Friday, July 12, 2013

Thinking about the way people talk about externalities a little bit this morning...

If I have to pay you not to dump toxic waste behind my house (but not on my property), it makes no sense at all to say that voluntary action has "solved" the externality. Maybe the difference between the external cost I would have experienced and the marginal value of dumping the waste can be said to have been "solved" - creating a market where there was none internalizes that portion of the cost.

But we don't like externalities because I'm still bearing the cost of the marginal value of the dumping the toxic waste in the first place. In a sense you could say it is internalized into an unjust/perverse/extortionary market relation which isn't really "voluntary" at all. Why? Because it just shouldn't have been dumped in the first place.

So it seems to me arguments like this (and maybe there are other arguments, but of course this is one that you commonly here) aren't solutions to the problem of externalities at all.

If I can't say the bolded sentence above. If we are instead dealing with an example where I can't legitimately claim that I have moral standing and the polluters don't (and certainly there are cases where standing is shared), that doesn't solve anything either. The person taking the action can still extort that portion of the benefit. If the land that the toxic waste is being dumped on is land that isn't owned by anyone, the polluter can dump and demand payment to stop but I can't require payment before dumping occurs.

Standing is subjective - they may feel they have the same standing that I do, perhaps. And they can make that case.

But you can't make an objective claim that the externality is solved by the market in this case if I don't share that understanding of our respective standing in the transaction.

Property rights are nice because they help these transactions to function, but property rights don't provide a self-justification. We're perfectly entitled to reject the legitimacy of a property rights arrangement and no one can objectively challenge that (again, they can of course subjectively challenge that rejection).

The last three paragraphs ought to get you thinking about how this relates to the problem of social welfare functions and interpersonal utility comparisons. To get anything meaningful out of those exercises we need to make assumptions about weighting utility. That's fine to make those assumptions, you just have to acknowledge it's a normative exercise and not a positive one. The same goes with these claims that markets (in this set up) solve externalities - you can say that but don't pretend you're making a positive claim.

Where am I wrong? This is just a set of thoughts I threw together so I may be.


  1. Where is the externality coming in? If I tell you I will put grafitti all over the public property around your house unless you give me a hundred bucks, and you give me the money, I don't think anyone would claim that an externality has been solved.

    An externality would be if the toxic waste in your example was a byproduct of making spiderman action figures. If the company making the action figures is going to dump next to your house, it makes no difference whether you pay them to stop or not. You are still bearing part of the cost of making spiderman action figures.

    I probably missed something...

    1. I don't think you've missed anything which makes me wonder if I'm missing something about your comment.

      I do think some people would say that the externality has been solved in your first case, and that's what I perceive to be a problem.

      Often in setting up these problems getting the optimal allocation of grafitti-production or pollution-production is what people point to. But what really matters for making it an externality is what costs and benefits are paid, NOT the form in which I pay them.

      If I pay a cost through suffering with pollution or through an abatement payment I'm still paying a cost. And whether I have standing to claim that as a harm largely depends on social definitions of what constitutes a legitimate harm.

      I'm sure some people who cite Coasean solutions don't make the mistake of confusing allocational outcomes with the solution to an externality - but many do.

  2. "If I have to pay you not to dump toxic waste behind my house (but not on my property), it makes no sense at all to say that voluntary action has "solved" the externality."

    If the toxic waste behind your house (not on your property) would have harmed you or your property, then you could sue in a society based on property rights, and obtain compensation yourself (and a cease-and-desist, likely). If not, THERE WAS NO EXTERNALITY. Just someone near you doing things you don't like. Do we really need to "solve" the "externality" in that case? I don't like people wearing sweatpants around - I find that gross. I suppose I could pay them not to... but I wouldn't have "solved the externality"...

    1. Right but the whole point is that's not a market solution - that's an interventionist solution.

      The only difference between the case you describe and the case of, say, the externalities of climate change is that a group of human beings decided on the standing question in the case you describe and have not decided either way on the standing question in the case of climate change. That's the only difference.

      re: "I don't like people wearing sweatpants around - I find that gross. I suppose I could pay them not to... but I wouldn't have "solved the externality"..."

      Right but we as a society have made a ruling on the standing of your distaste for sweatpants. There is an externality in this case, paying them would not solve it, and nobody cares one way or other because we don't think you have standing.

      We're not obligated to care about externalities, after all.

  3. You could think about this in several ways, though I think you first need to define the problem a bit more clearly.

    Who owns the land behind your house? If you build your house in front of a landfill, complaining that "it should not have been dumped in the first place" seems kind of silly, since the purpose of the land is to dump things. If the stuff they choose to dump is worse than you expected, I don't think you have the moral high-ground in that case, either. You gambled on the value of the property, and lost.

