Thursday, November 24, 2005

A Discussion in Externalities

I hope this post is not too long, but since this blog is for me, I think I will.
This is a discussion of me and Common_Man_Jason (Jason) talking to each other on the ThomHartman Blog.

Jason:
For the record, I do not support state control of the means of production. I believe in free enterprise and the right to private ownership. I see a citizen controlled government as the arbiter of the marketplace, not the administer of the marketplace. Where people often get confused about the progressive ideology is that we also believe in a sensible public sector for resources that just aren't well suited for the private sector because the profit motive will lead to private tyranny.

For example, fire department services in a private sector would let a house burn down that didn't pay its bill or sign up for the service. Or if the roadways were privately held a private interest could control the flow of goods, services, and people to the benefit of their profit margin rather than to the benefit of freedom of movement within a free society.

Some things are better suited for the private industry, and some things are better suited for the public industry. I wish the debate was over where to draw the line (and I do see it as a moving target) rather than whether all things should be private or all things should be public. History shows that neither work alone.

Ron:
Yes a healthy democracy is important, but it is not the resources themselves that lead to tyranny but not well defined property rights.
I don't believe any system in the world has every been either or (Cambodia coming close). All systems have been a "mixed economy", it only boils down to the degree of one over the other.



I like some aspects of this political map , in that the political spectrum is divided between "dangerous but good" and "neccasary evil".

The dividing line for me is whether there are externalities that can not be captured by market mechanisms. For example public education is one, where the value to society as a whole is better off for having all citizens educated. But in some cases of free markets in LDC (Less Developed Counties) has shown that the market did result in the right level of education without government interference.

Along with this we also need to look at "public goods" . Where public goods are:

* Non-rivalrous — its benefits fail to exhibit consumption scarcity; once it has been produced, everyone can benefit from it without diminishing other's enjoyment.
* Non-excludable — once it has been created, it is very difficult, if not impossible, to prevent access to the good.

The perfect example is the fireman example as you pointed out. If the firemen lets one house burn down since non-payment this would jeopardize the paying customers. National defense is also an example here.

quote: Once national defense is in place it protects Bill Gates, Bill Clinton and Bill Rutherford () equally.

Jason:
Of course that map is designed (as many maps of this sort are, even Doug's above) to sway a person in a certain direction (conservative is good, liberal is bad). You'll notice it doesn't even address corporate power, just state power. Further, it doesn't seem to even care what kind of state is being "worshiped." My statements were about public vs. private, yet a state power is not necessarily a public domain power. China, for example, is often called a communist country, yet it really isn't because the government is privately owned (much like the USSR was). China is actually more fascist than communist in that respect.

The key to the public domain, is that every citizen gets an equal voice (suffrage) in the administration of it. It isn't about "state worship" as the right wing propaganda chart you shared would imply, it's about democracy, or more specifically representative democracy (We The People elect with free choice servants to administer the public domain).

Externalities, by definition, are not captured by market mechanisms (unless the public domain forces them to be with public policy).

Ron:
Jason, let me first say that no political map I have looked at is perfect. But these maps are much better than our left-right linear representation.
I don't see the sway as you see it or right wing propaganda. If you have a better map let me know. One thing to consider is that this map shows Fascists, Naxis, and Classical Anarchist as being irrational. I don't see too many people screaming to be in those groups.

With well defined property rights, many of the externalities will be accounted for in a free market. Again, I suggest the reading of:
Free Market Environmentalist
by Terry Anderson and Donald Leal
Then the reason that government is important is when property rights can not be well defined and there are large externalities (+/-) that can not be captured by the market.
And unfortunately most time public policy does not do a good job of capturing externalities.

Though this is not directly related, the first time I started thinking about other ways to define the political spectrum was "Communities, shared spaces and weblog reading" . And there I was thinking where would you put the environmentalists and Friends of Animals? By default they have migrated to the left but there is a counter offer of Free Market Environmentalists.

Jason:
Dude! Do you even know what an externality is? It is the conscious decision of a corporation (or an association of corporations) to pass along a cost to the public; a cost it should be absorbing in the production of its goods and/or services. Of course the public domain isn't good at capturing those costs, because it shouldn't have too!

Why not just require the corporations who do the damage, to pay for the damage? Seems like that would prevent them from doing it, wouldn't it?

Most of the time citizens are completely unaware that they're being made to pay for part of a corporation's production costs because they are tricked by the artificially lower prices that result. They are simply unaware that the savings they thought they were getting were paid for with higher taxes and/or more dangerous environmental conditions (a tax on future generations who had no say in the policy, that is "taxation without representation").

