And Sometimes A Cigar Is A Negative Externality.

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65 Responses

  1. Ken says:

    We could argue until the end of the world — strike that, for years — about what constitutes an externality anyone should care about or that any system should account for.

  2. Grandy says:

    Wonderful video explanation. I like this guy.

  3. naught_for_naught says:

    @Ken

    Alright then, let's get this party started. Can we all agree that there is a netagive externality to cell phones as they are currently used in the public commons?

    Favortive moment in the clip: Freudian slip of "Sectional Pressure" => "Sexual Pressure" as an effector on the judgments of the political class.

  4. Patrick says:

    Professor Munger would agree that cigars, cell phones, and potato chips all have potential to be or create negative externality.

    What he questions is whether an excise tax on their enjoyment is an efficient or wise means to compensate those affected.

  5. Ken says:

    That's a good example, naught, because it illuminates one problem with defining externalities: does their cost vary with the subjective sensitivity of the third party? (That's a point also illustrated by the chips example in the video.)

    Many people are assholes with cell phones. To what extent is being an asshole an externality that ought to be addressed, and to what extent is it the human condition that we have to endure the assholitude of our fellow man so as to preserve our own freedoms?

    My concern with externality theory is that it promotes sensitivity, querlousness, and general butthurt.

  6. Patrick says:

    Munger, by the way, ran a great campaign for Governor of North Carolina as a Libertarian in 2008, setting the party's record for percentage of the vote in that contest.

  7. Patrick: "What he questions is whether an excise tax on their enjoyment is an efficient or wise means to compensate those affected."

    Well, since none of those excise taxes have ever been paid to me — and as "Carl" I assume I must be one of those unwilling participants — I'm inclined to say that particular question has been answered. Pretty much Pigou suspected.

  8. Grandy says:

    My concern with externality theory is that it promotes sensitivity, querlousness, and general butthurt

    Mmmmmmmm, I think I have to take exception to this. It is the drive for a solution, rather certain kinds of solutions, that can lead to this. I don't think it's a problem inherent with "externality theory".

    Also Grandy + Coase 4ever.

    Munger, by the way, ran a great campaign for Governor of North Carolina as a Libertarian in 2008, setting the party's record for percentage of the vote in that contest.

    Is he a friend of yours or a friend of ours?

  9. Patrick says:

    He is a Friend of Ours, as is his co-blogger, Via Angus.

  10. naught_for_naught says:

    Fair enough, Ken. Can we say then that the existence of negative externalities which have intangible costs, based on the subjectivity of the affected, demonstrates the need for a negative-externality taxonomy? An intelligent classification system could provide the attributes necessary to intelligently address different classes of effects.

    Paging Dr. Linnaeus

    Say, for example, we begin by distinguihing between externalities with intangible costs and those with measureable costs. In the measureable category, for example, we could look at the health costs associated with obesity as a negative externality attributable in some measure to the consumption of soda pop and fast food.

  11. @Bear – Oh, but we set up a special government bureau in order to distribute money to potato-related annoyance claims. So you or Carl just have to fill out for PCA-8172-A-2012 and submit that to be compensated for your annoyance. Of course, we had the raise the tax to cover the cost to the whole government department and then again to create an enforcement arm to counteract the huge and totally surprising amount of fraud.

    Sorry, I was also thinking "how does Carl benefit in this" and that was all I could come up with.

  12. Jess says:

    What he questions is whether an excise tax on their enjoyment is an efficient or wise means to compensate those affected.

    Often the cost of the effort to account for something is greater than any realized benefit of accounting for it. When I merge that with what Munber states “The government has a knowledge problem just like everyone else.” I don’t see an outcome that would be efficient or wise. Mostly it seems more an opportunity to try to "force" manners on people through government interference.

    @Naught_for_Naught – you brought up on of my favorite pet peeves – people who blather on their cell phones in public places where manners should generally dictate they not. The worst offenders – and it happens a lot – are those women who feel somehow “compelled” to answer their cellphone when in the bathroom stall of the ladies rom. I must admit I’ve been known to shout “Really? Really what is so important you have to answer the phone in the bathroom?”

  13. Josh C says:

    Actuall, excise taxes "going to the right place" is completely irrelevant. It's not about penalizing behavior, or compensating victims, it's about adjusting relative costs.

    Imagine a factory which makes toxic sludge. Each bucket of sludge can be trucked away, or dumped in a river. Trucking it away costs $10/bucket; dumping it causes $100/bucket in damages to folks downstream, but no costs to the factory. If you're trying to prevent dumping, you set an excise tax at $11/ bucket dumped. It doesn't matter whether the money you collect goes to downstreamers, or to education, or if you build a tiny money-fire out of it.

