defense against large-scale territorial
> aggression is
> difficult, unless you for example introduce rogues who
> would allowed
> to prey on defectors and thus persuade them to buy bundled
> protection
> contracts. Tricky. I do think it's doable, that's why I am
> an
> anarchocapitalist, but it's not easy.

I disagree.  First, positive externalities are subjective.  For instance, you might live next to a bakery that gives off the aroma of fresh bread and other delectables for a good chunk of the day.  And this might be something you like -- and, therefore, experience as a positive benefit.  As you're not paying for it, it would be considered a positive externality.  The bakery cannot charge you for this benefit.

Yet another person might experience this as a nuisance.  (Property rights might settle the issue in the fashion of who was there first.  For instance, imagine the bakery was in the neighborhood first and has been there for decades -- in which case, some might say the bakery "homesteaded" the right* to give off baking odors in the neighborhood and, if you don't like it, you'll have to negotiate with the bakery to get it to stop BUT you can't use coercion against it.  Imagine the opposite case: you're there first and the bakery's the new kid on the block.  In that case, some might say that you have the right to the pre-bakery condition and the bakery has to negotiate with you for the right to "pollute" the air with baking aromas -- or, at the extreme, must stop.  Note that, in either case, there is no failure of property rights or the market.  Also, it's likely that people who really detest baking smells won't move next to a bakery in the first
 place;
 bakeries, too, that want to avoid going to court will likely also want to avoid moving into neighborhoods where someone hates baking smells enough to take them to court.)

Second, positive externalities extend out in all directions and do NOT necessarily impose a cost on the producer.  In the case of the bakery, that you enjoy baking smells really doesn't any additional cost to the bakery.  The bakery might still enjoy a handsome profit without even knowing that you open up your passive ventilation apparatus every morning so that baking odors will waft in for you to enjoy.  And if it really bothers the owner that much, she might find ways to deny the odors to you.

This applies generally.  Me using the same language as you might yield a positive benefit to countless others reading this.  Yet this doesn't diminish the profit you and I get from being able to understand each other.  I don't fret thinking, "Keith, Lee, and Natasha might read and understand this without making a side payment to me, so I'm losing out in life."  (Note that this would also apply in security examples.  For instance, during the Napoleonic Wars, it could be said that Britain was a free rider during most of the conflict, allowing France's continental enemies to do most of the heavy lifting.  (This is generally the case for off-shore powers who can sit out continental conflicts or enter them late after the belligerents have worn each other down.  Another example is US entry into both World Wars.  The US didn't send troops over to defend Belgium in WW1 or France in WW2, but waited until Japan attacked and then Germany (idiotically, some
 would say, because its treaty with Japan did not obligate it to declare war against any nation Japan attacked, but only in defense) declared war on the US.)  Likewise, a neighbor who is always about his home, working on the yard and such, might deter burglars from making an attempts on his neighbors' homes.  In both cases, positive externalities, in the mainstream economist's view, are generated.)

Third, from the work of Walter Block and others, it seems clear that the definition of "public good" -- the epitome of a positive externality -- is troublesome if not incoherent.  This is because any positive externality ultimately can be internalized by the producer stopping production, negotiating with the third party, or by changing production in such a way as to limit the positive externality.  (All of this depends on the producer here seeing the positive externality as a problem.  In case of the bakery above, the bakery owner might not care that you enjoy the aroma of fresh baked goods without paying for it.  She might not seek a way to prevent you from enjoying that benefit without paying.  That's her choice.)

How might this practically be applied to security?  Well, let's assume a libertarian market anarchist society, Fair Libertaria, where each person decides her or his security arrangements -- even whether to have any at all.  (Imagine, for exmaple, America were to turn libertarian today with no substantial change in security issues.  (My guess would be that security issues would becoming less pressing in a libertarian society because people would be able to defend themselves and the overall costs of real crime -- as opposed to victimless crime -- would be much higher.  This is, of course, my guess.)  I used to live in Northern Vermont, where crime is extremely low.  In that area, I might decide I don't need to pay for any security.  I also lived in the NY metropolitan area at one time.  There I'd be much more likely to pay for security, simply because crime is much higher.)

