A commenter on my first externalities post wrote: “I'm confused, and suspect the difficulty is in our ethical assumptions, not your math.” She was mistaken, but the fault was mine. I have been analyzing issues of externalities in terms of economic efficiency without ever explaining what it is or why anyone should care about it. I will now do so.
Quang Ng's argument seems brilliant, I've always had similar intuitions but never thought through the argument explicitly. I also think Robin Hanson's dealism is also a pretty good but fairly subtle defence of economic efficiency.
With respects to your earlier post, the basic summary seems to be that the true cost of a externality isn't simply the cost of the externality imposed on others, rather its the deadweight loss of overproduction, that is the sum of the marginal benefits minus the sum of the marginal costs across the quantity of the internalized externality market equilibrium to the quantity of the Laissez-faire market equilibrium. As such if after the cost of a negative externality being internalized the difference in quantity between the equilibriums is close to zero then the cost of the inefficiency is also close to zero even if the negative externality was very very large. You can also make a similar argument using the same kind of reasoning looking at the MB and MC curves.
Forgive my economic illiteracy, but what work by Marshall laid out this theory? Also, do any contemporary textbooks reference Marshall's work in the way you have or is this a forgotten bit of history?
It seems to me that fault #3 will, in some cases, vitiate the whole approach.
"It assumes that, in combining values across people, the appropriate measuring rod is willingness to pay, that a gain that one person is willing to pay ten dollars to get just balances a loss that another is willing to pay ten dollars to avoid."
It breaks down badly when gain or loss from the proposal is strongly correlated with wealth.
Here's an outrageous thought experiment. Suppose anyone can gain an additional 70 years of healthy life - by a process that requires killing another human being, plus other significant expenses. For simplicity, let's say everyone is willing to pay all they own to avoid being one of the victims, and half what they own to receive the treatment. If all people have equal wealth, the treatment is rejected. But instead it's proposed to sacrifice "useless", "worthless", *poor* people for the benefit of far richer people, claiming that those rich people are far more valuable. The richest 1% currently own 50% of the world's wealth. The richest 10% of adults have 85%. It's pretty obvious the richest 50% can "outvote" the poorest 50%, and still have half their wealth left over.
Very few people are so economics-focussed as to condone outright murder, or to want their government to condone it, which is why my thought experiment above is outrageous. But arguably every decision that results in increased pollution or reduced health care for poorer people is an example of the same thing. They aren't living in slums because that's their preference, and they are quite likely paying a larger percentage of their resources for their living space than richer people are paying for theirs.
And yes, I've drifted somewhat from externalities, but they can be brought back by reframing the unhealthy living conditions in terms of the location and regulation of profitable polluters.
These are some good posts and some interesting comments. I do think it is very important to consider the marginal utility of the dollar, as well as ability to pay. I'd pay more to avoid something bad (losing my little pinky) than my 20-something student kid would, but only because I have more money to spend.
This is all key to setting policy (since God keeps failing to come down and create an actually fair world), but I think that summing fails as a personal philosophy, as I note in "Biting the Philosophical Bullet" here: https://www.losingmyreligions.net/
Quang Ng's argument seems brilliant, I've always had similar intuitions but never thought through the argument explicitly. I also think Robin Hanson's dealism is also a pretty good but fairly subtle defence of economic efficiency.
With respects to your earlier post, the basic summary seems to be that the true cost of a externality isn't simply the cost of the externality imposed on others, rather its the deadweight loss of overproduction, that is the sum of the marginal benefits minus the sum of the marginal costs across the quantity of the internalized externality market equilibrium to the quantity of the Laissez-faire market equilibrium. As such if after the cost of a negative externality being internalized the difference in quantity between the equilibriums is close to zero then the cost of the inefficiency is also close to zero even if the negative externality was very very large. You can also make a similar argument using the same kind of reasoning looking at the MB and MC curves.
Forgive my economic illiteracy, but what work by Marshall laid out this theory? Also, do any contemporary textbooks reference Marshall's work in the way you have or is this a forgotten bit of history?
It seems to me that fault #3 will, in some cases, vitiate the whole approach.
"It assumes that, in combining values across people, the appropriate measuring rod is willingness to pay, that a gain that one person is willing to pay ten dollars to get just balances a loss that another is willing to pay ten dollars to avoid."
It breaks down badly when gain or loss from the proposal is strongly correlated with wealth.
Here's an outrageous thought experiment. Suppose anyone can gain an additional 70 years of healthy life - by a process that requires killing another human being, plus other significant expenses. For simplicity, let's say everyone is willing to pay all they own to avoid being one of the victims, and half what they own to receive the treatment. If all people have equal wealth, the treatment is rejected. But instead it's proposed to sacrifice "useless", "worthless", *poor* people for the benefit of far richer people, claiming that those rich people are far more valuable. The richest 1% currently own 50% of the world's wealth. The richest 10% of adults have 85%. It's pretty obvious the richest 50% can "outvote" the poorest 50%, and still have half their wealth left over.
Very few people are so economics-focussed as to condone outright murder, or to want their government to condone it, which is why my thought experiment above is outrageous. But arguably every decision that results in increased pollution or reduced health care for poorer people is an example of the same thing. They aren't living in slums because that's their preference, and they are quite likely paying a larger percentage of their resources for their living space than richer people are paying for theirs.
And yes, I've drifted somewhat from externalities, but they can be brought back by reframing the unhealthy living conditions in terms of the location and regulation of profitable polluters.
These are some good posts and some interesting comments. I do think it is very important to consider the marginal utility of the dollar, as well as ability to pay. I'd pay more to avoid something bad (losing my little pinky) than my 20-something student kid would, but only because I have more money to spend.
This is all key to setting policy (since God keeps failing to come down and create an actually fair world), but I think that summing fails as a personal philosophy, as I note in "Biting the Philosophical Bullet" here: https://www.losingmyreligions.net/
PS: thanks for making everything free, David.