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| | But there are many “positive externalities” too. These create benefits for the public without requiring some to pay for it. If you happen to live next to an outdoor classical concert facility, then you may enjoy listening to music without buying an admission ticket. The people paying for the concert receive the benefit they want, but you would receive a benefit free to you as a “positive externality.” Or perhaps you have a view of fireworks from your front porch on July 4th. You do not have to pay to see the fireworks, and benefit from the positive externality of the display. | | But there are many “positive externalities” too. These create benefits for the public without requiring some to pay for it. If you happen to live next to an outdoor classical concert facility, then you may enjoy listening to music without buying an admission ticket. The people paying for the concert receive the benefit they want, but you would receive a benefit free to you as a “positive externality.” Or perhaps you have a view of fireworks from your front porch on July 4th. You do not have to pay to see the fireworks, and benefit from the positive externality of the display. |
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| − | === More Examples of Externalities === | + | === Dealing with Negative Externalities === |
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| | The internet is filled with activities that create both positive and negative externalities. The positive externality is the enormous amount of free and useful information posted on websites at someone else’s expense, but available to the public. The negative externality is all the pornography that destroys those who fall victim to it, creating costs for society to bear in dealing with them. FBI agents say that the one common attribute of every criminal residence that they raid is the presence of pornography. | | The internet is filled with activities that create both positive and negative externalities. The positive externality is the enormous amount of free and useful information posted on websites at someone else’s expense, but available to the public. The negative externality is all the pornography that destroys those who fall victim to it, creating costs for society to bear in dealing with them. FBI agents say that the one common attribute of every criminal residence that they raid is the presence of pornography. |
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| − | Professor Lawrence Lessig is a champion of the “commons” on the internet. The “commons” is a term from medieval England, when anyone could bring their sheep to graze on public land. Ultimately, all the grass was eaten and then the commons was not of much use, so the story goes. Professor Lessig supports free books, music, etc., over the internet. He took a case to the U.S. Supreme Court fighting long copyright extensions (Eldred v. Ashcroft). In the end, some Justices seemed worried about the impact on private property of his theories, and he lost. | + | Professor Lawrence Lessig is a champion of the “commons” on the internet. The “commons” is a term from medieval England, when anyone could bring their sheep to graze on public land. Ultimately, all the grass was eaten and then the commons was not of much use, so the story goes. Professor Lessig supports free books, music, etc., over the internet. He took a case to the U.S. Supreme Court fighting long copyright extensions (''Eldred v. Ashcroft'', 537 U.S. 186 (2003)). In the end, some Justices seemed worried about the impact on private property of his theories, and he lost. |
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| | Illegal drugs create perhaps the largest negative externality. The transaction is between the drug dealer and the drug addict, but when that drug addict runs out of money due to his habit then he is going to turn to crime. Soon he will be robbing and even killing people to obtain money to feed his addiction. The victims of this crime bear the negative externality. | | Illegal drugs create perhaps the largest negative externality. The transaction is between the drug dealer and the drug addict, but when that drug addict runs out of money due to his habit then he is going to turn to crime. Soon he will be robbing and even killing people to obtain money to feed his addiction. The victims of this crime bear the negative externality. |
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| | + | Libertarians promote a philosophy of "let everyone do what they want." But that approach ignores the harm caused by negative externalities. Letting someone get drunk will sometimes result in his driving drunk, and then killing an innocent person who had nothing to do with the purchase and sale of the alcohol. Should alcohol companies pay for the negative externalities caused by their good? Should abortion provides pay for the negative externalities caused by abortion? |
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| | What is the cause of positive and negative externalities? It is desirable to eliminate the negative externalities, so that sellers bear all the costs of their production and sales. How can they be required to pay all of their costs, rather than pushing those costs onto the public? | | What is the cause of positive and negative externalities? It is desirable to eliminate the negative externalities, so that sellers bear all the costs of their production and sales. How can they be required to pay all of their costs, rather than pushing those costs onto the public? |
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| − | Taxes are the typical way. Government imposes a gasoline tax, supposedly to pay for the costs imposed on society by cars. For positive externalities, government subsidies are a way to make the public to pay for benefits that it receives, and support the firm providing the benefit. | + | Taxes are one way to pay for negative externalities, at least in theory. Government imposes a gasoline tax, supposedly to pay for the costs imposed on society by cars. But then try to find out where those taxes are spent. Often they are spent on salaries for government workers, rather than helping people who are hurt by the negative externalities. |
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| − | The problem is, politicians are known to maximize their own interests in setting tax policy rather than maximizing public interests. “Public choice theory” recognizes that self-interested politicians can act contrary to public interest.
| + | “Public choice theory” recognizes that self-interested politicians can act contrary to public interest. Politicians are known to maximize their own interests in setting tax policy rather than maximizing public interests. |
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| | Remember Ronald Coase? He would say that the reason for externalities is transaction costs. If it were practical to give everyone a right to be free from pollution, and then allow them to sell it without incurring transaction costs, then the negative externality of pollution would disappear. People would accept small payments from Exxon and other oil companies in exchange for allowing the gas to add a little pollution to their lives, if transaction costs weren’t larger than the payments. We would not need additional taxes on gasoline by an inefficient government. | | Remember Ronald Coase? He would say that the reason for externalities is transaction costs. If it were practical to give everyone a right to be free from pollution, and then allow them to sell it without incurring transaction costs, then the negative externality of pollution would disappear. People would accept small payments from Exxon and other oil companies in exchange for allowing the gas to add a little pollution to their lives, if transaction costs weren’t larger than the payments. We would not need additional taxes on gasoline by an inefficient government. |
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| | + | === Positive Externalities=== |
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| | + | The news is not all bad about externalities: some are positive. Jesus Christ's Passion, Crucifixion and Resurrection constituted the greatest positive externality in history, opening the way to salvation for all. |
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| | + | There are positive externalities in engineering. The transistor was invented by AT&T Bell Labs here in New Jersey, and that patented invention became the basis for almost every electronic good manufactured today: computers, IPods, cell phones, televisions, etc. AT&T did not profit from all these goods. Instead, its invention created a trillion dollar benefit for many other people, as a positive externality of its discovery. |
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| | + | In fact, the unique American patent system put in place by the Founding Fathers is based on the positive externalities created by the publication of a new patented invention. The Founding Fathers included patent protection in the U.S. Constitution, and the First Congress then passed a law setting forth the details. The approach taken was to encourage inventors to publish details about their inventions in the form of a patent, so that others could benefit from the ideas and perhaps build on them with more inventions of their own. |
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| | + | Supporters of the Second Amendment observe that there is a positive externality when many in a community own guns: burglars and criminals stay away from that community, and there is less crime. John Lott researched many different areas and found that the more guns there were, the less crime there was. he entitled his famous book, "More Guns, Less Crime." That is hard for some to understand ... until they learn the concept of positive externalities. Gun ownership has the effect of deterring crime, and that benefit extends throughout the community because criminals do not know who has a gun and who does not. |
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| | + | Some argue that the government should provide subsidies for goods that have a positive externality, because the benefits far exceed the costs. But just as taxes on goods having negative externalities do not usually help the people who need it, taxes to provide subsidies for positive externalities rarely end up helping anyone. |
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| | == Public good == | | == Public good == |