Talk:Externality/Archive 2

Bribing example as a critique of Coasian bargaining
"Additionally, firms could potentially bribe each other since there is little to no government interaction under the Coase theorem. For example, if one oil firm has a high pollution rate and its neighboring firm is bothered by the pollution, then the latter firm may move depending on incentives. Thus, if the oil firm were to bribe the second firm, the first oil firm would suffer no negative consequences because the government would not know about the bribing."

I believe that the first statement is an inaccurate summary of the article and that the second statement is just not clear. The cited article's main idea is as follows

"In the absence of liability laws, threats could become revenue generators. This, in turn, could lead to possible resource misallocation, since incentives could exist for channeling resources into the invention of threatening possible actions or production processes"

It basically contrasts the absence and presence of liability laws. I am not sure but I believe that this paragraph can just be removed from the article. --Alaexis¿question? 18:21, 16 October 2018 (UTC)

Opening Paragraph Modified
I removed the last two sentences of the first paragraph. It was poorly-sourced and reeked of blatant anti-market bias. Saying that allocative efficiency rarely occurs on the free market because of corporate limited liability is just ludicrous. — Preceding unsigned comment added by 98.191.15.34 (talk) 14:02, 13 March 2019 (UTC)

Is congestion an externality?
Congestion is mentioned as a social cost (presumably an externality) in the page on Frank Knight. More broadly you could say that consumption of a scarce resource always gives rise to external costs because it reduces the amount available for other people. It’s external to the transaction but not to the market. Economically it seems completely different from (say) pollution which imposes costs not reflected by the market.

Ought the definition to make the distinction clearer? Colin.champion (talk) 15:00, 20 September 2019 (UTC)


 * Yes, I’m sure the definition is wrong. It implies that externalities exist whenever the marginal cost function is non-constant, since one person’s purchase makes the good more or less affordable to other people. This isn’t an interesting property and isn’t problematic for market mechanisms. On the other hand the question of whether traffic congestion is external isn’t well formed: people don’t pay to drive, so there’s no market for it to be external to. You could model driving as taking place in a pollution market in which the price has been set to zero by government subsidy, in which case congestion is external and pollution internal, or (more naturally) you could see it as taking place in a subsidised market for road use, leading to the opposite conclusion. Knight seems to have been led astray by a badly chosen example. Colin.champion (talk) 07:15, 23 September 2019 (UTC)

Can I suggest a reworded (and abbreviated) lead para? Though informal, I think the definition is more nearly correct. It is useful to bring in reference to context (especially the First Theorem of Welfare Economics) since this is assumed throughout the article. Some of the material I omitted would need to retained elsewhere. (I’m far from being an expert on the subject, so I’m reluctant to jump in and edit myself.) In economics, an externality is the cost or benefit associated with a transaction which is not reflected in the market mechanisms governing its price. The commonest example is pollution, as when the price of coal is determined by the costs of its extraction and sale without taking account of the pollution it causes. External costs can also be negative (i.e. be benefits), as when the purchaser of a tree isn’t rewarded for the benefits it confers on other people.

Externalities are important in economics because their existence is one of the ways in which the assumption of market completeness can be violated. According to the First Theorem of Welfare Economics, market completeness is a condition for competitive markets to yield a Pareto optimal solution to economic problems, so the existence of externalities is an indication that markets may behave harmfully. Since the absence of transaction costs is another condition, the simple solution of internalizing all costs is likely to substitute one inefficiency for another. An alternative solution is the imposition of Pigovian taxes, which require a polluter to pay a sum through taxes equal to the price his pollution would incur if it was charged through the market. Colin.champion (talk) 08:17, 24 September 2019 (UTC)

Second Paragraph Grammar
"Externalities can be both positive or negative." This isn't meaningful to me as written because using "both ... or" isn't normal English usage. In my understanding, the grammatical/meaningful options are "Externalities can be positive or negative" OR "Externalities can be either positive or negative" OR "Externalities can be both positive and negative", although the latter suggests they would be positive and negative at the same time. Perhaps this could be corrected by someone with more knowledge of what the real meaning might be than I have? Cantabile3 (talk) 22:26, 6 October 2019 (UTC)


 * I’m sure you’re right, and I’ve changed ‘both’ to ‘either’. I have a suspicion that no one is taking responsibility for the lead para. Colin.champion (talk) 12:28, 13 October 2019 (UTC)

What causes / contributes to externalities?
I think this article would benefit from more discussion of factors that contribute to negative externalities, like the incentives facing corporations and their investors. — Preceding unsigned comment added by Bookish982 (talk • contribs) 22:43, 3 November 2020 (UTC)
 * Do you have sources in mind? In general, such externalities depend on technology and cost. Just like every other production decision.  SPECIFICO talk 23:12, 3 November 2020 (UTC)

Wrong Graphics
https://en.wikipedia.org/wiki/Externality#/media/File:Positive_Production_Externality.png https://en.wikipedia.org/wiki/Externality#/media/File:Negative_Production_Externality.png

@AlexMaser First of all, thanks for creating these graphics, but I think you switched two things up? Shouldn't the socially optimum quantity be where the social marginal benefit and the social marginal cost cross? @AlexMaster. That's right, graphics need to be changed. In the case of "Negative Production Externalities" and "Positive Production Externalities" the labels for the social and private marginal cost curves need to be switched. — Preceding unsigned comment added by SoulaGr (talk • contribs) 10:15, 19 December 2021 (UTC)

Definition?
Where can I find a definition of "Externality"?

I like this definition: "a cost or benefit for a third party who did not agree to it."

I want to quote it in a research paper, but I'd prefer to cite a source other than Wikipedia. This article says, "The concept of externality was first developed by economist Arthur Pigou", and cites:



I found the following in the Internet Archive:


 * Pigou (1952) The Economics Of Welfare, 4th ed. (Macmillan)

Chapter 1 in this book is entitled "Welfare and Economic Welfare" and occupies pp. 3-22. That looks like what is cited, thought I cannot find an ISBN.

I didn't read every word, but I skimmed it and searched for words like "externality", "cost", "benefit", "third", "agree", "tax", "subsidy", "pollution", "negative", "positive" without finding anything that seemed to resemble this discussion.

Suggestions? Thanks, DavidMCEddy (talk) 21:48, 3 August 2021 (UTC)
 * Unfortunately, that definition is an amalgam of Wikipedia editors' contributions. That version was introduced by  with this edit: https://en.wikipedia.org/w/index.php?title=Externality&type=revision&diff=1031917387&oldid=1029276420&diffmode=source but as you can see  they were just tightening an earlier version. And if you look at the history, you can see that it has been changed repeatedly before and since then and today's version is quite different. I like it too: it is concise and clear but maybe is insufficiently rigorous for some (which probably suggesgts that you can't use it either).
 * BTW, ISBN's hadn't been invented when Pigou wrote that. But you can probably get an OCLC number for it at worldcat.org. --John Maynard Friedman (talk) 13:01, 19 December 2021 (UTC)
 * , I've just spotted that you asked that question in August, so I guess it is too late now? --John Maynard Friedman (talk) 13:03, 19 December 2021 (UTC)