dowthoyv

“It takes at least two hours to hammer home that policy relevant externalities aren’t just any externalities, they’re ones that are technological (as opposed to pecuniary), Pareto-relevant, and haven’t already been internalized via some bit of contracting.”

I’m not disagreeing that there are plenty of externalities that the government shouldn’t touch – as it would just make things worse (either through institutional mismanagement, perverse incentives, or the fact that the cost of the scheme exceeds the benefit).

However, I do think that the short definition of externalities (when there is a cost or benefit to some third party not involved in a transaction) is extremely useful. I agree that we can paint most things as externalities when we do this – but doesn’t that mean that we can use externalities to generalise our models, and thereby define what types of normative assumptions people must be placing on our logical framework in order to come up with their conclusions.

If this is the case, the language of externalities is useful, insofar as it allows us to see what sort of normative judgments people in society are making, vs the implicit assumptions we make.

I am not saying we should just do what every interest group is saying because it could be defending by an externality argument. I am saying we can clarify the differences between two positions by appealing to externalities – thereby making it clearer to everyone whats going on.

“The five minute version leaves folks WAY too happy to give an econ justification for taxing any damned thing they happen not to like”

Indeed it does – but this does not make the externality argument wrong. People are often happy to moan about the cost associated with an externality – but they don’t think about the cost associated with solving it. If their externality argument is unjustifiable we should be able to make a case that states that the costs of solving the problem are greater than the benefits from solving it – I think this is preferable to ignoring the externality altogether.

Again: two hours to define what kinds of externalities can potentially be improved upon via Pigovean taxes and subsidies. The five minute version leaves folks WAY too happy to give an econ justification for taxing any damned thing they happen not to like.

Firstly, and most importantly, the intrinsic value of things to society does matter for normative analysis – and so we should recognise it if we move from our objective seat to our prescriptive mode. Saying that an economic externality does can not include these things seems inappropriate too me. Saying that we should exclude these things during the objective part of our analysis is fine.

Secondly, the economists bias against regulation. Yes regulation is often inappropriate, but there is a transaction cost argument for it that is valid.

Nothing to add for the third thing, and in the fourth thing he is right, the government also causes failures. However, I tend to think that a lot of non-economists also get this, and if they don’t using externality arguments would help!

The language of externalities generalises our economic models, and I expect we could fit in a lot of the ‘non-economists’ point of views into this frame by assuming some value judgments.

Ultimately, I think us economists have things to learn from non-economists and vice versa – I don’t see it as the one way street Caplan does. I do think our methods are the best, but the rest of the world outside economics does have useful insights.

Maybe I’m biased, but I think economists do normally state their assumptions – or maybe the word economist should just automatically connote a framework that implies utility maximization and demand and supply curves that slope in standard directions. Perhaps for non-economists it is hard to determine whether economists are making objective or normative statements. That argument about tax cuts and productivity the other day struck me as an example of this.

The post you cite strikes me as a good example of the Caplan’s point on externalities. The typical response of someone worried about global warming (the externality) is to ban or regulate something like SUVs, not to ban or regulate dogs. The externality becomes an excuse to exercise existing preferences, not a starting point for finding an efficient solution. The “Extermination of dogs” line is throwaway, but less dogs does seem like a likely consequence of full carbon pricing.

GMU’s defining characteristic is intervention skepticism, not market faith.

Interest groups have an incentive to ignore costs if they think they can get away with it, economists shouldn’t.

“Examples?”

Anytime an economist comes to a conclusion without a (implicit) general model or stating the set of simplifying assumptions. Economists do this constantly (well at least I do), and I think it is just as concerning as people ‘over-cooking’ an externality and ignoring government failure (as it is implicitly the same sort of thing). An example from the same blog would be:

http://econlog.econlib.org/archives/2008/02/dogs_and_the_en.html

I realise that this was just a throw away type post, and that it is impossible to state all your assumptions etc. But there are some obvious social costs that should be involved in analysis before we try to make any sort of policy prescription. Dumping these social issues is fine if you want to just look at technical efficiency, however it is useless if you want to make any sort of normative claim.

I’m afraid I’m just not as confident about the Coase Theorem always coming to save the day as the guys at GMU are.