Tuesday, August 3, 2010

Primer on Externalities---One of the more interesting and relevant concepts in Economics

Here is an excellent blog post that summarizes externalitites, negative and positive,  better than I can do...It is an extension of the blog entry I did just below this one.

I Suppose That This Is One Way To Internalize An Externality, Turbine Edition…(From: Econogirl)

Let me start with a quick recap of the whole externality deal, in bullet-point form:
■Externalities are side effects in a market, i.e. costs and benefits that accrue to people who neither produce or consume a product. For example, pollution is an externality because I am affected by pollution from factories even when I neither produce nor consume the products that they make.

■Externalities can be either negative (as with pollution) or positive (as would be the case if I lived upstairs from a bakery and got the smells wafting into my apartment…though I suppose that would get old quickly).

■When externalities are present, free markets left to themselves don’t produce the socially optimal quantity of a good or service. If there are negative externalities, the free market produces more than is socially optimal because it doesn’t take into account the cost it is imposing on society by producing. If there are positive externalities, the free market produces less than is socially optimal because it doesn’t take into account the benefits it is providing to society.

■In these situations, taxes and subsidies respectively can increase overall welfare because they move production and consumption to the socially optimal level. Taxing or subsidizing in the amount of the externality that a good creates is referred to as “internalizing” an externality, and taxes (and subsidies, I suppose) of this form are called Pigovian taxes.

■Note that it is not necessary for the tax revenue generated to be spent on fixing the externality for this setup to work, since the taxes and subsidies are in this case merely used as a vehicle to move the needle on production and consumption. For example, Pivogian taxes to reach the socially optimal level of pollution do not require that the tax revenue be spent on pollution cleanup, but there is an implicit assumption that the tax revenue is being used for something socially beneficial rather than being flushed down the toilet.

This is usually where the textbooks stop, which means that they ignore a number of relevant subtleties and complications associated with externalities and Pigovian taxes. First off, they act as though calculating the amount of the externality is easy, whereas I am pretty sure there is a shiny new Ph.D. and academic job waiting for anyone who has a good way of figuring this out. I mean, by what dollar amount are you inconvenienced by the pollution resulting from the production of one beanie baby? Yeah, I don’t know either. But wait, it gets even more complicated, since this answer technically depends on the framing of the question- people typically give higher answers to the question “how much would you have to receive in order to tolerate one more unit of pollution?” versus “how much would you be willing to pay in order to make one unit of pollution go away?” And this doesn’t even come near the fact that differences in income and whatnot mean that different people probably give widely varying estimates of this amount.

Even if we could put a dollar amount on an externality, we still need to address a few more things before automatically jumping on the Pigou bandwagon. (Okay fine, there isn’t actually a Pigou bandwagon…but there is a Pigou Club.) When we say that Pigouvian taxes lead to the “socially optimal” level of production, we mean that this level of production is best for society in the aggregate under the assumption that a dollar to me is the same as a dollar to you is the same as a dollar to Bill Gates. (I’m not sure why he is always my scapegoat for these types of comparisons, other than that is has a lot more money that I or probably you do.) This does not mean that *everyone* is better off under a Pivogian tax, just that the winners win more than the losers lose. For example, consider a gasoline tax to internalize the pollution and congestion externalities of driving- those with their gas-guzzling SUVs are certainly worse off, since they have to pay more in taxes than they get in benefits from cleaner air and more open highways. People without cars are better off, since there is less pollution and they aren’t paying the gasoline tax. It is important to note, however, that while they may enjoy some public services that are funded by the tax revenue, they aren’t getting compensated directly for having to put up with the remaining pollution that is still in the air. (I will allow you to make your own judgment regarding whether you’d rather have $1 in cash or $1 in government services, but I think I can guess where this audience is going to come out on that.)
Wouldn’t it be nice then if we could eliminate the governmental middle man and have companies tell people “we’re sorry we @#$! up your air, here’s some cash?” It turns out that that isn’t as unreasonable as you’d think. From The New York Times:
Patricia Pilz of Caithness Energy, a big company from New York that is helping make this part of Eastern Oregon one of the fastest-growing wind power regions in the country, is making a tempting offer: sign a waiver saying you will not complain about excessive noise from the turning turbines — the whoosh, whoosh, whoosh of the future, advocates say — and she will cut you a check for $5,000.
Hm. Theoretically, this should work if $5,000 is an appropriate estimate of the per-household cost of the externality. It probably reduces the number of turbines that the company puts up (since more turbines would mean more noise and thus a higher payout required to get households to comply), and, if the households agree to the deal, their revealed preferences show that they are being compensated adequately for their inconvenience. It’s interesting to note that the article implies that some households were refusing the offer out of principle, since they didn’t like the idea of being bought. (Are you surprised by now that people don’t act like economic robots?) If I were trying to strike this sort of deal, I think I would have approached the households before the turbines went in so that they felt a little more in control of the process.

3 comments:

  1. HERE'S A DIFFERENT KIND OF REALITY IN THE U.S.A. THAT PEOPLE TURN A BLIND EYE TO BUT AFFECTS THEM DAILY AND WILL EVENTUALLY KILL SOCIETY AS YOU & I BOTH KNOW IT UNLESS WE STAND UP & STOP THEM!
    ===========================================

    PART 1

    THE U.S. CITIZENS HAVE THEIR BRAINS SCRAMBLED VIA FLUORIDE IN THE WATER & ALL THE ASPERTAME THEY CONSUME IN POP DRINKS, BUT THERE IS MORE.....