  14. Jeremy says:

    A good example of negative externalities and government regulation is prostitution.

    If the government did not regulate prostitution in any way, i.e., it were completely free of any regulation or taxes, STDs would likely become a serious cultural issue to deal with. This is obvious from history, and even present-day in 3rd world areas.

    Where you see the absolute forbiddance of prostitution, you see the oppression of women. This shouldn't be surprising, restricting women from practicing the oldest profession is oppression of womens freedom.

    Where you see the act taxed and regulated (like Nevada) You see it practiced in a safe manner, allowing the ladies to make their money, house owners to be legitimate businessmen, a large drop in human trafficking, and customers protected by health inspections.

  15. Wilhelm: "So you or Carl just have to fill out for PCA-8172-A-2012 and submit that to be compensated for your annoyance."

    I was going to, but then they cut down the trees to print more forms, and spoiled my view, and now I need to be compensated for that (and I live in NH; google "NH view tax" for just why that is so… ironic).

    The tricky thing about externalities is who gets to define them. Was the "externality" a real tangible harm or — as Ken noted — butthurt?

    Or… sometimes the "negative externality" seems to depend on "whodunnit". For fun there, google the "fines for animals killed oil industry wind power".

    [-slap- Bad Bear; bad troll!]

  16. eddie says:

    “Really? Really what is so important you have to answer the phone in the bathroom?”

    What reason do you have for caring whether someone else talks on a cell phone in a bathroom?

    Okay, fine, maybe you don't like taking calls and dumps simultaneously, but why are you all butthurt over the fact that not everyone has the same aesthetic sensibilities that you do?

  17. Grandy says:

    There are people who do not share my aesthetic sensibilities when it comes to moviegoing.

    These people are The Enemy. One day, a real rain will come. . .

  18. naught_for_naught says:

    What reason do you have for caring whether someone else talks on a cell phone in a bathroom?

    The oral ain't the problem, it's the aural.

  19. Paul Baxter says:

    An excellent example of this sort of problem is found in Jared Diamond's book, Collapse, where he describes the problem of the clean up of derelict mining operations. By his accounting, which I have neither the inclination nor the knowledge to challenge, were mining companies made to account for all of their eventual clean-up costs, it would virtually never be efficient to start a mine in the first place.

    These types of problems are numerous, and especially problematic within our individualistic/capitalistic society since we are quite reticent to impose societal good onto individual enterprises.

  20. Bear says:

    I've found that the easiest way to deal with folks using their cell phones in an inappropriate location (and generally at an inappropriate volume) is to join in their conversation: Pick out a stray comment prone to the weirdest possible out-of-context interpretation and go for it. Works every time, and provides lots of amusement for everyone else.

  21. Bren says:

    Examples like potato chips, cigars, and cell phones may only cause butthurt. If we use other examples, say pollution causing loss of fishing revenue, or car sales causing traffic delays for other drivers, we can easily find costs that represent an actual measurable shaft received by the third party.

    Another interesting fact about externalities not discussed is that "rights" isn't as much of an issue as transaction costs. For example in Josh C's example, if the downstream cost bearers can find a way to pay the factory $11 to dump, not truck, that's just as efficient (i.e it saves the $90 deadweight loss)

    That point has bearing on the "externalities=butthurt" argument because it means that the butthurt party could, for example, pay the potato chip eater to move OR themselves move away. (this is called the Coase Theorm)

  22. Bren says:

    darn, I screwed up my quote tags.

  23. naught_for_naught says:

    Pick out a stray comment prone to the weirdest possible out-of-context interpretation and go for it.

    Ignoring the homosexual connotation of this — would you please blow-poke my muse with an illustrative anecdote.

  24. Scott Jacobs says:

    I've moved to stand next to the person, called a friend, and started loudly talking about the other dude's conversation.

  25. Dan Irving says:

    "Munger, by the way, ran a great campaign for Governor of North Carolina as a Libertarian in 2008, setting the party's record for percentage of the vote in that contest."

    @Patrick – he got my vote that year. Unfortunately we got stuck with Bev …

  26. Scott Jacobs says:

    Don't bitch. In Illinois we get shitpiles like Quinn…

  27. opendna says:

    There are university Econ classes which teach market failures without mentioning imperfect information? Ironic.

