Journal Files A.A.S

Externalities

There are two ways to conceptualize Externalities. The most common is to view externality as a by-product of some production process. So there is intended steel and unintended air pollution. Alternatively, externality may be viewed as simply the lost opportunity occasioned by the incompatible use of a good. Instead of the pollution being seen as a by-product, it may be seen simply as another input necessary to produce an output. We do not usually say that labor (expenditure of effort), iron ore, energy and machines are by-products of steel. They are simply inputs. And so is a space to put waste. All are necessary inputs. The question for all of them is who owns these inputs and therefore is in a position to make their use by others a cost. Iron ore is payed for because the mines are owned. Likewise, the land for the steel plant is payed for because someone owned it and the steel plant had to buy it. The steel plant will pay for a place to put its waste (in the air, water or land) if that resource is owned by others. If it already owns it, the steel company will listen to bids of others who would like it, but do not own it. If the farmer rejects the bid of the steel company, the company will have to find a more expensive substitute. Its costs go up. Or if the steel company already owns the land, it may reject the farmer's bid. Likewise, if the steel company owns the air or water and uses it for waste disposal, the farmer or any other neighbor may offer the owner a bid for something it likes but does not own. If the bid is rejected, the farmer and neighbor turn to more expensive substitutes including doing without.

In some cases the non-owners may be many and no one or few can alone offer sufficient bid to the steel company. Further, the alternative use of the air for breathing is a high exclusion cost good and since anyone can use it if it exists, some are tempted to be free riders and not help pay to obtain the right from its owner whose best use is for waste disposal. Potentially Pareto-better trades may not occur for air rights in this case, but the same is true for iron ore and other inputs into steel production if transaction costs are high.

A negative externality is inevitable (ubiquitous) if goods are scarce and use by different parties incompatible. This is why people contend to be owners. Ownership defines who has the opportunity and who is exposed to the exercise of these opportunities. The ability to create negative Externalities produces income for the owner. The bid persuades the owner of the opportunity to forego her preferred activity and defer to the bidder. A poor person is one who has few owned opportunities which produce income. An owner who cares for a non-owner and derives utility from that person's welfare will transfer ownership to that person to reduce that person's exposure to the owner's opportunities. e.g. A person with a lot of land will share produce with the hungry and a person with a lot of pollution rights will share those rights with the contaminated by reducing the polluting activity and finding more costly substitutes for the owned inputs.

Crime is an unlawful interference with the right of an owner to create externality for non-owners. In its extreme form it may lead to a revolutionary change in the previous ownership. Ownership rests on a consensus of legitimacy. This willing acceptance of the distribution of opportunities rests upon some moral judgment. Expenditure to enforce ownership against those who contest or deny ownership ranges from police to guerillas to armies. Legitimacy of ownership requires some minimal threshold of respect, if not care, for the owners. A despised owner is an insecure owner. Without respect and willing participation by non-owners, the expenditures to maintain putative ownership can be very high.

If you have any questions or comments, please email schmid@pilot.msu.edu

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