Tuesday, August 21, 2012

Another round of externality talk...

...Ryan was concerned I belabore the basic externality point, but this paragraph from Jonathan shows why (it's an interesting post - he talks about bundling and externalities, out of personal experience - I just want to pick this one nit):

"The same principle applies to roads, as well. Imagine a world without government-built infrastructure. There is no major paved artery that leads to a Costco in a suburb of San Diego. Costco has the option of building such a road, but they know that should the road be built it would also connect their clients to other businesses — which may or may not be competitors. Not building the road means facing a loss: the opportunity cost of an increase in clientele traffic. So, while Costco may not internalize all the benefits of building the road, they may still end up in a better position building it anyways.

The real world is one of disequilibrium and non-optimality, which is why the “economics 101″ public goods argument is not a very good one. As such, there is less of a reason as ever to expect that the market will under provide such goods as roads. There is also plenty of real world evidence of private roads, including large networks of free roads (agricultural roads, including paved highways, in Spain are privately funded, free, and extensive)."

The underlined portions are why I thought it was important to highlight that "underprovide" and "not provide" are two very different things. It's out there and it's natural for a lot of people to talk like this, Ryan. These things happen on the margin. Take a hundred different Costcos with slightly different local infrastructure endowments and costs structures, and on the margin there will be less investment in private roads if they can't internalize all the benefits.

This is why I hate the phrase "public good". I'll get on Ryan Murphy's good side now by saying that I hate the phrase "public good" because it's such an essentialist way of looking at goods and services. Instead we need to think in terms of profit and loss. What profits can be captured? That's what influences decision making.


Jonathan gave a real world example of economics - chicken at Costco. I thought of one yesterday too.

My neighbor, whose house is pretty run down, recently got a brand new roof and is currently in the process not just of repainting but replacing all the siding. It looks a lot nicer than it used to. This is good for me, of course - it keeps property values up.

Which made me think, if we wanted to internalize all the benefits maybe I should cut him a check. It's an obvious positive externality.

Which suggests something else: curb appeal type improvements are probably underinvested in. And it suggests a project for anyone who wants to build a neighborhood's wealth: subsidize curb appeal improvements. Nothing inside the house at all - just exterior improvements. Presumably the gains from interior improvements can be more easily internalized.

I know of at least one example of exactly this approach, which I've always thought would be neat to write a paper on. Does anyone know the example I'm thinking of?


  1. Let me guess...would the example be that of education? Or is it something else?

    1. Huh?

      No I mean an example of a case where private building exteriors were subsidized for the benefit of the whole community.

    2. Ah. No, I'm afraid I don't know of a particular case. Is it a very historical example?

  2. I know a lot of 'model neighborhoods' will hire lawnmowers/yardworkers out of the neighborhood associations' budget. Yards aren't housing exteriors, though. In fact, the practice of building an entirely new neighborhood at one time (a development) may be in order to capture the benefits from having all new houses in a neighborhood.

    1. Not what I was thinking of, but that's an interesting point - particularly on the development issue.

      I think yards make sense. There is more of a direct neighbor-utility goal there rather than property value goal, probably.

      I'll mention my example in a little while - I've always thought it's pretty cool.

  3. I'm undecided here. The 'econ101' approach seems to weave between an aggregate and an individual case - adding up all the different 'externalities' does not tell us whether in each individual case there will be a profit available. I'm inclined to go with the Austrians here although I'd object to privately funded roads for various reasons - certainly in the case of normal roads.

  4. "Which suggests something else: curb appeal type improvements are probably underinvested in. And it suggests a project for anyone who wants to build a neighborhood's wealth: subsidize curb appeal improvements. Nothing inside the house at all - just exterior improvements."

    In the village I come from in England some people keep gardens in the public spaces that are owned by the local council. The local council don't complain, but they don't destroy these gardens either. Often one person will garden the grass verge (which is owned by the council) in front of several of the houses close to their house. They don't just mow the grass, they plant flowers and trees. I'm not sure if this is entirely a matter of improving house prices though, since many people I know who've done it haven't been tried to sell their houses for many years.

    My great-grandfather planted daffodil bulbs in the verges throughout the village. Since daffodil bulbs reproduce they're still there, and the village is quite well known for the daffodils. But, this must be an old trick, see Wordsworth....


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