    You see, Bush Sr., & Jr., Clinton, Regan, Carter, Obama, Ford...ALL these presidents are in what is dubbed a SECRET SOCIETY called The Moloch Axis Demoniacs (i coined the phrase myself...Dr. A.P. and i don't use my full name because WHO knows WHAT sinister crap they'd do to me IF they found out?) or M.A.D. for short.

    These people, and there’s obviously more of them (Cheney, Rumsfeld etc.) than the ones mentioned, control KEY positions not just in government, business, society etc. They are GRADUALLY erroding MORAL/FAMILY VALUES in society. SO gradual that it's like hairloss! You see it ever so slowly and you have to be a keen eye to boot!

    For example, women in the workforce...they go to work so WHO takes care of the kids? Some goofs getting minimum wage who could care less about those kids. Family split apart because NOW both parents work and the cost of life itself purposely increased to perpetuate this separation. Kids grow up with NO moral/family values. Repeat this a few generations and before you know it, you have mindless zombies that don't know RIGHT from WRONG! Easily programmable to get in debt, be anti-christ-like etc.

    Also, the coming mark of the beast 666. Remember HOW it all used to be ca$h only? Then they introduced checks, then credit cards to get yourself in serious financial troubles, then ATM cards, and now that STUPID SWIPE-PASS card. What is the purpose of all this? To get people broken down enough and stupid enough through putting FLUORIDE in the drinking water and ASPERTAME in soda drinks/pop cans so we ALL can accept the 666 chip. So NOBODY can buy or sell or own ANYTHING lest he has the mark of the beast (anti-christ) which is 666.

    I can go on for days & days as to the subtleties and more examples but i think you all SEE the points i make here. It's all SUBTLE and GRADUAL negative changes day in & day out that these M.A.D. demons (because they are demonic and have placed their trust in demons in exchange for their souls and material possessions here on earth) are passing into laws in Canada, USA, UK, SPAIN, FRANCE etc.

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  2. PART 2
    They are genetically modifying the food so that the REAL NORMAL SEEDS will eventually be extinct and the modified canola, corn, soy and cotton seeds will be the ONLY ones left. Genetically modified means that these NEW seeds that are in almost ALL USA store bought products have the herbicide, fungicide, pesticide and who knows what already in the seed. THEREFORE, when you eat that mishmash, WHO THE HELL KNOWS WHAT IT WILL DO TO YOUR INTESTINES OVER TIME! And of course, the industry (Monsanto) TELLS US.."Ohhh..it's ALL safe to eat jajajaja". SAFE TO EAT? Just look at the bees landing on these genetically modified crops and their stomachs are being ripped apart & THEY DIE! Yet you SEE HOW funny it is on TV/MEDIA that NOBODY, including the M.A.D. payed-off demonic scientists don't even whisper/mention the OBVIOUS that i just stated here?

    Like i said, i can go on and on for days giving you more & more & more examples of the gradual demonic end-game these M.A.D. are playing with us. But like i said, i think you all reading this get the picture. And by the way, i am a Dr. and guess what? I DO NOT WORK FOR THE M.A.D. OR HAVE SOLD MY SOUL TO A DEMON! But....i live in virtual poverty somewhere on this planet with a family to feed and barely scrape by. And IF you think that sounds bad, well, this AIN'T nothing compared to what the M.A.D. have in store for ALL of us in the aforementioned countries (and more) i listed. And again, ALL their moves are subtle and gradual like a chessgame being played out with the regular folks as the pawns.

    I sometimes WONDER WHY the regular folks in these countries NEVER do ANYTHING TO STOP these demonic morons. It doesn't matter IF you vote Republican or Democrat because from those 2 choices, they are BOTH a part of M.A.D. Same with Canada and their Liberal or Conservatives...same M.A.D. , and on and on and on. I sometimes wonder.....you NEVER see ANY of these M.A.D. criminals go to trial or imprisoned for fraud on the people yet IF little billy J-Walks across a bussy street he gets a ticket he must pay! When will Bush Jr. & Cheney and ALL those involved in blowing up 3 buildings in Manhattan and blaming it on Arabs EVER be brought to justice? NEVER because when it FINALLY is discovered what they did, they'll be safely dead from old age and the vast majority of the people in the USA will be soooo brainwashed with NO moral/familiy values they will have already taken up the 666 mark and be worshipping the anti-christ.

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  3. PART 3
    Sometimes it makes one wonder WHY there are NO good people that will step up (with God as their guide) and put a STOP to these M.A.D.?? That is one of the BIGGEST questions i ask myself almost everyday! Maybe people are SCARED? Maybe they are waiting for God to MAGICALLY guide them without realizing that God doesn't work in that manner/way.

    I just HOPE somebody puts a STOP to M.A.D. or we are ALL going to be really in BIG trouble!

    The above is a LOT to think about, believe me, i have been living it since 2005, and jobless to boot! And i am a Dr. so go figure?? But i WILL NEVER SELL MYSELF TO A DEMON OR THE M.A.D. so how about them cookies :)

    Peace be unto you and please WAKE UP PEOPLE!
    +Dick Cheney Loves the demon moloch from hell and wants to destroy earth too! Just look at what his
    Moloch Axis Demoniac HALLIBURTON company did in the Gulf of Mexico with the offshore oil rig…need I say more? Cheney is RESPONSIBLE for the atmospheric CHEMTRAIL pollution program sprinkling toxic Aluminum & Barium Oxide to alter the weather and poison the plants, soil and people to make way for genetically modified foodstuffs to further poison us! STOP THESE DEMONS NOW!!!!!!!

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