    If your neighbor owns the land, I think we're just in the normal property rights dispute place. Like with Coase's railway-sparks causing a fire on the farm, there is a reciprocity of harm. Your living in that house imposes a cost on your neighbor that he would not have borne had you lived elsewhere. If your neighbor had been dumping there with no problem for a long time and you decided you wanted to live there, then we would see the situation differently. Just as your neighbor could opportunistically threaten to dump in order to extort you, so could you opportunistically buy a piece of property near where he dumps and extort him.

    Property rights are never unconditional, they are always circumscribed. The Coasian question is where you assign these rights so that transaction costs are minimized. You're wrong to say that you "own your land," you own a bundle of rights associated with that land. If you purchased the land with the belief that there was to be no toxic waste behind your house, most judges will grant you the right to prevent your neighbor from dumping, because you having that right minimizes social cost. It's why I can't buy a thin area of land around houses with a great view, and build up walls blocking the view to extort the owners of the house. Giving the right to the person with a view minimizes social costs.

    The rules of morality in this case map pretty well onto the property right constellations that minimize social cost. Of course, your point about standing is still interesting. What if you're dumping in a place that I consider my ancestral home. I build a house there, you claim I am an opportunist, and I claim that my rights to the land extend further back than yours. It's up to the court to systematize what grounds for standing are legitimate and those that are not, and these things will vary depending on the things that particular cultures believe give legitimacy.

    I'm not sure whether I'm agreeing or disagreeing with you, reading your post again. I think I'm agreeing with the last part of your post, while disagreeing with your "it should not have happened in the first place"-- that claim is historically and culturally contingent. But claims like this *do* decide whether people believe that property arrangements are legitimate, or not.

    1. Right - I thought I did specify that nobody owns it for precisely the reasons you lay out. So consider the air or the climate if the temptation is to say that you should just privatize it.

      Same goes for you "property rights are never unconditional" paragraph, the point being that these declarations of what a right properly consists of are not market outcomes - they're institutional interventions into markets that we have to evaluate on some other basis than the market.

      This is my standing point. The judge is affirming standing that I assert. In land cases where there is a long history of this that stuff is laid out pretty well, so again maybe it's better to think in terms of more controversial interventions in cases of externality. The intervention is just making a ruling on the standing question, just as the judge is.

      re: "I'm not sure whether I'm agreeing or disagreeing with you, reading your post again."

      I think we agree on a lot actually. I'm not arguing that there are not any cases where one cannot say "it shouldn't have happened in the first place". The point is that even though there are cases where that can't be said there are also cases where that can be said. The biggest externality elephant in the room - the climate - is an example. When people say we need intervention the claim is that Coase/Buchanan solutions basically ratify extortion by ignoring the very subjective and contested standing question. In cases where there's lots of common law and ways for working this out the institutional intervention has really already been accomplished. If you take that as given in the property rights regime you can call it a non-interventionist solution but in reality it is.

    2. I guess I would disagree over the "no one owns it." As long as someone has power to affect the land, someone owns it. If you can prevent someone from dumping there, you own that land (although you own fewer rights than the land your house is on); just as, if the only people able to affect the 'climate' are big polluters, the big polluters own the climate (for the purpose of economic analysis). Big polluters may not be the owners of the climate that minimize social cost, so the Coasian solution would be to reallocate the right (because transaction costs are large). (This paragraph was mostly nitpicking over word choice, so I'm sorry--but words are important!)

      I don't see it as an 'intervention' if a judge clarifies ownership rights--they're laying the foundation to the market process (which is done in both an evolutionary, cultural process and a legal process). There would be a market if airlines had to contract with each and every person to fly in their air space, and there is a market when the airlines have that right. Neither solution is interventionist--it's comparing two markets, one better than the other. The Coasian solution is the solution that minimizes social cost--which is not the same as preserving the present property right regime unless transaction costs are zero. If the conditions have changed so that the property regime allows people to extort one another, the property regime should change; it's not the "Coase/Buchanan" solution to let it keep happening.

  4. In the grand scheme of things, Daniel, in this post you are rejecting Ronald Coase and embracing Walter Block!

    1. It seems vaguely familiar to me that someone associated with the Mises Institute has said similar things before... not sure if I'm remembering Block or someone else. I'll have to take a look!

      As is (I hope) kind of apparent in the conversation with Ryan above I don't really feel like I'm "rejecting Coase" but I do get bothered by some of the ways in which Coase is summarized - as if he's making Pigou irrelevant or something. Coase had some important things to say about market solutions to externalities, but I've never felt like he's completely put off my worries about them.

  5. Several economists have made these points. As Bob points out Block did, I Rothbard did too. I've read a more left wing economist who did too, though I can't remember who it was.

    I once made the point about what you call 'standing' using a lesbian couple's behaviour as an example. Since their can give negative and positive externalites depending on perspective, and that externality can be "moral" or not, depending on social norms.


All anonymous comments will be deleted. Consistent pseudonyms are fine.