Review Exercise A.A.S. Aug. 2000
EXTERNALITY defined by various authors:
- "Benefits or costs of an economic activity that spill over to a third party.
Pollution is a negative spillover." (North)
- "An incidental effect produced by economic activities but not accounted
for by the market system. Such effects do not enter the cost or benefit decisions
of either buyer or seller." (Barkley)
- "Occurs when an action taken by an economic unit results in uncompensated
benefits (costs) to others." (Mansfield)
- "Describes any cost or benefit generated by one agent in its production
or consumption activities but affecting another agent in the economy." (Schotter)
- Externalities are reciprocal. It is selective perception to say that A
harms B rather than B harms A. (Paraphrase of Coase)
- "???" (Schmid)
Can you critique the above defintions? Below are some clues from the readings:
1. Do markets remove any externalities?
2. Did your last meal create an externality? Could the effects have
been compensated for?
3. Are externalities ever incidental? What is the difference between
a spillover and an ordinary input to production?