Timeline for Are ALL externalities inefficient?
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| Apr 24 at 14:41 | comment | added | Craig Duncan | Thank you for these comments. I thought I was taught (in my Econ class 25 years ago!) that all externalities are necessarily Pareto-inefficient. That seems to be a faulty memory. Maybe I was taught that externalities = market failures. But if not owing to inefficiency, why do externalities = market failures? Is the idea that (typically?) in the case of an externality the marginal social costs outweigh the marginal social benefits? Or some other reason? (Side note: in my 2nd example in the OP, the marginal SB > marginal SC, right? If so, then this externality is not a market failure, right?) | |
| Apr 24 at 13:33 | comment | added | Giskard | Not many covert millionaires living in the densely populated areas these days. But hey, maybe I am wrong; what is the source/reasoning behind your claim "Usually it is not Pareto efficient to entirely eliminate the level of the externalities (i.e. put the amount equal to zero).", and how exactly are we supposed to understand "usually"? | |
| Apr 24 at 12:25 | comment | added | tdm | @Giskard I agree that there are indeed many externality levels set to 0 in reality, but that does not mean that 0 is the efficient level though. If my neighbour likes to shoot fireworks and pays me enough, I'm probably willing to let him shoot some fireworks. | |
| Apr 24 at 8:41 | comment | added | Giskard | "Usually it is not Pareto efficient to entirely eliminate the level of the externalities (i.e. put the amount equal to zero)." In what population is this "usually" true? In textbook externality exercises definitely, but those suffer from survivorship bias. I'd wager you are allowed to fire 0 fireworks next to your neighbors house on most nights, can run around naked in the street for 0 seconds, etc. There are many externality levels that are so thoroughly set to 0 we simply do not think about them. | |
| Apr 24 at 5:11 | history | answered | tdm | CC BY-SA 4.0 |