Economics Dictionary of ArgumentsHome
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| Externalities: Externalities are unintended side effects or consequences, positive or negative, of economic activities impacting third parties not involved in the transaction. They occur when the actions of individuals or businesses generate spillover effects on others' welfare or resources, without compensation. Examples include pollution affecting communities or innovations benefiting industries beyond the innovator. See also Compensation, Economy._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
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James M. Buchanan on Externalities - Dictionary of Arguments
Boudreaux I 45 Externalities/Buchanan/Boudreaux/Holcombe: An externality exists when the actions of some people impose costs or convey benefits to others not involved in those actions. One common example is smoke from a factory that pollutes the air that nearby individuals breathe. The typical remedy suggested by economists is to tax the externality-generating activity, or if that is not feasible, to impose a regulation that reduces the external cost - the cost that’s imposed on third parties. Buchanan’s views on the existence of externalities conform to those of mainstream economists, but he departed from those scholars on the desirable remedies for externalities. He maintained that when externalities cause resources to be used inefficiently, individuals have an incentive to find ways to remedy these inefficiencies on their own. If some people impose external costs on others, both parties have an incentive to negotiate to remedy those inefficiencies on their own. Boudreaux I 46 Clubs/Buchanan: There is a parallel between Buchanan’s views on externalities and his theory of clubs - the latter being, (…) an explanation of how people voluntarily form clubs to produce collectively consumed goods. >Clubs/Buchanan. In both cases there is the prospect that resources can be allocated more efficiently, with all parties able to adjust their actions to create mutual gains. Because externalities are rarely global in nature, Buchanan’s discussion of federalism reveals that it is possible for people to have the option of moving out of jurisdictions where external costs are high and into jurisdictions where these costs are lower. Taxation: Also important to keep in mind is that using taxes or regulation to mitigate externalities brings its own problems. Buchanan noted that the theoretical remedies recommended by economists would work only if industries are what economists call “perfectly competitive.” >Taxation/Buchanan, >Perfect competition/Buchanan. Externalities might result in inefficiencies, but there is no guarantee that matters would be improved by a government-directed remedy. (…) this fact did not lead Buchanan to advocate against all government responses to pollution and other externalities, but it did prompt him to advise politicians and the public to temper their enthusiasm about governments’ abilities to improve matters with interventions. Costs: Of course, the problem with externalities, as the name suggests, is that resources are used in ways that some affected persons don’t bargain for - as happens, for example, when a factory emits pollutants into the air that is breathed by all the town’s residents and, thus, harms these residents. Boudreaux I 47 If (say) the town council had a clear property right in the town’s airspace, the factory could negotiate with the council and offer to pay to it a sum to compensate the town for whatever amount of pollution the factory emits. Such a bargain would benefit both the town and factory. Property: But if there is no clear definition of property rights in the air, then the factory will be reluctant to negotiate with the town council. It will likely simply continue to pollute without the town being compensated to bear the cost of the pollution. Clearly defined property rights thus promote bargaining to mutual advantage -that is, toward greater efficiency of resource use - while the absence of such rights stymies such bargaining. Buchanan/Tullock: In The Calculus of Consent, Buchanan and Tullock say „If property rights are carefully defined, should not the pure laissez-faire organization bring about the elimination of all significant externalities? … After human and property right are initially defined, will externalities that are serious enough to warrant removing really be present? Or will voluntary co-operative arrangements among individuals emerge to insure the elimination of all relevant external effects?“ (Buchanan and Tullock, 1962/1999(1): 44) Boudreaux I 48 Politics: A central reason for Buchanan’s caution in recommending government intervention to remedy externalities was his recognition that democratic politics carries with it a built-in externality. If one thinks of an externality as a third-party effect - that is, some people impose costs unilaterally on others - one should then see that when collective decisions are made by majority rule, the majority imposes external costs on the minority. The majority gets what it wants, forcing the minority to accept what it, the minority, does not want. This reality further reinforced Buchanan’s reluctance to recommend government remedies for externalities. Government action would replace one externality with another. This point warrants emphasis: politics contains a built-in externality. Government policies apply to everyone, whether or not they agree, unlike market exchange which only takes place if and when all parties to the exchanges agree. The nature of government means that whatever it does, it unilaterally imposes costs on some people. As Buchanan explains, „The minimum-size effective or dominating coalition of individuals, as determined by the voting rule, will be able to secure net gains at the expense of other members of the political group.… In the simple majority-rule model, this involves, in the limit, fifty plus percent of the total membership in the dominating coalition and fifty minus percent, of the total membership in the losing or minority coalition.“ (Buchanan, 1999(2): 64-65) Buchanan’s point is partly theoretical. This outcome could happen. But his point is also partly practical. If democratic political institutions could be used in this way, individuals then in fact have incentives to use them this way because they can. It is naïve to think that some people can possess the power to manipulate the political process for their own gain without understanding that some people actually will exercise this power in that way. Boudreaux I 49 Government action/Buchanan: This reasoning points directly to Buchanan’s overall approach to analyzing political action. Economists, even in the twenty-first century, tend to evaluate government action as if government officials apolitically implement optimal public policies. Economists derive the theoretical optimal allocation of resources and then assume that government will act to achieve this optimal allocation. BuchananVsTradition: Buchanan’s fundamental contribution was to note that just as resources are not typically allocated in markets with perfect efficiency, neither are they typically allocated by government with perfect efficiency. >Government policy/Buchanan. Boudreaux I 51 In drawing a parallel between market failure and government failure, Buchanan’s insight is that democratic political systems create their own inevitable externalities. Some people can use the system to impose costs on others. >Government failure/Buchanan. 1. Buchanan, James M., and Gordon Tullock (1962/1999). The Calculus of Consent. Liberty Fund. 2. Buchanan, James M. (1999). The Logical Foundations of Constitutional Liberty. Liberty Fund._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
EconBuchan I James M. Buchanan Politics as Public Choice Carmel, IN 2000 Boudreaux I Donald J. Boudreaux Randall G. Holcombe The Essential James Buchanan Vancouver: The Fraser Institute 2021 Boudreaux II Donald J. Boudreaux The Essential Hayek Vancouver: Fraser Institute 2014 |
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> Counter arguments against Buchanan
> Counter arguments in relation to Externalities
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