April 4th, 2012 at 12:18 pm

More on this later—I’m back on the road, talking housing policy in NV, where they seriously need some good housing policy—but I’m starting to think that if I could get America in one big room to talk about what’s important this year in terms of political economy, I’d talk about…wait for it…wait for it…


Basically, an externality in econ is the market failure that occurs when some action isn’t captured in the price system.  So, if my factory pollutes your water supply, and I don’t have to pay for it, I’m not facing the true cost of my actions and you’re worse off for it.  Or, to pluck something from current events, if my invincibility delusion leads me to forego buying health insurance, but I get sick, get treated, and you foot part of the bill through higher premiums, that too is a negative externality.

This is largely what I was getting at here in listing all the ways in which government action is needed to offset market failures—in this case, necessary components of modern economies that markets will under-provide.

The reverse Robin Hood stuff—spending cuts for the poor, tax cuts for the rich—is truly nuts for sure.  But after that, the thing I worry about most is that anti-government ideology trumps the pragmatic necessity to offset these externalities.

And it has as much to do with efficiency as fairness, i.e., you don’t have to care a whit about what’s fair to get behind this agenda–markets will simply under-provide the necessary public goods, regulation, education and training, safety nets, retirement security.  If we forget that, the negative externalities will drown us.

I don’t mean to be melodramatic, but if you really want to hurt America—not just the poor, the middle class or any particular group, but our general ability to grow and prosper—this is how to do it.

(As long as I’ve got the nation in the room, I’d also talk about the inequality chain and its role in the transformation from virtuous to vicious cycle, but that’s related to the NE problem as well.)

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8 comments in reply to "NE’s"

  1. Tom says:

    There might be a question as to whether these are ‘market failures’ or examples of corporations rigging the rules to protect their profits….

    • Mike says:

      It’s only rigging if they go to nefarious ends to prevent themselves from ever having to cover the costs that their pollution caused.

  2. Comma1 says:

    A simpler way to frame NE is to call it what it is… stealing. In your example above, the factory owner is stealing by taking monetary value from the clean water supply. In some ways it is worse, because not only is he extracting monetary value from the clean water supply, he very well may be creating additional and unnecessary costs on the water drinking public due to worsened health.

    • Bumpa says:

      Here in Colorado and in Wyoming we call it Fraking. Where the Oil and Gas shale industry is given free reign to pollute the ground water and the residents have no recourse, because the “powers that be” claim that there is no pollution.

  3. Mike says:

    I took an intro to macroeconomics course at a community college in Texas, and this was covered. Why do the folks in DC have such a hard time understanding this.

  4. readerOfTeaLeaves says:

    Glad to see NE’s getting some light and focus.
    More, please!

    Examples are everywhere, but the people I know who went to B-school, and also my harder-core GOP acquaintance, seem resistant to the concept. However, if I’d spent the past 20+ years reading the WSJ daily, listening to conservative talk and cable, and immersed in a bubble of ‘free market’ ideology, then I’d probably be fairly resistant to the idea. It’s a very simple concept, but I think there are still plenty of people who want it swept under the carpet.

    The externalities are part of a system of willful denial and self-delusion; in this respect, their dangers compound over time.

  5. Michael says:

    You’re operating under the absurd belief that conservatives want America to prosper.

    Once you hate (deep breath) people of color, women, nonchristians, the wrong kind of Christian, the poor, the middle class, and LBGTQ folks . . . you just round up and hate America.

  6. James Edwards says:

    I’ve long believed that negative externality taxes are the best way for the government to raise revenue. Carbon taxes, pollution taxes, congestion taxes all raise money to pay for positive externalities like schools, parks, and sports stadiums. They reduce the problem by motivating changes in behavior and allow for innovation that government regulations can’t accommodate.

    Another advantage to externality taxes is it changes the debate in Washington. Setting the tax level on the externality is a simple matter of have we reached our goal, so debates could be is the air clean enough now rather than taxes are too high. We are too far down the rabbit hole to ever do this though. What could be a simple and elegant system would be carved up with exceptions and the science determining results would be brought into question, Studies attacked, and Doublethink Tanks established.