A quick clarification on the externality thing...

...because there's some interesting conversation going on here.

First, commenter Mark was wondering about some of the things I said about subjective value in response to this sentence in Don's post: "This is not science; it is metaphysics: value judgments and political goals will enter into the determination of whether externalities occur in our world." When I concurred with this, noting that we're dealing with subjective value (i.e. - peoples' value judgements) I didn't mean that it's debatable or subjective whether there are externalities. There absolutely are. But those externalities are introduces by individual subjective valuation - value judgements - and these alone don't make externalities "unscientific" any more than anything else in economics is unscientific.

One tricky thing about the way that subjective valuations impact externalities is that there are really two layers of value judgements: first, peoples' own subjective valuations of externalized costs and benefits, and second - our decision as a society whether we want to recognize or give standing to those subjective values. For example - thieves like to take money from people. OK, that's their subjective value. As a society, we say "tough shit" to thieves. We don't really care about that subjective value and we give it no standing whatsoever. That seems like a silly example, right? It's actually quite relevant to these arguments that economists have over whether markets or government solves externalities more effectively. One "market" solution is to have the two parties bargain - people can pay to have polluters reduce pollution. Sounds fine, and if you draw it out the model, it looks fine. But this is still entirely contingent on a social value judgement. Think of it this way - why don't we say to people "well, you can pay the thief not to steal your money". We don't accept this. We give standing to polluters to impose costs, but not to thieves.

"Crime" is just the word we use to describe the actions that impose externalized costs that we consider it unreasonable to expect people to make a Coasean bargain over. We are OK talking to students about swimmers paying polluters not to pollute. We generally don't like to talk to students about paying a murderer not to kill you. Another way of saying this is that ransoms are just a type of Cosean bargain.

These are all value judgements, so coming out and saying "the market does better than the government" or "the government does better than the market" is not a question you can answer unless you can clarify what you mean by "better".

The other thing about this whole bargaining issue (which is central to the question of governments vs. markets in externalities) is that a lot of externalities involve public goods (and bads). Cleaner air is non-excludable, for example. So when we think about bargaining over this stuff we have to think about public goods issues too.

I do agree with some of Mark's points about just figuring out an objective measure of these things. We do that all the time. There's a ton of literature over the discount rate (as Current alluded to in his comment), and over the value of a human life. People estimate all sorts of demand elasticities precisely for this reason - to get a rough estimate of what these costs and benefits might look like.

That's all pragmatic application of the economics, and in my opinion it's much better than flying blind.

But it's important to recognize that these are rough estimates. It's not a measure of "utility" it's a measure of willingness and ability to pay. We need to be careful about two things when we do this: (1.) make sure we always recognize we're not really measuring subjective value - we're just trying to get better acquainted with the costs and benefits, and (2.) make sure we understand that we still have to bring value judgements about who has standing and who doesn't!