Talk:Externality

From Wikipedia, the free encyclopedia

 This article is within the scope of the Economics WikiProject, an effort to create, expand, organize, and improve economics-related articles..
Start rated as Start-Class on the assessment scale
Mid rated as mid-importance on the importance scale

Contents

[edit] lack???

The article on externality seem to lack a part on externalities that can be viewed as services that are not paid for but still are important for the product or services that an organisation/company sells. Eg. pollinating insects is generally perceived as a free resource but the cost of pollination could for example be evaluated in terms of the cost of manual human pollination. Another example could be ability of marshlands and forests to purify water. If am not mistaken the city of New York pay upstream farmers to stop using the farmland close to the river and thus does not have to spend so much resources on water purfication as would otherwise be needed. BedrupsBaneman 12:26, 30 May 2005 (UTC)

It's generally not an externality if money is being exchanged. So the New York farmers have internalized the externality because they will forfit money if they use the farmland close the the river. Pollination services are often paid for goods as well. For example, almond farms pay for bee keepers to come by and pollinate their fields since almond honey is not edible to humans. I do agree that there are some services that have traditionally been externalities. For example, at the start of the industrial revolution, dumping coal smoke into the air was free to the producer, but had a rather incredible health cost to the people who were breathing it. Jrincayc 14:33, 30 May 2005 (UTC)

It does not imply that all pollination is paid for, and thus remains an externality. But as you noted it can be prized and thus we have a prize tag on the ecosystem services provided by the bees. Btw ecosystem services is the word I was lacking in the comment above. Sometimes the term environmental or ecological externality is given to externalities like pollution etc that is already discussed in the article. An example similar to the New York state sitaution is the Panama Canal that is being filled with mud due to extensive deforesting and is thus a cost because of the need of dredging. See more on: http://economist.com/displaystory.cfm?story_id=3886849 As it turns out this may also be internalised in terms of the Panama state charging the freight companies so that the country can be reforestred. But this would imply that a third party (the freight companies) is paying for the restoration of the ecosystem services that was destroyed by the Panama Government (or who?). I mention this because putting a prize tag on an externality especially in terms of ecosystem services can be used to change processes or procedures towards a more well thought of dito or lets call them sustainable. This can be put into the article if I only can the the right words or place in the article. Bedrupsbaneman 13:57, 1 Jun 2005 (UTC)

The Coase theorm needs to be mentioned here. Basically under certain conditions externalities will solve themselves. -- Jrincayc

The graph and the comments of the case of positive externality need to be addedMilton 18:38, 14 Mar 2004 (UTC)

Suppose that two companies merge and, as a result, 1) there are a number of layoffs and 2) the remaining employees become more dissatisfied with their jobs. Clearly, the people making the merger decision have negatively impacted at least some people not involved in that decision: the employees. But would this count as a negative externality? If not, is there some other label economists would assign to it? --Ryguasu 19:57, 8 Apr 2004 (UTC)

It only counts as a negative externality if the negative impact does not (or only partially) affects the people making the decision. For your example, the layoffs probably would be a negative externality since the decision makers are probably not affected. The remaining employees' dissatisfaction might not be a externality, since this would presumably affect the decision makers in ways such as making hiring more difficult, increasing turnover and so on. Jrincayc 13:02, 9 Apr 2004 (UTC)
On second thought, perhaps neither situation merits speaking of a negative externality. As you point out, there is a market for jobs-at-that-company. A good neo-classical economist should say that increased employee dissatisfaction will influence prices in that market; in particular, provided elasticity conditions are right, increasing employee dissatisfaction will tend to increase wages. Similarly, wages will probably also increase when a company becomes less committed to job security. I'd love to hear if this analysis is leaving something out, though. --Ryguasu 17:17, 9 Apr 2004 (UTC)
Ryguasu, I have to disagree with your conclusions. The fact that the event will eventually influence market prices is non-sequitor and cannot be used to conclude that they are not externalities. To be an externality, some aspect of a transaction must be external to it. That is, it has not been internalized into the firm's production function and is not reflected in the market prices set for the transaction. What is at issue is whether the market mechanism is incorporating these effects into the current transaction price and output, not whether they will eventually have some influence on the market. mydogategodshat 07:20, 10 Apr 2004 (UTC)

In the Coase theorem, the constraints of applicability mentioned in the article:

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


The pont 2 and 3 does not make justice to the full power of the Coase achievement. The point 2 is not necessary since firms and associations can be involved instead of individuals. Thus, the Coase philosophy can be applied very well to the case of a big company versus a citizen association.

