This relates to the earlier point about Russ Roberts' post insofar as markets themselves are positive externalities. My exchanges support the existence and persistence of producers. All markets, in this sense, are a collective action problem: they require a critical mass of demand to even emerge. This is why I hesitate to be too celebratory about places like Amazon or Wal-Mart. That they can provide goods at a low price is obviously something that I acknowledge and celebrate them for. But there is a real collective action problem associated with culture-producers and preservers like small book-sellers and farmers' markets. I have my own demand for niche books and farmers' market food, and the market will satisfy that demand the way the market always does. But when we think about culture, we realize that our demand doesn't stop there - what we derive utility from doesn't stop at the level of our own individual consumption. I derive utility from the presence of a bustling farmers' market. I derive utility from the existence of a variety of small and used bookstores and I derive utility from hearing about the positive experiences that friends have there. Now, I could pay friends to go to these venues, of course. That would be the market solution. But the very act of payment for that source of utility would destroy it as a source of utility. The point is, we derive utility (and disutility) from interactions that we have no control over, particularly the cultural milieu that we find ourselves in. That is the very definition of an externality, and because it's an externality we can't expect the market to provide for it on its own - other institutions may be more helpful.
John Nash’s Contribution to Game Theory
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