Mirrored Externalities

Abstract

A fundamental but underappreciated truth is that positive and negative externalities are actually mirror reflections of each other. What we call “mirrored externalities” exist because any action with externalities associated with it can be described as a choice to do or to refrain from doing that particular action. For example, if a person smokes and thereby creates a negative externality of more secondhand smoke, then her choice not to smoke creates a positive externality of less secondhand smoke. Conversely, if a person’s choice to get an immunization confers a positive externality of reducing vectors for disease transmission, then a choice not to get an immunization necessarily imposes negative externalities on third parties in the form of more vectors for disease. In each set, the negative externalities are the inverse — the mirror image — of the positive externalities. Thus, we have two possible characterizations or framings of any decision, one of which focuses on negative externalities and the other of which focuses on positive externalities. Which framing tends to predominate may be influenced by a number of factors, including society’s baseline sense of the actor’s legal or moral entitlement to engage in (or refrain from engaging in) particular behavior, the availability of a villain to whom to ascribe negative externalities, and the relative invisibility of certain externalities until disaster strikes, when the negative framing becomes the face of the crisis.

Ultimately, the framing of externalities has profound effects on both the way we think about and process externalities and on our politics and policy development. We see profound potential impacts of framing on human perception of risk and opportunities, particularly due to the implications of the Nobel Prize-winning work of behavioral economists Amos Tversky and Daniel Kahneman. Their work on human perception suggests that due to loss aversion, the availability heuristic, and our bimodal response to catastrophic risk, we will give much greater weight and attention to negative externalities and consistently undervalue positive externalities. While positive externality frames are more effective in inspiring voluntary action, negative frames have serious implications for policy decision-making. The choice to emphasize either the positive or negative externality in the mirrored set shapes the array of policy prescriptions we are likely to consider. The same choice may affect whether we think there is a real problem to be solved in the first instance. We find loss aversion at work in policymaking as well: negative externalities, we suggest, are often viewed as a call to action, while positive externalities are viewed merely as an occasion for celebration. Lastly, the negative-externality “call to action” is often a concerted campaign to redefine the legal and social meaning of particular activities.

Given the critical role externalities play in justifying both development of property rights and intervention in markets and individual liberties, understanding mirrored externalities and the consequences of our framing of them is vital.