2. Liberty and Externality:
Liberty and Externality:
All Too Common Tragedies
World of Business: Module 3, Day 2

3. Let’s Start with the Definitions Reading
Which reading was the closest to just “definitions”?
My opinion:
“Externalities: Prices Do Not Capture All Costs” (Helbling)
Why not titled:
“Externalities: Prices Do Not Capture All Benefits”?
Your examples of Negative Externalities?
Your examples of Positive Externalities?
Your examples of Neutral Externalities?

4. Helbling’s Main Thesis/Claim:
“When there are differences between private and social costs or private and social returns, the main problem is that market outcomes may not be efficient.
His assertion: “To promote the well-being of all members of society, social returns should be maximized and social costs minimized.”
His related additional assertion: “This implies that all costs and benefits need to be internalized by households and firms making buying and production decisions.”
On externalities and property rights: “Problems in defining property rights are often a fundamental obstacle to market-based, self-correcting solutions, because the indirect effects of production or consumption activity can affect …”

5. His “Textbook Conclusion” and Your ???
“Otherwise, market outcomes involve underproduction of goods or services that entail positive externalities or overproduction in the case of negative externalities. Overproduction or underproduction reflects less-than-optimal market outcomes in terms of a society’s overall condition (what economists call the “welfare perspective”).”
“Although there is room for market-based corrective solutions, government intervention is often required to ensure that benefits and costs are fully internalized.”
Your ???
Aside: Is the creation and enforcement of property rights a “government intervention?” Is that what you think he means – or is it something more centrally-planned?

6. Compliments of our colleague Catherine Milburn

7. Back to Game Day Negative externalities: Positive externalities:
Noise interference with others’ communications
Headaches
Inability to coordinate a cooperative solution (e.g. rotation)
Noise pollution to other classes
Positive externalities:
You watched earlier attempts and learned … public good
If using the same word list, might confirm some words or correct the spelling
Others assisted in your learning exercise; it would have been hard to have this exercise with only one student
Shared humor
What actions could Helbling’s “government intervention” introduce to improve societal “well-being”?

8. Next Reading: Hardin Restrictive Breeding
Motivating Premises (Population like “Tic-Tack-Toe?):
“I think that everyone will grant, without argument or proof, that maximizing population does not maximize goods. Bentham’s goal (of “the greatest good for the greatest number”) is impossible.”
“We want the maximum good per person” (now alive?)
““If each human family were dependent only on its own resources; if the children of improvident parents starved to death; if, thus, overbreeding brought its own “punishment” to the germ line—then there would be no public interest in controlling the breeding of families. But our society is deeply committed to the welfare state, and hence is confronted with another aspect of the tragedy of the commons.”

9. Hardin’s Conclusions
“Ruin is the destination toward which all men rush, each pursuing his own best interest in a society that believes in the freedom of the commons. Freedom in a commons brings ruin to all.”
“The tragedy of the commons as a food basket is averted by private property, or something formally like it. But the air and waters surrounding us cannot readily be fenced, and so the tragedy of the commons as a cesspool must be prevented by different means, by coercive laws or taxing devices that make it cheaper for the polluter to treat his pollutants than to discharge them untreated.”

10. Hardin’s Prescribed “Mutual Coercion”
“The social arrangements that produce responsibility are arrangements that create coercion, of some sort. … Taxing is a good coercive device. To keep downtown shoppers temperate in their use of parking space we introduce parking meters for short periods, and traffic fines for longer ones. We need not actually forbid a citizen to park as long as he wants to; we need merely make it increasingly expensive for him to do so. Not prohibition, but carefully biased options are what we offer him. … The only kind of coercion I recommend is mutual coercion, mutually agreed upon by the majority of the people affected.”
Is this susceptible to “Tyranny of the Majority”?