  28. Anonymous says:

    A theoretically easy* solution would be to prevent the transaction unless Carl accepts. At this point, you have to pay Carl an amount of money that has equal utility to the utility he will otherwise lose in the transaction. If this is more than you are willing to pay, you don't get to perform the transaction. If this is less than or equal to what you are willing to pay neither first, second or third party incurs any loss of utility from the transaction.

    *Easy in a world with only three actors, all of them rational actors with perfect information

  29. Bear says:

    naught_for_naught:

    Upon hearing guy pleading with girlfriend [in loud, most masculinevoice]: Oh, darling! Just hang up on the bitch and come back to bed.

  30. ru says:

    On the cell phones in washrooms issue. The only real reason I object to it is that it seems to make women hesitant to flush, since that telltale sound will give away to their conversation partner where exactly they are. It is bad enough working in a public library where no men flush ever. But for the women to stop flushing is *doom*.

    My elegant solution? If I come into a public washroom and someone is talking on a cell phone, I go into a stall and flush the toilet first thing (regardless of it previous state of flushed-ness). It serves the purposes of cleaning the place up a bit, surreptitiously notifying the bathroom talker's conversation partner where they are, and amusing me!

  31. Jess says:

    @Eddie – I suppose because of something called manners. I would say it’s because I still have this misbegotten idea of thinking I’m a lady but that would simply cause the other readers here to have a snerk attack.

    @Bear @Scott – both of those ideas work as well. Amy Alkon describes doing the same and I think she has the right idea.

  32. Ken says:

    Prof. Munger made a memorable appearance in the second Keynes v. Hayek rap video, too.

  33. naught_for_naught says:

    Bear:
    Good…very good.

  34. Bear says:

    I like to imagine that he had a lot of explaining to do. And that he became far more circumspect about his phone calls.

  35. En Passant says:

    Jeremy wrote Dec 20, 2012 @11:09 am:

    A good example of negative externalities and government regulation is prostitution.

    If the government did not regulate prostitution in any way, i.e., it were completely free of any regulation or taxes, STDs would likely become a serious cultural issue to deal with. This is obvious from history, and even present-day in 3rd world areas.

    I think this ain't necessarily so, and it ain't so obvious.

    It assumes that prostitutes are incapable of rationality.

    Paging Maggie. Maggie, to the courtesy telephone, stat.

  36. Shane says:

    @Paul Baxter … I am not sure if you talking about the mines being on public or private land. If they are on public lands then you need to watch the little video on tragedy of the commons, if it is on private land then the cost of the land is decreased by the difference in price before and after the mining operation.

  37. Shane says:

    @ru … I know pronounce you capitalist. With that kind of thinking your fortune awaits. :)

  38. Anonymous says:

    "It assumes that prostitutes are incapable of rationality."

    Well (1), I generally assume humans are affected by all sorts of biases when attempting to think rationally and (2), what is "Rational" may well not be "Avoiding HIV at all costs," because e.g. "Earning enough my dealer won't kill me tomorrow" might just win out.

  39. Jeremy says:

    @En Passant • Dec 20, 2012 @3:07 pm

    It assumes that prostitutes are incapable of rationality.

    Not all prostitutes are pimp-free. Criminal/thuggish pimps tend to make their behavior less-than-rational.

  40. En Passant says:

    Jeremy wrote Dec 20, 2012 @4:32 pm:

    Not all prostitutes are pimp-free. Criminal/thuggish pimps tend to make their behavior less-than-rational.

    The original assertion was

    If the government did not regulate prostitution in any way, i.e., it were completely free of any regulation or taxes, STDs would likely become a serious cultural issue to deal with.

    If a pimp is one who holds a prostitute in involuntary servitude, then regulation that prohibits pimps is not a regulation of prostitution per se. It is a regulation of pimping, or regulation of involuntary servitude.

    Likewise, non-regulation or non-prohibition of drugs would decrease the price of drugs sufficiently that their price would not create the ersatz "pimp" of drug expenses.

    As I indicated in my first response, Maggie, who sometimes comments here (and is on the Popehat blog roll), has covered the issue of prostitution regulation far better than I can expect to do here.

  41. Brandon says:

    Two fantastic, Patrick-style posts about the Newtown shootings within a 24-hour period. I loved the first one, and applaud the subtlety of this one.

  42. Robert White says:

    Biggest problem with using taxation to ameliorate the externality is that the harmed third person is never made whole.

    Since the state is paid its tax for Al and Betty's happiness in proportion to Carl's injury, the state is incentiveized to maximize Carl's injury to the degree that it can then charge Betty and Al.