In the point 3, bargaining cost is preferable to be small but it is not necessary. The optimum allocation of resources is achieved when bargaining costs are 0, but a high cost of transaction does not invalidates the philosophy of the Coase theorem. Moreover, in fact, judge decisions and state involvement are not ruled out by the Coase theorem. Firstly, Property rights have to be clearly defined, as the point 1 rightly stated; That must be done usually by the State previously to the dispute. Additionally, judges usually enforce agreements that have the virtual effect of lowering the transaction costs, and thus act as natural extensions of the market mechanisms.

The Coase achievement goes rather far than the unreal limits of the Coase Theorem. The global philosophy of the Coase work is: instead of having diffuse property rights and paying taxes to the State for externalities, it is better for a optimum allocation of resources and thus, the social welfare to have clear property rights and to pay directly to the affected by the externality.

I think there needs to be a much deeper discussion of "laid-off" costs and "internalized costs."

Ecar


[edit] Uses of the term outside economics

There is a completely different usage of "externality" in theology and (primarily French) anthropology. I can't provide a definition myself (I had been hoping to find one here), but I thought it needed to be mentioned.--WadeMcR 17:01, 12 April 2006 (UTC)

[edit] References?

I don't know anything about economics really, and happened here via "Random article". The article is basically well-written (though the examples seem a bit one-sided and biased, to me; others are a bit hard to understand), but there are no references at all here. Is this a normal term associated with economics? If so, shouldn't there at least be some references to it's coinage or inception and some applications of it in economic theory? It reads now as very POV to me. Anyway, I've no vested interest in this article, but thought someone might find it useful what an unlearned source takes away from this. --Davetron5000 20:32, 10 August 2006 (UTC)

Since no one responded, I put in the {{source}} template to indicate a lack of sources or references --Davetron5000 16:51, 25 August 2006 (UTC)
The data seems to come from Allexperts, http://experts.about.com/e/e/ex/Externality.htm. --jfolin 13:50, 17 October 2006 (CET)

WELL TO UNDERSTAND the concept OF externalities book written by N.GREGORY MANKIW, GIVES AN EXELENT PREVIEW OVER THE SUBJECT.. WELL IT DOES HELPED WITH SOME GRAPHS, AND OVER ALL THE ARTICLE IS WELL EXPLAINED.

[edit] Opening sentance doesn't make sense.

The opening sentance of this entry doesn't make sense. On the fourth reading I finally figured out what it was meant to be saying but it needs clarifying -

"In economics, an externality is a cost or benefit from an economic transaction that parties "external" to the transaction receive"

would read better if it said

"In economics, an externality is a cost or benefit from an economic transaction that is borne by those parties "external" to the transaction.

Zibba66 14:39, 21 February 2007 (UTC)

The opening sentence was a semantic challenge to me as well. I have boldly gone where no editor has gone before and rewritten it as: "In economics, an externality is a cost or benefit resulting from an economic transaction that is borne or received by parties not directly involved in the transaction." This would seem to me to be more readable and is hopefully a correct definition as well. Piperh 19:22, 3 June 2007 (UTC)

[edit] Needs Work

Just skimming this page shows in needs lots of work. The examples are often strange and confusing. E.g., perfume as a positive externality? There are much better examples like research and development, knowledge, etc. —The preceding unsigned comment was added by 128.36.66.250 (talk) 01:59, 3 April 2007 (UTC).


[edit] Vandalism and crime are not externalities

Not every public nuisance is an externality in the economic sense. I have removed mistreatment of animals, vandalism, and crime from the list of negative externalities. These are not examples of collateral consequences to third parties of an economic transaction or activity. This section claims to be dedicated to the negative consequences of the actions of consumers on the rest of society, so let's stick to the subject here. I've added a little more about the negative consequences of the consumption of tobacco and alcohol. The last paragraph of this section is so garbled that I don't know what it is trying to say. Maybe someone else would dare to try to clean it up? Piperh 18:57, 3 June 2007 (UTC)

[edit] 3rd paragraph of intro

I deleted (you're right, should have explained) "This should be contrasted with purely private economic agreements that do not affect third parties, where the assumption may be made that, if each party is acting in his or her own interests (as defined by utility) and there are no other major market failures, the agreement or exchange improves overall utility for society. Put more simply, if an economic transfer between two parties enhances the utility of both without negatively affecting the utility of any third party, the well being (collective utility) of society is improved; if the utility of others is harmed, it is no longer unambiguously clear that society's collective utility has increased, and may have decreased." Other than weak writing and lack of citations (neither of which is a very good reason to delete, I think), I want to get rid of this because it's so strictly theoretical that it's useless. Obviously a transaction that benefits the private parties with no externalities would only be beneficial, that's defined in the description of the transaction. I would ask what could possibly fit under this classical economics scenario though. Everything has externalities, even products with clear overall benefit to society. Heart valves, for example, are great, I'm thankful for them. They do harm research pigs though, and cost a little air and water pollution to be made, etc. Even though those externalities are vastly outweighed by benefits, they still exist, even if we don't care much about researh pigs as compared to grandmas. Envirocorrector 09:36, 9 July 2007 (UTC)

