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Externalities


Socratus O' Pericles

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I've come across a new term (for me) i.e. externalities it seems that it is a positive or negative side effect of an economic transaction.

That is it is something the market does not allow for? Examples given were pollution and beekeeping.

If a bank fails it is not the fault of any one transaction but a series of transactions can cause the externality of bank failure. Moral hazard is wrapped u pin here somewhere too. At this stage I couldn't follow the discussion any more.

Anybody any thoughts on this??
 

Cassandra Syndrome

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NAMA is a negative externality for the housing market. Keeping house prices artificially high.

The ECB rate was a negative externality on the market too, giving out interest rates way below the natural rate of interest causing the bubble.
 

Cassandra Syndrome

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SideysGhost

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Externalities...yeah the things that the cartoon world of neo-liberalism pretends don't exist.

Externalities are the whole reason why we have legal frameworks, Governments, regulation etc in the first place. They exist - not in every industry or at all times, but they exist. Pretending otherwise is never going to work, and in fact the kind of lunatic meddling proposed by the Wingnuts - take the electricity market in Ireland for example, or in the UK Maggie and the train network, or banks everywhere - to "introduce competition" or "liberalise" markets with huge externalities or natural impulses towards monopoly usually end up making the situation much worse.

Externalities, along with the nature of money, and study of the history of asset bubbles are three critical areas that are sadly neglected or glossed over in many economics courses. I suppose that's how we end up with the likes of Comical Austin and Desperate Dan.
 

PAD1OH

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I have no thoughts and no clue as to how beekeeping can damage the economy myself.
the theory is if I buy some bees to make myself an oul bit of honey and then my bees fly into your garden and pollinate your plants and you sell them on you have gained something at my expense.
 

Mossy Heneberry

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the theory is if I buy some bees to make myself an oul bit of honey and then my bees fly into your garden and pollinate your plants and you sell them on you have gained something at my expense.
Your neighbour's flowers provided your bees with the nectar to make you your honey, so both of ye gained.
 

Socratus O' Pericles

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NAMA is a negative externality for the housing market. Keeping house prices artificially high.

The ECB rate was a negative externality on the market too, giving out interest rates way below the natural rate of interest causing the bubble.
Can you say a bit more about this or give a link--I thought the externality was on the transaction e.g. the purchase of a house not on the regulatory framework or other provision in the macro environment?

Having serious trouble getting the head around this:confused:
 

ibis

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Can you say a bit more about this or give a link--I thought the externality was on the transaction e.g. the purchase of a house not on the regulatory framework or other provision in the macro environment?

Having serious trouble getting the head around this:confused:
You can assist yourself by discarding in its entirety what Cassandra Syndrome has said in the post you quote. Neither NAMA nor the ECB are externalities, and saying they are suggests that CS hasn't a clue what an externality is. Government intervention is not an externality, but an external force.

An externality is simply anything that the market doesn't take into account directly and which results from a transaction/action in the market. An externality means that someone else is bearing some costs or making some profit from a transaction or action, and that profit or cost is not being factored into the original transaction/action.

Pollution from industry is a negative externality if the market does not reflect the cost of pollution in pricing the good:

Take an unregulated market. Say it costs you €10 to make product X - €5 labour, €3 parts, €2 energy and rent etc. As part of the production process you take in clean water from the local river, and you produce toxic liquid waste, which you pump back into the local river.

Now, if you draw a picture of the production process from a market point of view - from the point of view of things that are priced - you'll note that you don't actually have to include the toxic waste or the clean water at all, because it doesn't cost you anything. It's outside the picture frame of the market completely - hence an "externality". In this case it's a negative externality, because you're doing damage you're not paying for.

Similarly, your choice of driving somewhere causes both congestion (costing other people time) and pollution - if neither of these are reflected in the price of driving, then they are externalities. Again, you're not paying for the damage you're causing, and so this is a negative externality.

Beekeeping for honey has a positive externality, which is that the bees pollinate crops and flowers belonging to other people. It's an externality because you're not paid for the good you do. There's also a couple of negative externalities - your honey derives from nectar in flowers belonging to other people, for which you don't pay, and some people get stung, which you probably don't have to compensate them for.