You make externalities sound like an unavoidable natural condition. NO, it's a conscious human choice founded in greed and should simply be made illegal. The true Free Market person would support the idea of a corporation having to pay all the costs associated with the production of goods and/or services (and charging appropriately for said goods and services) rather than forcing and tricking others to subsidize them; many of whom do not consume said product or service and thus shouldn't be helping to pay for the production of it.

Ron:
I will treat you with respect and expect that in return. Thanks for pointing out the faults with this political map. When originally looking at this map, I was interested in having fascist and socialist as not stationed in the same square. The label "welfare liberals" should be able to be changed and still make some of the points valid.
I believe that you have too narrow of view of externalities. First externalities can be positive as well as negative. One example is flu shots. If everyone around you gets the shot, you will be less likely to get a flu. You have recieved benefits from the actions of others. If a product or service has very positive externalities, then the market usually does not provide enough of this product or service. Either it is better to have the government provide the service or subsidize businesses to provide it. The problem of course is that then who determines what the right level of service should be.
Now there is positive externalities for having a professional sports team in your town, but I do not want any taxpayer monies for this.
Second, externalities are not limited to corporations. Let us say your neighbor has a large tree that shades your house and creates a beautiful neighborhood. Now you have some positive externalities (shade, beauty, comfort, energy) as will as negative (raking, cleanup, lack of view).
Thirdly, corporations have no conscience, only people do. And as such many externalities are not known or even able to be measured.
We know that a majority of pollution is caused by automobiles and this pollution causes health problems. So now how does the market create compensation for those that have property rights violated by those that polluted?
Under perfect markets then yes all externalities are captured in the transactions, but we all know that the courts have to settle property rights on a regular basis. Being a automobile claims adjuster, I was exposed to the dispute in property rights on a regular basis. Most were solved by the insurance industry but a lot still end up in courts.

I think this enough for now.
But what mechanisms would you use to get corporations to pay for the damages?

Jason:
I'm not sure you're describing externalities here. You're describing public production vs. private production; and I agree that sometimes the public sector is better at providing a product or service (especially a needed one that isn't profitable) and sometimes the private sector is better at providing a product or service.

An externality is a cost, known to the private sector entity, that is purposely passed on to the public sector. That being said, I agree that there are times when it is appropriate for the public sector to pick up the cost; especially when the private sector is providing a needed product or service and would go out of business without passing on the cost. But that is usually not the case, and in most cases the general public is unaware that the private sector is passing on the cost, as they've made backroom deals with politicians.

No offense, but this bs was obviously propagated by some corporate think tank who wanted soften the image of what an externality really is. When corporate behavior results in a positive outcome for the public, then that corporation is doing its proper job and the result need not be called an externality.

Agreed. The key is what to do when it becomes known, and the executives of a particular corporation will be the first to know (like the health hazards smoking caused)
The producers of the product need to pay unless the public decides it is worth picking up the cost; but the public needs to be informed with truth, not lies, and there needs to be proper public debate both among legislators and the general public.

No one is asking for perfection; that's obviously not possible. The producer of a particular externality will be the first to know in most cases, and they need to be responsible for letting the public know the moment they know, and the public will decide if it is willing to pay for it.

As for any externality that is between two private spaces, that's why we have courts. It isn't pretty or quick, but it's the best we have and I think it works pretty well. That's how multiple private owners co-exists, and that is how they settle disputes.
Creating Laws, enforcing laws, and using the courts to settle any dispute about those laws. In spite of the propaganda to convince people that due process is somehow bad, it actually works.

Ron:
Jason, could I have you read this article on externality.
Since the discussions was on where the line was between what should be provided by private vs. public enterprises, I was explaining that externalities should be a helpful guide for deciding these decisions.

I am sorry but the sports stadium is my own explanation (not a corporate think tank) of an example that has positive externalities but should not be provided by taxpayers. On a side note, I could see a city backing the bonds that went into the construction of the stadium as long as there was no costs to the city and not affecting its credit rating.

Yes you have explained some conflicts with external costs that are transferred. But the courts are very inefficient and seldom come back with the optimum equalized results. Part of this inefficiency is due to the high transaction costs to reach settlements.

Due to our litigious society, it creates incentives for corporations to either hide information that is adverse to their products or ignorance is bliss. Using the tobacco example, it would have better for them to not do research on their products.

A solution to some of the problems of externalities is by(above link):


This result, often known as the "Coase Theorem," requires that

1. Property rights are well defined;
2. the number of people involved is small; and
3. bargaining costs are very small.

Only if all three of these apply will individual bargaining solve the problem of externalities.


Lastly the automobile pollution is not externalities caused by the production of automobiles but by the consumption by consumers. Some of the pollution could be tied to the purchase of gasoline, but most is tied to how consumers use the gas (1965 F150 vs. 2005 Prius) or how much a consumer uses.
From link above:
-

And, Jason could you provide some examples of externalities to discuss?

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