Getting people to like economics is a favorite subject of mine.
I think the most attractive free market concept for non-economists is "comparative advantage."
It was for me, anyway. But I'd like to know if it was for other commenters here on Bryan's Blog. The example that did it for me was the boss who could type faster than his secretary, yet finding it profitable paying her to do that. Is there a way to show how "comparative advantage" enables individuals, countries (or ethnic enclaves) to all benefit with fewer transaction costs imposed by the government?
The externality that most concerns those who are least likely to be economists is inequality. It is a religion even for those who proclaim loudly they are atheists. The assistants profit less than the boss, in the "comparative advantage" example and that results in inequality. But at the same time, it can be seen that if the government forced him to pay more he would not employ as many assistants and that means a society where there are no specialists; everyone has to do everything. I think why an understanding of comparative advantage is of value is because of how natural it is for the boss not to do something. It would never occur to the boss to hire an assistant if the government made him pay the assistant as much as he pays himself. "It would never occur to the boss" leads to the concept of choice based on what advantage is it to the boss. Just as it would never occur to the boss to hire an assistant in one scenario, it "would" occur to him (in the absence of government force for equality) to find someone who could do what he can do even if not as well. That would help the non-economist to see the concept of "willingness to pay" as well as "living with" the externality of an inequality.
PREAMBLE: The purpose of an externality charge is NOT to raise revenue (to compensate losers). It is to influence decision making. The decision maker faces the full social cost of his/her decision. Any revenue raised can be burnt! The social cost of burning the money would be the destruction of some slips of paper (or, more accurately, the cost of paper and ink to reprint).
Externality charges eliminate the externality. There is no longer an externality to be compensated.
MY SUBMISSION: I’m puzzled by the claim that the “concept of externalities relies entirely on economists’ standard notion of willingness to pay.” WTP is useful for valuing some externalities, but by no means all.
Take road collision externalities. A collision results in costs that can be quantified without resort to WTP. Emergency services. Vehicle recovery and repair. Loss of productive output for those injured.
Then there is loss of life. We do not value a “life”. Lives are not traded. We value risk reduction, using WTP to do so.
Suppose I would pay $10 more for a ticket on a airline because it has a better safety record than the alternative. The difference between my preferred airline and the next best option is 1 in 100,000 chance of a fatal crash. If, notionally, 100,000 people paid this premium the total paid would be $1M. The expected benefit would be the preservation of one life. Hence the sloppy statement “value of life is $1M”.
I drive a battering ram of a vehicle, which in a head-on collision favours me. My decision has external effects on other road users, such as you. You may elect to drive small car. Small cars are more collision-involved, so your decision increases my odds of being involved in a collision. I solved this conundrum 30 years ago using differential calculus to derive externality charges that internalise the externalities.
Out of interest, I showed (30 years ago) that New Zealand trucks should be levied a fee of 5 cents a kilometre. When I retire (I’m 83) I’ll get around to publishing this work.
Is the purpose of a tax on an externality solely to reduce consumption? Or is the idea that the tax revenue should also be purposed towards actively rectifying the effects of the externality?
Also, a sufficiently high tax is close to a ban, in effect. So you could see these as being on a policy spectrum. Is there any economic consensus on how one could practically identify the right level of taxation for an externality?
No. The purpose of a tax on a negative externalities is to *compensate the losers*. If I pollute the air with my car exhaust, we can tax me and spread the money to everyone else (indirectly thru the government not needing to tax everyone else as much), in proportion to the amount of harm my exhaust does to the rest of the world.
The tax does discourage me from polluting, but its purpose is to compensate others for the harm I do to them by polluting. If I choose to continue polluting and pay the tax (instead of just stopping), that's because I'm better off that way. And with the tax, if I choose to do that, I'm now compensating others for the damage to the environment, so they aren't worse off.
Getting people to like economics is a favorite subject of mine.
I think the most attractive free market concept for non-economists is "comparative advantage."
It was for me, anyway. But I'd like to know if it was for other commenters here on Bryan's Blog. The example that did it for me was the boss who could type faster than his secretary, yet finding it profitable paying her to do that. Is there a way to show how "comparative advantage" enables individuals, countries (or ethnic enclaves) to all benefit with fewer transaction costs imposed by the government?
The externality that most concerns those who are least likely to be economists is inequality. It is a religion even for those who proclaim loudly they are atheists. The assistants profit less than the boss, in the "comparative advantage" example and that results in inequality. But at the same time, it can be seen that if the government forced him to pay more he would not employ as many assistants and that means a society where there are no specialists; everyone has to do everything. I think why an understanding of comparative advantage is of value is because of how natural it is for the boss not to do something. It would never occur to the boss to hire an assistant if the government made him pay the assistant as much as he pays himself. "It would never occur to the boss" leads to the concept of choice based on what advantage is it to the boss. Just as it would never occur to the boss to hire an assistant in one scenario, it "would" occur to him (in the absence of government force for equality) to find someone who could do what he can do even if not as well. That would help the non-economist to see the concept of "willingness to pay" as well as "living with" the externality of an inequality.
Ron Allan
PREAMBLE: The purpose of an externality charge is NOT to raise revenue (to compensate losers). It is to influence decision making. The decision maker faces the full social cost of his/her decision. Any revenue raised can be burnt! The social cost of burning the money would be the destruction of some slips of paper (or, more accurately, the cost of paper and ink to reprint).
Externality charges eliminate the externality. There is no longer an externality to be compensated.
MY SUBMISSION: I’m puzzled by the claim that the “concept of externalities relies entirely on economists’ standard notion of willingness to pay.” WTP is useful for valuing some externalities, but by no means all.
Take road collision externalities. A collision results in costs that can be quantified without resort to WTP. Emergency services. Vehicle recovery and repair. Loss of productive output for those injured.
Then there is loss of life. We do not value a “life”. Lives are not traded. We value risk reduction, using WTP to do so.
Suppose I would pay $10 more for a ticket on a airline because it has a better safety record than the alternative. The difference between my preferred airline and the next best option is 1 in 100,000 chance of a fatal crash. If, notionally, 100,000 people paid this premium the total paid would be $1M. The expected benefit would be the preservation of one life. Hence the sloppy statement “value of life is $1M”.
I drive a battering ram of a vehicle, which in a head-on collision favours me. My decision has external effects on other road users, such as you. You may elect to drive small car. Small cars are more collision-involved, so your decision increases my odds of being involved in a collision. I solved this conundrum 30 years ago using differential calculus to derive externality charges that internalise the externalities.
Out of interest, I showed (30 years ago) that New Zealand trucks should be levied a fee of 5 cents a kilometre. When I retire (I’m 83) I’ll get around to publishing this work.
Is the purpose of a tax on an externality solely to reduce consumption? Or is the idea that the tax revenue should also be purposed towards actively rectifying the effects of the externality?
Also, a sufficiently high tax is close to a ban, in effect. So you could see these as being on a policy spectrum. Is there any economic consensus on how one could practically identify the right level of taxation for an externality?
No. The purpose of a tax on a negative externalities is to *compensate the losers*. If I pollute the air with my car exhaust, we can tax me and spread the money to everyone else (indirectly thru the government not needing to tax everyone else as much), in proportion to the amount of harm my exhaust does to the rest of the world.
The tax does discourage me from polluting, but its purpose is to compensate others for the harm I do to them by polluting. If I choose to continue polluting and pay the tax (instead of just stopping), that's because I'm better off that way. And with the tax, if I choose to do that, I'm now compensating others for the damage to the environment, so they aren't worse off.