Social Externalities and Economic Analysis

Abstract

This paper considers and assesses the concept of social externalities through human
interdependence, in relation to the economic analysis of externalities in the tradition of Pigou and
Arrow, including the analysis of the commons. It argues that there are limits to economic analysis.
Our proposal is to enlarge the perspective and start thinking about a broader framework in which
any pattern of influence of an agent or a group of agents over a third party, which is not mediated
by any economic, social, or psychological mechanism guaranteeing the alignment of the marginal
net private benefit with marginal net social benefit, can be attached the “externality” label and be
scrutinized for the likely negative consequences that result from the divergence. These
consequences may be significant given the many interactions between the social and economic
realms, and the scope for spillovers and feedback loops to emerge. The paper also establishes a
tentative and probably incomplete list of possible internalizing mechanisms for externalities under
this broader framework, which includes: pricing and monetary incentives; altruism and solidarity;
moral norms; reciprocity and mutual monitoring; centralized cooperative decision-making; and
merger. There are clear reasons why the pricing mechanism is not appropriate in some cases. A
more difficult question to answer is what factors determine which of the mechanisms is the
appropriate one to rely on in a given sphere of relations and activities. The object of the paper is to
encourage research and contributions from all the relevant disciplines of social sciences on the
pervasive human interdependence that the notion of social externalities tries to capture.

Keywords: Externalities, Commons, Human Interdependence, Social Externalities, Internalizing Mechanisms, Ethical Principles

JEL Classification: A12, A13, B31, D02, D62, D63, H23