11. Hardin Concludes (Malthus revisited?):
The alternative of the commons is too horrifying to contemplate. Injustice is preferable to total ruin.”
“The only way we can preserve and nurture other and more precious freedoms is by relinquishing the freedom to breed, and that very soon. “Freedom is the recognition of necessity”—and it is the role of education to reveal to all the necessity of abandoning the freedom to breed. Only so, can we put an end to this aspect of the tragedy of the commons.”
Chris: Prosperity and birth rates are negatively correlated

12. Game Day Connection: Hardin’s Bandwidth Recommendations?
Would Hardin Advocate “Net Neutrality”?
I don’t think so, due to leaving the bandwidth Tragedy of the Commons unaddressed
Would Hardin advocate Payment for Bandwidth Priority?
Possibly, since he does point out that private property rights can have some value in addressing the Tragedy.
But are property rights in the Internet well-defined given the interlocking parts and the value deriving from the whole and not necessarily the parts?
More directly, he would likely argue that Netflix, Amazon Prime and other licit and illicit media streaming players are those who are breeding the “children” that will destroy the common good. Bill Gates argued that spam was also a similar threat to the common good of .

13. Okun’s Musings on Non-Marketable Rights, Equality and Efficiency
Begins with a “straw man’ assertion:
“AMERICAN SOCIETY proclaims the worth of every human being. All citizens are guaranteed equal justice and equal political rights. Everyone has a pledge of speedy response from the fire department and access to national monuments. As American citizens, we are all members of the same club.”

14. But, serious restrictions on club benefits
“Yet at the same time, our institutions say "find a job or go hungry," "succeed or suffer." They prod us to get ahead of our neighbors economically after telling us to stay in line socially. They award prizes that allow the big winners to feed their pets better than the losers can feed their children. Such is the double standard of a capitalist democracy, professing and pursuing an egalitarian political and social system and simultaneously generating gaping disparities in economic well-being. … and hence society faces a tradeoff between equality and efficiency.”
“It is, in my view, our biggest socioeconomic tradeoff, and it plagues us in dozens of dimensions of social policy. We can't have our cake of market efficiency, and share it equally.”

15. Okun’s View of “Rights”:
“acquired and exercised without any monetary charge”; “society does not try to ration the exercise of rights”
“are not distributed differentially based on comparative advantage/specialization”; given to the untalented;
“not distributed as incentives, or as rewards and penalties” (except voting by felons)
“distribution … stresses equality even at the expense of equity and freedom” (Although one can lay down some rights like voting and free speech, one’s freedom does not include selling those rights to others.)

16. Summarizing Okun on the Non-Marketability of “Rights”:
“In short. the domain of rights is full of infringements on the calculus of economic efficiency. Our rights can be viewed as inefficient because they preclude prices that would promote economizing choices that would invoke comparative advantage, incentives that would augment socially productive effort, and trades that potentially would benefit buyer and seller alike.”

17. Okun on Reasons for “Rights”:
Libertarian motivations, but …
“Even with the invocation of externalities, liberty cannot single-handedly explain the full range of rights in American society.”
Pluralistic motivations:
“Material gain is (at most) one of the many motives propelling economic activity. In turn, the economy is only one aspect of society and must be "embedded into'" a successful society.”
“The domain of rights is part of the checks and balances on the market designed to preserve values that are not denominated in dollars.”
Humanistic motivations:
“He (Rawls) concludes that these (non-self-interested) founding fathers and mothers would opt for equality in the "basic liberties" that relate to the freedom of the individual to follow his conscience, express his own moral principles, and participate in social decisions.”

18. From the unassigned Okun pages of the same treatise

19. Okun Assertions on the Scope and Cost of “Rights”:
“It is much less expensive, in every sense, to fulfill the right to free speech than a "right" to free food.”
“By prohibiting your sale of rights, society is encroaching on your freedom, but it is also protecting you from others who might want to take your rights away. Your creditors cannot make you part with your dignity. They cannot force you into trades that are made as a last resort, which could not be fair trades and which would be distorted by vast differences in the bargaining power of the participants and by the desperation that spawns them. Any rational person who would sign a contract for indentured service must be in desperate straits, Similarly, anyone taking out a loan to cover basic consumption needs must be operating under extreme pressure: hence the religious bans on usury during the Middle Ages."

