Asymmetry Between Positive and Negative Externalities

re: Asymmetry Between Positive and Negative Externalities

Donny with an A — Wed, 09 Apr 2008 20:22:12 GMT

I agree, but I'm not entirely sure what your point is...

re: Asymmetry Between Positive and Negative Externalities

IGOGO — Mon, 07 Apr 2008 19:42:16 GMT

factors which enhances market efficiency.

mechanism of internalizing both positive and negative eternalities.

re: Asymmetry Between Positive and Negative Externalities

Donny with an A — Wed, 26 Mar 2008 20:57:46 GMT

But with perfect protection of rights, the hoodlum would be brought to justice, and the victims compensated. The beneficiaries of Bill's light show still wouldn't need to pay anything. Bill could try to get them to AGREE to pay, but they would have the right to refuse, even though they benefited. The property-damaging hoodlums, by contrast, would have no such right.

re: Asymmetry Between Positive and Negative Externalities

Scott D — Wed, 26 Mar 2008 14:40:56 GMT

"In the story, I specified that it would be extremely difficult for Bill to run this as a business."

My point was that the purpose of business is to solve exactly the problem you present. Without business and trade, all utility would have to be created by a person's own actions OR as positive externalties. Similarly, without the rule of law and negative rights, no one could reliably collect compensation for negative externalities. If a hoodlum damages property and cannot be found and brought to justice, I see it as no different from Bill's inability to find and collect from the people who like his show.

I don't see the assymetry as something systemic in the manner you see it.

re: Asymmetry Between Positive and Negative Externalities

Donny with an A — Wed, 26 Mar 2008 01:04:31 GMT

In the story, I specified that it would be extremely difficult for Bill to run this as a business. I don't see what you're objecting to, really. I haven't said that this is proof of any flaw in the capitalistic framework. I only pointed to the asymmetry and said, "Look, an asymmetry." Then I went on to discuss what I thought might be a genuine problem with the way that we think of compensation and rights violations. Are you trying to establish that in some cases, it might be possible to internalize positive externalities? I agree. But I'm not sure how that has anything to do with my original post.

re: Asymmetry Between Positive and Negative Externalities

Scott D — Tue, 25 Mar 2008 21:56:25 GMT

"There is no such mechanism for internalizing the benefits associated with positive externalities."

This is where the creativity and sensibility of the entrepreneur comes in. The mechanism for internalizing those benefits is whatever Bill comes up with to establish a stream of revenue.

re: Asymmetry Between Positive and Negative Externalities

Danny Shahar — Tue, 25 Mar 2008 20:06:37 GMT

I didn't mean to suggest that Bill should be exempt from having to compensate the people harmed by his light show, just as I wouldn't say that Kate should be exempt from having to pay her landlord. Clearly those are obligations which must be fulfilled. My point was only a positive one. There is a mechanism by which negative externalities are internalized through obligations to pay those negatively impacted. There is no such mechanism for internalizing the benefits associated with positive externalities. Accordingly, actions producing positive externalities can come to be unprofitable even if the beneficiaries could fully compensate the victims and still be left better off.

re: Asymmetry Between Positive and Negative Externalities

Scott D — Tue, 25 Mar 2008 19:45:18 GMT

"By saying that positive externalities represent something for which rent is due, you're not only accepting my point, but taking it a step further."

When I said "the rent is still due" I meant the rent to the landlord that Kate owes. In other words, Kate can't skip out on her obligation to pay rent because some local folks will be sad to see her go. Sorry for the confusion.

Entrepreneurs must find ways to capture profit from the market to cover costs. When they fail at that task, the business fails. I think of Bill as an entrepreneur who has, effectively, zero costs and zero revenue. However, his activities cause a trespass against his neighbor, and at the same time, create value for other, unrelated parties. When the neighbor asks for compensation, Bill now has a cost, an overhead for continued light shows, but still no revenue stream. If Bill cannot come up with a way to entice his light show fanatics to voluntarily help him generate revenue, that's his problem, not theirs. The fact that they enjoyed the show does not obligate them to pay compensation.

