Friday, June 29, 2012

Steven N.S. Cheung on Externalities

From The Myth of Social Cost:
To say that a factory owner will not be concerned with his polluted neighborhood, a beekeeper will not pay for the orchard's nectar, or a television viewer will take a "free ride", is simply to say, self-evidently, that every individual wants to capture beneficial effects and to push away harmful ones. But to assert that he is able to do so freely is to claim that the world is without constraints. At what margin the performer of an action will operate can neither be determined nor explained without an appropriate specification of the constraints involved.
Furthermore, economists who propose corrective policies tend implicitly to assume unrealistic constraints on governments. It is assumed, for example, not only that situations exist which entail divergences between private and social costs, but also that some state agency will incur a sufficiently low, if not zero, cost in correctly assessing the values of various marginal schedules, even for complex situations where multiple uncontracted effects will have an impact on large numbers of individuals. (pp.21-22)
In other words, if private parties are too myopic to bargain around externalities, why should we assume that the miracle of government can resolve these problems without equivalently high costs?

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