The big externality to all industry at the moment is climate change resulting from the production of greenhouse gases - the costs, in terms of the negative effects of climate change, will not be borne by the people who profited from the original industrial production. An Irish company produces product X, which it sells to an Irish consumer, but the climate change results in, say, increased aridity in Ethiopia. So the external cost of the transaction between the Irish company and the Irish consumer is borne by the Ethiopian peasant farmer.

The standard libertarian solution to this is complete ownership of everything. The water in the stream used by the company would be owned by someone, and so on, everyone would have "air shares" in the atmosphere
etc. Since the frictional costs in such a market would make it infeasible, we make do for the moment with government regulation.
 
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D

Dylan2010

The standard libertarian solution to this is complete ownership of everything. The water in the stream used by the company would be owned by someone, and so on, everyone would have "air shares" in the atmosphere
etc. Since the frictional costs in such a market would make it infeasible, we make do for the moment with government regulation.

I've never heard of "air shares" , I think the basis would be more along the lines of trespass of pollutants. It does contrast with with the moral hazzard that government regulation can never keep up with. I think its a reasonable assetion to make , that if property rights and responsabilities are clear , externalities are accounted for on the other hand the more "commons" there are, the more opportunity for corruption and mismanagement. A good example might be ground water in a hot climate. Its a scarce resource , however its likely that if the gov. regulates its use, it will be for the benefit of the people with the biggest "brown envelopes"
 

Mossy Heneberry

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You can assist yourself by discarding in its entirety what Cassandra Syndrome has said in the post you quote. Neither NAMA nor the ECB are externalities, and saying they are suggests that CS hasn't a clue what an externality is. Government intervention is not an externality, but an external force.
The very action of the government can cause externalities. When the government introduced tax incentives for property development and rent allowances/ Landlord subsidies into the market we can now see the resultant externalities that have happened there, ghost estates, over surplus of hotels and false rental rates.

Now, if you draw a picture of the production process from a market point of view - from the point of view of things that are priced, you'll note that you don't actually have to include the toxic waste or the clean water at all, because it doesn't cost you anything. It's outside the picture frame of the market completely - hence an "externality". In this case it's a negative externality, because you're doing damage you're not paying for.
Do we not have regulations in place that penalises people who pollute the environment?

Similarly, your choice of driving somewhere causes both congestion (costing other people time) and pollution - if neither of these are reflected in the price of driving, then they are externalities. Again, you're not paying for the damage you're causing, and so this is a negative externality.
Not true, drivers pay road taxes and fuel duty.

Beekeeping for honey has a positive externality, which is that the bees pollinate crops and flowers belonging to other people. It's an externality because you're not paid for the good you do. There's also a couple of negative externalities - your honey derives from nectar in flowers belonging to other people, for which you don't pay, and some people get stung, which you probably don't have to compensate them for.
Why keep bees? To produce honey. How do bees produce that honey? From gathering nectar from plants and in the process they pollinate crops and flowers. So the owner of those crops and flowers benefit as well.

The big externality to all industry at the moment is climate change resulting from the production of greenhouse gases - the costs, in terms of the negative effects of climate change, will not be borne by the people who profited from the original industrial production. An Irish company produces product X, which it sells to an Irish consumer, but the climate change results in, say, increased aridity in Ethiopia. So the external cost of the transaction between the Irish company and the Irish consumer is borne by the Ethiopian peasant farmer.
What a load of tosh. The biggest threat to Ethiopian peasants is over population and corrupt government.

The standard libertarian solution to this is complete ownership of everything. The water in the stream used by the company would be owned by someone, and so on, everyone would have "air shares" in the atmosphere
etc. Since the frictional costs in such a market would make it infeasible, we make do for the moment with government regulation.
That is not true. If you live downstream from a polluter or near a factory polluting the air, your rights are being infringed upon. You would then sue the polluter.
 

ibis

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The very action of the government can cause externalities. When the government introduced tax incentives for property development and rent allowances/ Landlord subsidies into the market we can now see the resultant externalities that have happened there, ghost estates, over surplus of hotels and false rental rates.
Again, no. Those are market distortions introduced by the government, but they are not externalities.

