Talk:Externality

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The article on externality seem to lack a part on externalities that can be viewed as services that are not paid for but still are important for the product or services that an organisation/company sells. Eg. pollinating insects is generally perceived as a free resource but the cost of pollination could for example be evaluated in terms of the cost of manual human pollination. Another example could be ability of marshlands and forests to purify water. If am not mistaken the city of New York pay upstream farmers to stop using the farmland close to the river and thus does not have to spend so much resources on water purfication as would otherwise be needed. BedrupsBaneman 12:26, 30 May 2005 (UTC)

It's generally not an externality if money is being exchanged. So the New York farmers have internalized the externality because they will forfit money if they use the farmland close the the river. Pollination services are often paid for goods as well. For example, almond farms pay for bee keepers to come by and pollinate their fields since almond honey is not edible to humans. I do agree that there are some services that have traditionally been externalities. For example, at the start of the industrial revolution, dumping coal smoke into the air was free to the producer, but had a rather incredible health cost to the people who were breathing it. Jrincayc 14:33, 30 May 2005 (UTC)

It does not imply that all pollination is paid for, and thus remains an externality. But as you noted it can be prized and thus we have a prize tag on the ecosystem services provided by the bees. Btw ecosystem services is the word I was lacking in the comment above. Sometimes the term environmental or ecological externality is given to externalities like pollution etc that is already discussed in the article. An example similar to the New York state sitaution is the Panama Canal that is being filled with mud due to extensive deforesting and is thus a cost because of the need of dredging. See more on: http://economist.com/displaystory.cfm?story_id=3886849 As it turns out this may also be internalised in terms of the Panama state charging the freight companies so that the country can be reforestred. But this would imply that a third party (the freight companies) is paying for the restoration of the ecosystem services that was destroyed by the Panama Government (or who?). I mention this because putting a prize tag on an externality especially in terms of ecosystem services can be used to change processes or procedures towards a more well thought of dito or lets call them sustainable. This can be put into the article if I only can the the right words or place in the article. Bedrupsbaneman 13:57, 1 Jun 2005 (UTC)


The Coase theorm needs to be mentioned here. Basically under certain conditions externalities will solve themselves. -- Jrincayc

The graph and the comments of the case of positive externality need to be addedMilton 18:38, 14 Mar 2004 (UTC)


Suppose that two companies merge and, as a result, 1) there are a number of layoffs and 2) the remaining employees become more dissatisfied with their jobs. Clearly, the people making the merger decision have negatively impacted at least some people not involved in that decision: the employees. But would this count as a negative externality? If not, is there some other label economists would assign to it? --Ryguasu 19:57, 8 Apr 2004 (UTC)

It only counts as a negative externality if the negative impact does not (or only partially) affects the people making the decision. For your example, the layoffs probably would be a negative externality since the decision makers are probably not affected. The remaining employees' dissatisfaction might not be a externality, since this would presumably affect the decision makers in ways such as making hiring more difficult, increasing turnover and so on. Jrincayc 13:02, 9 Apr 2004 (UTC)
On second thought, perhaps neither situation merits speaking of a negative externality. As you point out, there is a market for jobs-at-that-company. A good neo-classical economist should say that increased employee dissatisfaction will influence prices in that market; in particular, provided elasticity conditions are right, increasing employee dissatisfaction will tend to increase wages. Similarly, wages will probably also increase when a company becomes less committed to job security. I'd love to hear if this analysis is leaving something out, though. --Ryguasu 17:17, 9 Apr 2004 (UTC)
Ryguasu, I have to disagree with your conclusions. The fact that the event will eventually influence market prices is non-sequitor and cannot be used to conclude that they are not externalities. To be an externality, some aspect of a transaction must be external to it. That is, it has not been internalized into the firm's production function and is not reflected in the market prices set for the transaction. What is at issue is whether the market mechanism is incorporating these effects into the current transaction price and output, not whether they will eventually have some influence on the market. mydogategodshat 07:20, 10 Apr 2004 (UTC)

In the Coase theorem, the constraints of applicability mentioned in the article:

1 Property rights are well defined; 2 the number of people involved is small; and 3 bargaining costs are very small.


The pont 2 and 3 does not make justice to the full power of the Coase achievement. The point 2 is not necessary since firms and associations can be involved instead of individuals. Thus, the Coase philosophy can be applied very well to the case of a big company versus a citizen association.

In the point 3, bargaining cost is preferable to be small but it is not necessary. The optimum allocation of resources is achieved when bargaining costs are 0, but a high cost of transaction does not invalidates the philosophy of the Coase theorem. Moreover, in fact, judge decisions and state involvement are not ruled out by the Coase theorem. Firstly, Property rights have to be clearly defined, as the point 1 rightly stated; That must be done usually by the State previously to the dispute. Additionally, judges usually enforce agreements that have the virtual effect of lowering the transaction costs, and thus act as natural extensions of the market mechanisms.

The Coase achievement goes rather far than the unreal limits of the Coase Theorem. The global philosophy of the Coase work is: instead of having diffuse property rights and paying taxes to the State for externalities, it is better for a optimum allocation of resources and thus, the social welfare to have clear property rights and to pay directly to the affected by the externality.


I think there needs to be a much deeper discussion of "laid-off" costs and "internalized costs."

Ecar


[edit] Uses of the term outside economics

There is a completely different usage of "externality" in theology and (primarily French) anthropology. I can't provide a definition myself (I had been hoping to find one here), but I thought it needed to be mentioned.--WadeMcR 17:01, 12 April 2006 (UTC)

[edit] References?

I don't know anything about economics really, and happened here via "Random article". The article is basically well-written (though the examples seem a bit one-sided and biased, to me; others are a bit hard to understand), but there are no references at all here. Is this a normal term associated with economics? If so, shouldn't there at least be some references to it's coinage or inception and some applications of it in economic theory? It reads now as very POV to me. Anyway, I've no vested interest in this article, but thought someone might find it useful what an unlearned source takes away from this. --Davetron5000 20:32, 10 August 2006 (UTC)

Since no one responded, I put in the {{source}} template to indicate a lack of sources or references --Davetron5000 16:51, 25 August 2006 (UTC)
The data seems to come from Allexperts, http://experts.about.com/e/e/ex/Externality.htm. --jfolin 13:50, 17 October 2006 (CET)

WELL TO UNDERSTAND the concept OF externalities book written by N.GREGORY MANKIW, GIVES AN EXELENT PREVIEW OVER THE SUBJECT.. WELL IT DOES HELPED WITH SOME GRAPHS, AND OVER ALL THE ARTICLE IS WELL EXPLAINED.