Changes

==Externalities==

==Externalities==

“Externalities” are benefits or costs that are external to the seller and buyer of a good or service, for which no compensation is made.  That may puzzle you at first.  A company produces a good at its expense, and sells to a buyer who pays for it.  The buyer bore the cost and received the benefit of the good itself.  The seller bore the cost of producing the good, and received the payment for selling it.  What else could be going on here?

'''''“Externalities” are costs or benefits that are external to the seller and buyer of a good or service, for which no compensation is made'''''.  Stated another way, externalities to a transaction are costs or benefits that hit other people.  These direct costs or benefits spill over without anyone paying directly for them.

 

This is a new concept.  Until now we assumed that transactions were between a buyer and seller, like buying a chocolate bar.  No one else is affected.  The buyer gives $1 to the cashier person, and gets the bar in return.  More generally, a company produces a good at its expense, and sells to a buyer who pays for it.  The buyer bore the cost and received the benefit of the good itself.  The seller bore the cost of producing the good, and received the payment for selling it.  What else could be going on here?

After all, when you buy gas, you pay the cost and you receive the benefit.  It’s a transaction between you and the service station.  What cost or benefit does anyone else receive?

After all, when you buy gas, you pay the cost and you receive the benefit.  It’s a transaction between you and the service station.  What cost or benefit does anyone else receive?

Next time you’re traveling in a car, take a look at the exhaust pipe on the car in front of you.  Pollution comes out of it.  The pollution used to be far greater than it is today, but there still is some exhaust.  In some neighborhoods, it’s fashionable for car owners to modify their cars so that the engines consume less gas by producing more pollution.  You can smell the difference when you are stuck behind one of those cars.  Airport taxicabs are notorious for putting out more pollution than the average car.  Airplanes themselves put out substantial pollution at airports as they idle.

But look more closely.  The next time you’re traveling in a car, take a look at the exhaust pipe on the car in front of you.  Pollution comes out of it.  That harms other people who did not sell or buy the gas.  People who do not drive, or children, are slightly affected by that pollution.  In some neighborhoods, it’s fashionable for car owners to modify their cars so that the engines open higher miles-per-gallon, but produce more pollution.  You can smell the difference when you are stuck behind one of those cars.  Airport taxicabs are notorious for putting out more pollution than the average car.  Airplanes themselves put out substantial pollution at airports as they idle.  In New Jersey, there is now a law against idling one's engine for longer than a few minutes.  At truck stops, truckers are encouraged not to idle their engines for long periods of time.

The driver of a car or airplane does not bear all of the cost of the fuel.  The public is bearing the cost of the pollution.  Some people who never drive cars or fly in airplanes bear the cost of the pollution.  This is an called a “negative externality” because it imposes costs on people who did not buy the good.

So the buyers and sellers of gas do not pay the full cost.  The public is bearing the cost of the pollution.  This is an called a “negative externality” because it imposes costs on people who did not buy the good.  A negative externality has a negative effect on others.

Car pollution is often unnoticeable.  But sometimes pollution can be severe and dangerous.  If a company can dump its waste into a river for free, then it is economically profitable for it do so.  Those who like to swim or fish in the river will suffer the expense.  Either they will have to curtail their activity, interfering with their utility, or they could become sick from it.

Car pollution is often unnoticeable.  But sometimes pollution can be severe and dangerous.  If a company can dump toxic waste into a river for free, then that is going to be cheaper for it than disposing of the waste in proper manner.  The company will make more profits by dumping its waste at less cost to it.  But those who like to swim or fish in the river will suffer the expense.  Either they will have to curtail their activity, interfering with their utility, or they could become sick from it.  Environmental harm is the most obvious type of "negative externality."  Another example of a negative externality is excessive noise at heavy metal rock concerts, which may disturb neighbors who never bought or sold a ticket.

There are “positive externalities” also.  These create benefits for the public without requiring some to pay for it.  If you happen to live next to an outdoor 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.”

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.

A “public good” is something, like music, that provides a benefit to one person without reducing the benefit to others.  One listener does not lose benefit by the presence of other listeners.  Food, in contrast, is not a public good.

== Public good ==

Can you think of other positive externalities?  Public transportation, perhaps, where the price of a ticket is less than the true cost? The New York Subway system, where you can go anywhere in all of New York City for a mere $1.50?  How about free internet music through peer-to-peer networks like the old Napster?

 

Can you think of other public goods?  Public transportation is another example, where the price of a ticket is less than the true cost.  An additional person can benefit from a subway train that going to a destination regardless. The New York Subway system, where you can go anywhere in all of New York City for a <continue?  How about free internet music through peer-to-peer networks like the old Napster?

The internet is filled with activities that create both positive and negative externalities.  The positive externality is all the 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 all the 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.

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.

==Antitrust Laws==

==Antitrust Laws==