Also, there is no reason whatsoever that a negative externality can't go uncompensated, and all it requires is the same condition: a lack of knowledge. Vandalism and graffiti are prime examples. Installing cameras or hiring security would solve those problems, but only after the damage has occurred. The only difference that matters is that negative externalities violate property rights. The removal of a positive externality does not.

There are a lot of avenues for obtaining revenues that are unexplored in this scenario, by the way. All Bill needs to do is get local business to sponsor his shows. If his equipment is sophisticated enough, he might even create advertisements in the clouds. The extra sales presumably generated from the ads then would pay for the revenue Bill collects from his sponsor. Bingo, problem solved.

re: Asymmetry Between Positive and Negative Externalities

Donny with an A — Tue, 25 Mar 2008 15:51:37 GMT

By saying that positive externalities represent something for which rent is due, you're not only accepting my point, but taking it a step further. My entire argument was that there is an asymmetry between positive and negative externalities because with negative externalities, you are required to pay rent to those who are negatively impacted, but with positive externalities there is no obligation to pay rent to the party who created the benefit. What you seem to be saying is that with positive externalities, there is such an obligation after all. Is that right?

re: Asymmetry Between Positive and Negative Externalities

Scott D — Tue, 25 Mar 2008 13:34:51 GMT

I never said that it did constitute a positive externality, only that it is no more justified to uphold a positive externality than any other economic arrangement that brings utility to someone. But it's not difficult to bring that element into the arrangement.

Kate decides she has to do something to get more customers, so she puts a pair of her top-end speakers outside and plays music at high levels. Most people don't care and go on about their day, but a few of the local populace love the new development! Sadly, none of them realize that poor Kate will soon be out of business.

I contend that the particulars of this arrangement are not so important as you think. The only difference between a voluntary trade and a positive externality is that those who benefit do so without asking for or offering anything in return. The rent is still due.

For another twist, Kate decides to allow her customers to audition her equipment in their home for an indefinite period, without payment. She gets dozens of people who take her up on it, and they get great satisfaction from it. Does the fact that Kate and her clients entered into the arrangement voluntarily rather than as a side effect make their continued enjoyment any less important than Bill's devotees?

Again, I contend that the framing of the argument is the only thing that separates positive externalities from any other type of trade.

re: Asymmetry Between Positive and Negative Externalities

Donny with an A — Tue, 25 Mar 2008 01:06:33 GMT

The point is that Bill's customers are getting the benefits of his service without paying for them. Kate's "potential customers" are not in this position. Kate's store doesn't produce a positive externality.

re: Asymmetry Between Positive and Negative Externalities

Scott D — Mon, 24 Mar 2008 21:32:58 GMT

Always at the heart of positive externality "problems" is an essentially practical barrier. In your case, Bill can't profitably collect money from the light-show devotees. The flaw is not in the market, but in the framing of the argument. The positive externality argument is presented in such a way as to favor statist action like taxation. What you are talking about is actually an unsustainable business venture, much like the following:

Kate decided to open a high-end audio store in a big city. She rents store space, buys the product and displays only to find out, oops, she didn't leave enough money for advertising. Her store sits there for a couple of months. A few people walk in, but none of the wealthy, discerning clientele that Kate needs to sustain the business. She works desperately to raise the money for radio ads, but the owner of Kate's building begins to grumble about unpaid rent. Before she can secure the money, she is forced to sell her stock and move out.

Now compare the two scenarios. There were hundreds, possibly thousands of people that may have benefited from Kate's store, but since they didn't know about it, they couldn't take advantage of it. Likewise, if the light-show watchers from your example knew about Bill's predicament and where to mail a check, they might have helped to keep the show going.

Bill's neighbor and Kate's landlord are in essentially the same position. Both are unhappy with what is happening and have a clear, legally and ethically justified reason for taking the actions they do. Bill's light-show watchers and Kate's potential audio customers, on the other hand, are only less well-off because of a lack of information.

Essentially, we are talking about the difference between positive and negative rights. Kate's landlord is NOT obligated to ensure that Kate has the chance to get her speakers out there to the people who would buy them. Bill's neighbor is NOT obligated to let the show continue for the benefit of the people who watch it. They ARE owed reparations for the damage done to them, the neighbor for direct damage to his property, and the landlord for Kate's breach of her rental contract.