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.
Sunday, April 17, 2011
Posted by dkuehn at 8:06 AM
I mentioned to Prateek in the comment section of this post that I might write some about culture as an externality. I honestly haven't had the time to put much thought into it. But here's the basic idea: culture is a context that you find yourself in and, if you are cultured, that you participate in and engage with. But culture isn't like a loaf of bread or any normal good; the extent to which you benefit from culture depends substantially on the culture that others purchase and experience. The buyers of fine architectural specimens benefit from their purchase themselves, of course, but they also provide a positive externality for everyone else by contributing to the culture of the community. Private pieces of culture - rare or important books, private art, my wine rack, etc. - are somewhat harder to talk about in these terms because they are often kept private, but they (1.) produce more cultured people who go into the world and interact with others in an cultured way, an (2.) create a market for works of culture that would be weaker otherwise.