Review Exercise A.A.S. Aug. 2000

EXTERNALITY defined by various authors:

  1. "Benefits or costs of an economic activity that spill over to a third party. Pollution is a negative spillover." (North)
  2. "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)
  3. "Occurs when an action taken by an economic unit results in uncompensated benefits (costs) to others." (Mansfield)
  4. "Describes any cost or benefit generated by one agent in its production or consumption activities but affecting another agent in the economy." (Schotter)
  5. Externalities are reciprocal. It is selective perception to say that A harms B rather than B harms A. (Paraphrase of Coase)
  6. "???" (Schmid)

Some questions:

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?