    If some means is made to remunerate Carl, then not only is Carl given incentive to experience more pain; but now Dave is given incentive to approach Al, Betty, and Carl so that he can be injured and remunerated as well.

    So imagine a micropayment system where everyone uses their cell phones to document and thereby tax the misery created by Al and Betty and suffered by an entire alphabet soup of persons influenced by the attractive nuisance of Betty's happy munching.

    Would Betty then be injured by the predation of Dave-through Xavier's unwanted attendance of her own actions?

    Would Al be injured by the clog of non-purchasers blocking access to his potato chip vending operation?

    How much micro-payment charge-back would Al and Betty deserve?

    Could Yancy and Zelda charge Carl-through-Xavier for blocking their access to Betty (the crowd is getting thick by now) and preventing them their right to harvest their opportunity for payment?

    The problem with all reparations schemes is that they are recursive and disproportionate because the reparations tend to be based on subjective relativism. Apportionment of guilt and impact of exposure are never uniform. The system cannot be deterministic, therefore it can not be codified.

    Once you take the lid off the can, the "but where is _mine_?" effect makes reparation untenable.

    So only punitive activity is possible. But that is again incentive. The state (taxation authority) is not immune to profit seeking.

    So the only solution, aside from everybody growing a pair and asking Betty to STFU or just chalking things up to the fact that life is flawed, is if the taxation authority nor the involved parties gain _any_ benefit from the tax.

    Even then, the mendacious Ernie could interpose himself just for the satisfaction of causing Betty some pain.

    We know spoilsports exist… we have the internet as proof of that.

    The problem is NP complete.

  43. Robert White says:

    One can be a "pimp" without the "servitude" being "involuntary".

    I have been pimped out by a head-hunter for jobs. In places where prostitution is legal there are still madams and pimps, if by different names.

    The movie Night Shift was a voluntary pimping scenario, and pretty funny.

    Your predicate that "pimp is bad" presupposes that "sex work" is "involuntary servitude". This is a perceived norm, and it may well be normal, but it isn't a defined predicate.

    There is too much baby in your bathwater, please get a strainer before proceeding with this course of action.

  44. Brett Middleton says:

    Aside from the issue of how Carl gets his compensation from a tax that goes to the government, I see another problem. What about a buyer who is always careful not to crunch within earshot of others? She still has to pay the tax, right? So the tax is imposing the cost of the externality regardless of whether it actually exists, unlike the case where the sludge-producing company only has to pay when and if they impose costs on those downstream.

    The same problem holds for the obesity example, since everyone who drinks soda has to pay the obesity tax regardless of whether they ever become obese or impose health-care costs on others as a result of drinking soda.

  45. MathMage says:

    The issue I had with this video (and the other one at the Learn Liberty site, by Sean Mulholland) is that no explanation is made of how to generate the stated conditions under which the Coase Theorem will prevail. Without that, it's just a "Private enterprise will solve all problems!" argument. If private enterprise will solve this problem, why is it still there? What should be done to open the way for private enterprise to solve the problem? Who will do it? How will they make sure what they are doing is working? And so on. These are the questions I have after watching the video, and any explanations would be greatly appreciated.

  46. Anonymous says:

    "The same problem holds for the obesity example, since everyone who drinks soda has to pay the obesity tax regardless of whether they ever become obese or impose health-care costs on others as a result of drinking soda."

    Well if the tax is e.g. Y cent for each X grams of sugar sold, you are taxed to the degree that you are likely to become obese from this sugar consumption.

  47. Anonymous says:

    "Since the state is paid its tax for Al and Betty's happiness in proportion to Carl's injury, the state is incentiveized to maximize Carl's injury to the degree that it can then charge Betty and Al."

    Only if you assume The State, as opposed to individuals within the state, operates from a profit motive. If that's the case, get a better state.

  48. Brett Middleton says:

    "Well if the tax is e.g. Y cent for each X grams of sugar sold, you are taxed to the degree that you are likely to become obese from this sugar consumption."

    The tax is still based on someone's guess at a likelihood rather than a certainty. At the time the tax is collected, no actual harm has been done for which anyone needs to be made whole, and that harm may never materialize. Doesn't that tax become a negative externality imposed on those payers who never incurred additional health-care costs? How do we compensate them for that harm?

  49. S. Weasel says:

    Anyway, I'd like to see some evidence that obesity really costs money. From a taxation standpoint, the best thing you can do is live a productive life and die the day you retire. The worst thing you can do is live long enough to get one or more of the really expensive diseases, like the dementias. Bring back smoking, says I.

  1. December 20, 2012

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