Saturday, October 24, 2009
The Problem With Pigou
From an email I wrote to a group of colleagues who were arguing over whether it was really true that fossil fuel use only had negative externalities. (One of the guys was arguing that cheap energy confers benefits on society, just as surely as an opera house.)
Sorry I'm late replying to this; swamped with work. Consumer surplus
refers to the benefit consumers get from the availability of certain
markets, because presumably you keep buying units until the marginal
benefit of the next unit is lower than the unit price. So the idea is
that you gain a surplus on each of the inframarginal units. A lot of
people don't see how a voluntary trade makes both people better off.
If a gallon of gas has a price of $2.50, then the consumer buys it and
at best is "even" because he swapped out $2.50 in cash for something
that is "worth" $2.50. But obviously that is wrong.
A positive externality means your actions shower benefits on other
people who aren't in the actual market transaction. Textbook examples
are things like schooling and vaccination. An individual presumably
decides to learn to read, and get vaccinated (or at least his parents
force him to do these things) because the personal benefits outweigh
the personal costs. But it's in my interest if other people become
literate and vaccinate themselves. (Let's stipulate that we're talking
about an effective vaccine. I know a lot of people don't like the H1N1
vaccine.)
The problem with externalities is that if you push it, just about
every action you take has a million positive and a million negative
externalities. E.g. if I put on smelly socks before going to work,
that's a negative externality and the government ought to fine me, in
principle. Oh but maybe the odor causes others to think about
workplace odor, causing 5 people to use anti-perspirant who otherwise
wouldn't have. Thus my wearing of smelly socks confers a positive
externality, and the government should subsidize me, in principle.
So [Mr. Colleague] is definitely right that there are positive externalities
from fossil fuel use, if only because I can dream up positive
externalities from any activity X.
Comments:
Great example. I am actually doing a paper on this very subject for an econ class, and this helped out a lot. The externality argument is not only impossible to solve (on net was there more negative than positive?), but it is based on normative value judgments of good and bad, so i never understand how the positivists can even attempt to justify it.
Heh, I ended up bringing this argument up with my lecturer, after reading the material provided to me by yourself and other readers of this blog. My lecturer (I paraphrase) basically replied "We focus on the -important- externalities." However, he was kind enough to accede that externalities "are the last refuge of the interventionist."
Wenzel, prior to the combustion engine automobile, a popular mode of transport was powered by horses. I think the use of a fossil-fueled auto by you, Murphy, or anyone else really, confers a benefit to me because the neighborhood would smell less like horse shit. That's one.
# posted by 
: October 25, 2009 at 12:39 PM
: October 25, 2009 at 12:39 PM
I am still waiting for someone to point out an actual proven negative externality to more CO2. We certainly have a lot of proposed, theorized, and predicted ones, but none proven.
# posted by : October 25, 2009 at 7:12 PM
: October 25, 2009 at 7:12 PM
Wenzel, in addition to the more serious one that Ryan mentioned, I could argue that anyone who was born to parents who met as co-workers at Exxon, owes his very life to fossil fuels.
BTW I should be clear, in case newcomers stumble onto the site and are astounded: I'm not claiming that I just blew up the case for a carbon tax. Obviously, one could retort to my example above, "OK, but there are just as many negative externalities from people who didn't meet at the stagecoach factory once it was put out of business by the Model T!"
That's right, but notice then you get hip deep in empirical arguments. My overall point in all of this is that it's easy to point at a specific aspect of some activity and label it worthy of subsidy or penalty. In reality, you would need to know the whole story, even if you conceded the basic Pigovian framework.
That's right, but notice then you get hip deep in empirical arguments. My overall point in all of this is that it's easy to point at a specific aspect of some activity and label it worthy of subsidy or penalty. In reality, you would need to know the whole story, even if you conceded the basic Pigovian framework.
Wouldn't the fact that cheaper energy => cheaper shipping => lower prices across the markets be a somewhat obvious positive externality of fossil fuel use? I'm curious.
If all freight services everywhere switch to biofuel tomorrow, the cost to ship goes up and the price of shipped goods goes up too, right? So all shipped goods are cheaper for cheaper fuel use.
Even in the presence of a more cost-efficient fuel, fossil fuel's presence in the market makes the total supply of fuels higher and the overall price of fuels lower, from a simplistic view...perhaps unless one considers fuel production as zero-sum; either wasteful, or not.
If all freight services everywhere switch to biofuel tomorrow, the cost to ship goes up and the price of shipped goods goes up too, right? So all shipped goods are cheaper for cheaper fuel use.
Even in the presence of a more cost-efficient fuel, fossil fuel's presence in the market makes the total supply of fuels higher and the overall price of fuels lower, from a simplistic view...perhaps unless one considers fuel production as zero-sum; either wasteful, or not.
Heh, not too long ago I made a similar argument about how jogging should be taxed, as joggers wear their joints out, and burden the health care system and thus bring up the cost. Or subsidized because joggers are in better shape than non-joggers. Or taxed because them being in better shape puts unreasonable demands for youngsters to be in shape and look pretty, who are already insecure about their looks. Or subsid... - you get the picture.
@Ryan
Are you really saying you prefer gas fumes and smog to the smell of horse manure, which you can still get btw on frams and from the orse drawn carriages on Central Park South in NYC?
@Bob
I'm not sure yours is an externality, don't people often choose their jobs based on what kind of co-workers will be around?
Are you really saying you prefer gas fumes and smog to the smell of horse manure, which you can still get btw on frams and from the orse drawn carriages on Central Park South in NYC?
@Bob
I'm not sure yours is an externality, don't people often choose their jobs based on what kind of co-workers will be around?
Oh do not forget dead horses and removal of those dead horses. Do a check on dead horse removal from New York City
However, consider the negative externalities involving the job losses in the horse breeding / horse breaking / horse stabling / horse feed / 'smithing / tanning / carriage making / horse vet / horse hospital / dead horse removing industries.
Horse-based transportation is too big to fail...
I see what you meant, Bob. Right on.
Horse-based transportation is too big to fail...
I see what you meant, Bob. Right on.
# posted by : October 26, 2009 at 12:13 PM
: October 26, 2009 at 12:13 PM
More humans die every day than did a thousand years ago.
This is not indicative that humans are "dying faster" than they used to.
But it /does/ mean more work for undertakers, no?
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This is not indicative that humans are "dying faster" than they used to.
But it /does/ mean more work for undertakers, no?
# posted by : October 26, 2009 at 7:06 PM
: October 26, 2009 at 7:06 PM Subscribe to Post Comments [Atom]
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