Do we not have regulations in place that penalises people who pollute the environment?

Similarly, your choice of driving somewhere causes both congestion (costing other people time) and pollution - if neither of these are reflected in the price of driving, then they are externalities. Again, you're not paying for the damage you're causing, and so this is a negative externality.
Not true, drivers pay road taxes and fuel duty.
Yes - those externalities have therefore been brought into the transaction by regulation.

Why keep bees? To produce honey. How do bees produce that honey? From gathering nectar from plants and in the process they pollinate crops and flowers. So the owner of those crops and flowers benefit as well.
Yes, that's the positive externality described.

What a load of tosh. The biggest threat to Ethiopian peasants is over population and corrupt government.
That's completely irrelevant - nobody asked what the biggest threat was.

That is not true. If you live downstream from a polluter or near a factory polluting the air, your rights are being infringed upon. You would then sue the polluter.
That's another way of doing it, but you'd need to show harm to your property. Plus, that allows only the property owner to complain. In the case of a river which runs past peoples' homes but which they do not own, no damage is being done to their property, and the ability to sue would require a legal recognition of non-property rights.
 

Cassandra Syndrome

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Can you say a bit more about this or give a link--I thought the externality was on the transaction e.g. the purchase of a house not on the regulatory framework or other provision in the macro environment?

Having serious trouble getting the head around this:confused:
Here are some definitions

A consequence of an economic activity that is experienced by unrelated third parties. An externality can be either positive or negative.
An externality is an effect of a purchase or use decision by one set of parties on others who did not have a choice and whose interests were not taken into account.
In economics, an externality (or transaction spillover) is a cost or benefit, not transmitted through prices[1], incurred by a party who did not agree to the action causing the cost or benefit. A benefit in this case is called a positive externality or external benefit, while a cost is called a negative externality or external cost.
My example of NAMA, refers to the government stepping into the housing market and trying to set a higher price for property by dictating their desired equilibrium of demand and supply. With 350,000 potential houses to sell the natural price for property would plunge into the 5 figures. The government steps in and restricts supply by purchasing these units ( vertical supply curve that shifts to the right at their discretion in the hope that over time the demand curve will keep shifting to the right as incomes in their pollyanna like vision increases ).

It is a negative externality as prices remain artificially high. Japan tried the same caper 20 years ago and prices are still falling today (nearly 90% from peak in the 1980s). All the people of Ireland incurr the cost of this negative externality.

My 2nd example, interest rates set by the ECB, have a look at this graph




n=1o is the natural rate of interest for Ireland which encourages people to save and invest in equal amounts leading to gradual growth with low inflation

i1 is the ECB rate. Much lower than the Natural rate for Ireland.

As a result of this negative externality the market results in disequilibrium as rates are too low to encourage people to save (S1) but are so low that people are encouraged to borrow excessively and invest in long term projects such as property (I1). The tug of war between people consuming too much at once and people investing too much at once for the same finite resources causes a massive bubble to occur leading to an eventual bust (I1-S1).

The cost of excessive low interest rates below the natural rate is an negative externality to society in general as unemployment, poverty and social ills result from the bust.
 

Cassandra Syndrome

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You can assist yourself by discarding in its entirety what Cassandra Syndrome has said in the post you quote. Neither NAMA nor the ECB are externalities, and saying they are suggests that CS hasn't a clue what an externality is. Government intervention is not an externality, but an external force.

.
Number 1. You are wrong. See the definitions of my last post. By your logic Pol Pot's Cambodian agrarian collective agenda was not a negative market externality for the Cambodians.

Number 2. Thanks for your attempt at the pretence of knowledge. But the last person I would refer to for constructive criticism of myself is a pathetic dogmatic economic illiterate EU fanatic.

Now go back to preaching about the horrors of global warming over in the treehugging whacko section of the forum.
 

cyberianpan

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Externalities are factors exogenous from/to the particular economic model

However the particular economic model could be extended to include the previously external factor

cYp
 
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