[extropy-chat] Externalities

[Brett Paatsch]

Hal Finney wrote:

> Negative externalities are often a cause for opposition to various
> proposals that might well have a net positive effect.  This manifests
> in the classic NIMBY syndrome, "not in my back yard".

Right. But a logical early question has to be external to what economic
system. Currently all economic activities that humans are engaged in
extend only about as far out as our satelights.  So we could look at
Earth as biosphere 1 and apply economic ways of thinking to that
system. The virtue of such an approach is that nothing much is an
externality any more to the system, and everyones backyard plus
frontyard is the size of Terra.

> Ideally, those who receive the negative externalities could be
> compensated for them, out of the benefits and profits from the activity. 
> If the
> positives don't outweigh the negatives, then the activity shouldn't go on,
> because it is a net negative.  But if the activity is a net positive,
> the profits will more than pay for the externality costs and the whole
> thing makes economic sense.

> This means that charging for externalities is actually an economic
> improvement, as it insures that only projects go forward which are
> economically rational.  But it also means that if externalities are not
> paid for, excess benefits appear and go into the pockets of the people
> engaging in the activity; so of course they will oppose proposals to
> compensate for externalities.

I'm reading, "it also means that" above, as, "on the other hand". Unless
your examples have now become your only point of reference in which
case you analyis seems to be changing is point of reference for not pinning
down the answer to the question, "external to what"?

> One of the problems with compensation is that it is difficult to come up
> with a formula for a fair compensation level. *1 Once the possibility is
> opened, of course each person has an incentive to exaggerate the negative
> impact he feels in order to negotiate a higher level of compensation.  *2
> And meanwhile the proponents of the activity are lobbying to reduce
> or eliminate compensation. *3  In the face of these opposing forces the
> political process is unlikely to hit upon an economically optimal level
> of compensation. *4

*1 because the question hasn't been asked and cogently answered
"external to what"?

*2 assuming a determinator (like a government, which at present
are only national not global, hence many of the problems of pinning down
externalities, to whom does the Pacific Islander appeal when his house
goes under water due to externalities of global warming ? What
congressmen can he write or lobby?).

*3 yes indeed, and those that happen to be citizens of powerful
countries get better representation from the politicians that depend
on their votes.

*4. Which political process? The current one, I agree. But the political
process in the form of institutions and governments is itself in a state of
change.

> There are various other ideas which have been proposed.  Economists have
> identified what are called "incentive compatible" mechanisms for these
> kinds of issues, where people have an incentive to tell the truth.
> For example, perhaps the community could vote between two alternatives,
> either don't start the activity, or else start it up and use a given
> compensation schedule. *5  Multiple votes could be held with different
> compensation schedules and the one which caused people in all areas to
> split 50-50 on the two options would be the fairest one.  *6

*5 "the community" again key question related to the earlier one. Who
are the members of the community. Those defined out are themselves
externalities because of the logic of political economy.

*6 sure but only after the community membership is defined.

> 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.

Okay.

> 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.

Presupposed a legal framework over the real estate. Okay but again
is it one legal framework for the globe or not. The answer will itself
raise sorts of externalities as legality flows downward from government
and governments are elected by community members with voting
rights, so you need a community definition.

> These are all rather esoteric ideas, but even a simpler and cruder
> approach would seem to be a step forward over the present method, which
> is basically for the two sides to yell at each other until somebody
> backs down.  We're going to need offshore oil drilling and many other
> measures as well in order to satisfy our energy needs.  It seems obvious
> that paying the communities which are impacted by the wells should go
> a long way towards quelling the opposition which will otherwise hold
> these efforts up for years, until we hit some kind of crisis.  It's
> the same way with other NIMBY problems.

Ah you've gone parochial, your just operating within a californian, and
USian mindset. That sees your externalities exported to places where
those affected can't influence the politicians and US courts as easily as
the US citizens.

> The truth is, the NIMBYs have a point. *7 They should be compensated,
> when all the rest of us gain an advantage by doing harm to them. *8
> Doing this will be more fair, it will improve economic efficiency,
> and it will reduce resistance to much needed development projects.

*7 They do.

*8 Seems they should.   But who you mean by "us" whiteman ;-)

Always a pleasure Hal,

Brett Paatsch