Externalities, Two Riffs from Libertarian Extremes

September 1, 2014 § Leave a comment


Myth of efficient distribution/allocation of resources and goods
Under certain assumptions a free market will lead to a pareto-optimal outcome
if there are no externalities
if every market is perfectly competitive
if every participant has perfect knowledge
if all the markets are in equilibrium
(not likely to hold)

“only if ” and that to just get an efficient not a fair outcome

In what percentage of our markets do we have these externalities …where are the empirical investigations/dissertations
on the significant externalities?
Karl William Kapp – Social cost of private enterprise

market cost of energy made using coal compared to negative external effect – people are undercharged by 70%
electricity generated by natural gas off by 19%
heat production ny natural gas off by 42%
yet fossil fuel industries in United States are the largest recipients of subsidies
if you don’t get the prices right you wont get efficient outcomes
Policy correctives for externalities …how high to put the Pegovian tax or subsidy

When it comes to assumption 2 of perfectly competitive markets the trend demonstrates decline of anti-trust action

Regulatory capture – not realistic given the degree of lobbying power

5-16 % unemployment is a clear indicator of inefficiency in labor market – fiscal stimulus – govt should buy more in a recession

(unions, minimum wage, progressive taxation)

all external parties are disenfranchised and transaction cost of collective consumption is left out of equation


Approaches to the problem of coordination
how to fix rules such that I bear both the costs of benefits of ventures
individual has incentive to avoid cost to larger group ~ pollution

absence of infinitely wise & benevolent central planner

Pegovian tax ~ In most cases we don’t have information needed
to accurately assess damages

Coase ~ In a world of zero transaction costs, bargaining would produce an efficient rule
to limit externalities

laissez faire in population ~> More people less of every thing
A child is not born with a deed so with resources that are private property
it’s not negative externality rather the parents have to work for providing for the child therefore they are enriching
say the landlord or some seller or some employer
but what of the commons …??
positive externalities more people more tax payers # sounds like bull how can you tax an impoverished mass

Net effect of carbon cap trade – we can’t even predict the sign of impact on externalities ???
It is taken for granted that change is bad

Nordhaus – if you only look at the clearly predictable effects it’s not a large negative that would justify X policy/action/effort/cost but there are many ways the outcome can turn out to be worse
Odd asymmetry in Nordhaus is the inclusion of low probability high cost scenario of allowing global warming without calculating high cost low probability estimate of not allowing

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