Exercise 8 KEY Econ 460 Fall 1996 Kilkenny

re: "You Ought to Give Iowa a Try" by Dave Barry, syndicated columnist

List of externalities Who caused it? Who is affected? Category

1. manure spill hog producer fishermen (U¯) -C

2. " " canoe-ers (U¯) -C

3. B.S. House of Reps citizens of USA (U¯) -C

4. Swine Doot odor canoe-er elevator passengers (U¯) -C

in the elevator

5. manure shot from guns large hog farmers passing cars (U¯) -C

6. " " swimmers U¯ -C

7. World's largest Stock Popcorn Co. tourists U­ +C

Popcorn Ball

8. " " guests at weddings, etc U­ +C

9. great time in Iowa friendly Iowans tourism industry in Iowa p­ +P

10. Dave Barry Article Dave Barry Iowa tourism comm. -P

NOTES:

  • a. The value to hog producers of being in business, dumping waste, etc, are NOT externalities. The hog production is paid for, so those benefits are internalized (in the form of income from production) by the hog farmers, and in the form of consumer utility by consumers of pork. These are NOT side-effects. These are THE basic market activities.
  • b. Tourists pay costs to visit/benefit from tourism, and columnists are paid for writing articles. By definition, the benefits/costs of these activities are internalized and should not be cited as externalities. Friendly Iowans, however, are not paid by tourists. And if Dave Barry's article irritates Iowans to the extent that productivity declines (externality #10) he has imposed an externality on Iowa businesses (-P).
  • c. Reports, stories, or advertising lead to externalities if the story is false, NOT if the story is true. Remember, perfect information is a characteristic of ideal competitive markets. More and better information means FEWER externalities. As long as authors are paid for the information they provide, there is no externality on that side. Only if the information is false and leads to less of something being transacted than given the correct information, is there an externality. Libel suits are an example of a legal institution developed and provided by government to force authors to internalize the cost of providing mis-information, and thus to deter the publication of lies.
  • d. Laws that impose fines internalize the costs imposed on others into the total costs of the agent responsible for a negative externality. Thus, fines, taxes, fees, or other consequences are NOT externalities unless they are imposed in addition to a private bargaining solution. The Coase Theorem says that if the opportunity for private bargaining is ignored, and gov't imposes taxes on those who generate negative externalities, society will 'overshoot' in attempting to achieve the target level of externalities (the policy backfires).
  • e. Unpleasant side-effects imposed on recreators by Mother Nature (e.g. being bitten by native marine life) are not caused by agents in economic activities so they are NOT externalities. A tropical fish vendor who let a piranha loose by negligence in the course of conducting his business is, however, imposing an externality (-C) on recreators.