Irrelevant Internalities, Irrelevant Externalities, and Irrelevant Anxieties

Abstract:     
Due to the high transaction cost that would be necessary for large numbers of people to negotiate with each other, even those who are sanguine about private markets become reserved when externalities affect large populations. The distinction between private and societal interest is well understood for pecuniary externalities, but neglect of Buchanan and Stubblebine's article Externality has left the same distinction widely unrecognized for non-pecuniary ones. If only a few parties on either side experience a relevant externality within Buchanan and Stubblebine's relevant/irrelevant distinction, private interactions can appropriately internalize costs and benefits across the entire population. Regardless of the perceptiveness of legal and cultural institutions in placing entitlements, and regardless of the level of transaction cost among the universe of the affected, a surprising number of externalities will readily fix themselves. The desirability of corrective intervention is much too easily conceded.

Number of Pages in PDF File: 34

Keywords: externality, externalities, positive externality, positive externalities, negative externality, negative externalities, relevant externality, irrelevant externality, relevant externalities, irrelevant externalities, Coase theorem, transaction cost, environment, amenities, collective goods, public goods, private goods, exclude, Nirvana fallacy, public policy, environmental policy, free rider, existence value, option value, Pigou, Pigouvian tax, Pigouvian subsidy, national park, strategic behavior, free market environmentalism, resource, misallocation, consumer surplus, producer surplus, pollution, Ronald Coase, James Buchanan, Stubblebine

JEL Classification: D6, D7, H1, H4, H7, K0, Q2, Q3

working papers series