Further, imagine some people pay for, say, a militia to defend against an invasion.  (Let's say the payments are in the form of money, goods and services, or actually joining the ranks to, say, carry a rifle or crew forts on the frontier or coast.)  Others, on the other hand, decide not to help out with this militia.  (Some might decide not to simply because they truly believe it's a waste of time and effort.)  Let's say there's an invasion and the militia swings into action defeating it, though at high cost.  Now, as you seem to contend, all the people of Fair Libertaria benefit from this -- even the ones who didn't pay for the militia.  As it's a libertarian society, the militia supporters can't coerce the other residents of Fair Libertaria to pay up -- either before, during, or after the invasion.  And the usual view is that as this sort of "national defense" is a pure public good, no one would privately provide it -- of course, assuming no
 altruism
 or that no one values defense so highly that she doesn't mind free riders -- so it must be publicly provisioned.  (In a sense, coercing non-payers here is just the same as taxing them: it initiates force and the justification is, as usual with taxation, for some public good.)

So what's to be done?  Well, for the libertarian, coercion can't be used.  (That would, anyhow, transform the libertarian society into a non-libertarian one.  In this case, the militia supporters would, in effect, become a ruling elite.)  So, either the libertarian society would, assuming militia supporters won't support a militia unless only supporters benefit, go defenseless or some other solution must be had.  This maps onto my statement above: the producer can stop production, negotiate with the alleged free riders, or change production in such a way as to limit the positive externality.  Let's take the latter two in turn.

Negotiation can involve everything from moral suasion to boycotting non-payers to anything else not involving coercion.  Social pressure can be brought to bear on non-payers.  Of course, there might still be some who still don't pay, but one would wonder why they'd continue their unpopular action or stay in an area where social pressure against them is very high.

Capturing or internalizing the positive externality would involve entrepreneurship.  One could imagine, for example, the militia letting the invaders know that this or that home or neighborhood will be defended.  An invader bent on plunder, thereby, might avoid those areas because of the high cost.  But how would this work in the case of, say, a frontier defense, where everyone living behind the frontier seems to benefit.  (This brings up the subjectivity, again, of externalities.  Many, many years ago in _The Connection_, Ben Best writing as Diogenes of Panarchia raised this issue, defending the notion that free riders should be made to pay.  I pointed out that one could take his argument to extremes by saying that the US should pay the PRC for its rivalry with the Soviet Union.  After all, from about the 1960s, the PRC, to some extent, checked Soviet power.  So, should Americans and Western Europeans pay the Chinese for this favor?  I don't recall
 Ben's answer.)  However, in my view, the toughness of this case should not be seen as a knockdown argument in favor of surrendering the libertarian principle in the name of national defense.  It merely represents, to me, an opportunity for people via markets and other voluntary arrangements to work out how to deal with the problem.  (I also think the problem magnified a bit.  Were collective defense the best bet against attack and invasions, societies with governments would never be attacked or invaded.  In fact, it's almost always the case that such societies are attacked and invaded -- and invaders usually fare better in such because they need only get some, most, or all in the victim government to collaborate.  Even when such collabortors aren't to be had, that the victim society is used to being ruled and already has centralized authority, makes it extremely easy to take over.  This is why the invasion of North America and Ireland took so long -- so
 long before the invaders completely took over and pacified the natives -- while the similar invasions of the Inca, Aztec, and Mogul empires were so quick and easy.)

Regards,

Dan

*  Note that this logic applies generally.  The homesteader gets the right to do something -- she or he has justly appropriately the good.  This doesn't mean that the homesteader can't or won't ever negotiate -- just that she or he can't be forced to stop using the property.  (Note my use of force here.  This doesn't mean anyone who doesn't like, say, bakery smells can't seek non-coercive remedies.)  In the bakery case, it might be that the bakery owners prefers to have the good will of her neighbors, so she might actually put in special ducts or filters to reduce or eliminate bothersome odors -- even though, from the property rights perspective, she has every right to let her facility reek of them into the neighborhood.