Since this is a discussion of externalities, I think it worthwhile to retain a description of the underlying assumption that transactions entered into willingly can be and are assumed to be beneficial; this is a point that is often lost. (As opposed to the base assumption that "everything has externalities, therefore those externalities should be dealt with before such transactions are allowed."
As to "everything has externalities", that's just a generalisation; one could easily take the opposite point of view and say most transactions have no externalities or only trivial ones. The point is the base assumption for economic analysis is generally that externalities must be identifiable, non-trivial and attributable to the transaction/industry/activity.
Don't like the writing? Edit.--Gregalton 11:44, 9 July 2007 (UTC)
Fair enough. But the very begining of the following section states "Economists see voluntary exchange as mutually beneficial to both parties in an exchange." If anything, the point becomes clearer as we cut back some of the clutter. Envirocorrector 12:41, 9 July 2007 (UTC)
I don't like the writing, and I'm editing. Thanks for tip, hadn't thought of editing on WP! Be bold and all that. I believe the intro as I've left it is clearer, shorter, better. The old one had about 4 paraphrasing of the same definition. Envirocorrector 13:28, 9 July 2007 (UTC)
Hey Gregalton, I like what you have done. There's no disagreeing with what you say, when there are only minor externalities, or none at all, the net result is a gain. What I didn't like before was that it was set up as a contrast, rather than a question of the relative weight of costs and benefits to both economic actors and third parties. Envirocorrector 14:05, 9 July 2007 (UTC)
Fair enough, the previous para was rather wordy - and thanks. The thing that I wanted to underline is that the underlying assumption is strong and fairly robust, and often gets forgotten - that as long as both participants are willing (in absence of x, y and z, including externalities), the result is net positive.
A quibble with what is there now that I don't know how to reformulate well: the "loss" in case of positive externalities is not a loss, but less gain than is theoretically possible. Perhaps this isn't a subject for the lede, but an interesting distinction.--Gregalton 14:32, 9 July 2007 (UTC)

[edit] Positive and Negative externalities

I have gotten rid of the section "types of externalities," which contained only the subheadings negative and positive externalities, and moved them (without edits) into the sebheadings "negative externalities" and "positive externalities." Those sections are now long, hard to ready, lack any real flow, and probably repeat themselves. Any work is welcome of course - I would suggest that we start by simply deleting examples that may be a stretch. For example, graffiti may not really be an externality, and if it is, it's certainly not the kind of textbook example that clarifies the subject of the article. I'll do some myself later this week, but wanted to ask for help. Envirocorrector 22:06, 9 July 2007 (UTC)

[edit] Diagram does not explain externality

Diagram explaining externality at http://en.wikipedia.org/wiki/Image:Externality.svg is ambiguous. What do the arrows denote? Either use normative diagrams such as UML or a key to explain your diagramming elements. Note also two spelling errors suggesting a lack of review. I recommend pulling this diagram, I think we can do much better than this. Toddboyle 17:51, 17 July 2007 (UTC)ToddBoyle

[edit] classic references

who is the first person that discovered this phenomenon, and in which paper or book? Jackzhp 19:42, 27 July 2007 (UTC)

Arthur Pigou. OptimistBen 05:07, 16 October 2007 (UTC)

[edit] relevance to present day

how relevant to the present day? major issues and approaches to address them. Jackzhp 19:42, 27 July 2007 (UTC)

[edit] Relevence of Coase Therom to understanding policy implications of Externalaties

Being new to this topic I am finding it hard to see how Coase can be helpful in understanding the policy implications of externalities. Help please!! (Jacolone 11:39, 24 September 2007 (UTC))

[edit] Types of Externalities

More examples needed in negative part, for car use one of the largest sections in economic externalities. ie traffic congestion, pavement damage, traffic accidents... the list goes on. —Preceding unsigned comment added by 193.1.172.163 (talk) 22:27, 7 December 2007 (UTC)

I agree totally, there should be a new section 'Examples'. Climate change is the most obvious one that comes to mind but there are many others. The links to other topics provided from such a section could be quite useful for readers. Woood (talk) 13:48, 30 January 2008 (UTC)