20. Okun on Rationale for Minimum Wage, etc.
“Minimum-wage laws and work-safety legislation can he viewed most fruitfully as further examples of prohibitions on exchanges born of desperation, extending the logic of the ban on indentured service. … As I read the laws, they declare that anyone who takes an absurdly underpaid or extremely risky job must be acting out of desperation. That desperation may result from ignorance, immobility, or genuine lack of alternatives, but it should be kept out of the marketplace, … closing a bad escape valve may be an efficient way of promoting the development of better ones through the political process.”
Chris’s Concern: this argument is akin to banning the sale of kidneys in order to urge the government to subsidize the biotech sector to develop the ability to “print” new kidneys for everyone. Does the end justify the means of the screams of those dying from kidney failure along the way?

21. Okun comes up for some market air:
“Those bans served to promote inequality as well as economic inefficiency. Indeed, across the spectrum of primitive, ancient, medieval, and modern societies, the market has been restricted more often to preserve unequal power and distinction for the few than to guarantee equal rights for the many.”

22. and then dives back in:
“My purpose is not to advance specific remedies, but to highlight the general problem of transgression (of money on rights) as an urgent one that requires a serious and concerted attack by political scientists, lawyers, economists, and the public at large. Some transgressions of money on rights make a mockery of America's commitment to civil liberties and democracy. Some of our most cherished rights are auctioned off to the highest bidder. These transgressions may be as important a source of cynicism, radicalism, and alienation as the vast disparities in material living standards between rich and poor. Yet pitifully little effort has gone into devising measures that would narrow the gap between principle and practice.”

23. and takes another market breath …
“Yet some people argue the case for private ownership of such items as though it were the same kind of basic liberty as freedom of speech or universal suffrage. The case for private ownership of productive assets must rest primarily on efficiency, as I hope to show below.” “As compared with the polar extreme of total economic centralization, a market economy clearly does protect rights from transgression by the state. That is a highly relevant consideration in evaluating proposals for dramatic increases in centralization. It is impressive that the history of nations with fully collectivized economies reveals not a single free election nor one free press.”

24. Capitulation to His Economic Side?
“While the provision of equal political and civil rights often imposes costs on society (as I noted in chapter I), the attempt to enforce equality of income would entail a much larger sacrifice. In pursuing such a goal, society would forgo any opportunity to use material rewards as incentives to production. And that would lead to inefficiencies that would he harmful to the welfare of the majority. Any insistence on carving the pie into equal slices would shrink the size of the pie. That fact poses the tradeoff between economic equality and economic efficiency.”

25. Returning to His Thesis/Position Statement
“Any case for a trade-in (of capitalism in the U.S.) rests squarely on the tradeoff: the efficiency is bought at the cost of inequalities in income and wealth and in the social status and power that go along with income and wealth. These inequalities stem from the private ownership of property, including the basic means of production, and from market-determined wages and salaries. The disparities need not be so large as they are today and they can be trimmed by a variety of approaches that I will discuss in chapters 3 and 4. But those approaches, which leave the capitalist system basically intact, also leave the highest and lowest incomes far apart.”

26. What Would Okun Say About Epipens?
Do they meet the criteria of a “right” in his view?
Are they more costly to provide than free speech and voting?
Are they more costly than providing free food?
What makes Epipens a “right” in your mind?
If it has a price and trades, is it a “right” to Okun?

27. What Would Okun Say About “Net Neutrality?”
Does the Internet meet the criteria of a “right” in his view?
Is it more costly to provide than free speech and voting?
Is it more costly than providing free food?
What makes the Internet a “right” in your mind?
If it has a price and trades, is it a “right” to Okun?

28. Hassett’s Recent Common on Okun Tradeoff
© National Review

29. Krugman’s Comment on Okun Tradeoff
“But it appears that what everyone knew (in accepting Okun’s tradeoff) isn't true. Taking action to reduce the extreme inequality of 21st-century America would probably increase, not reduce, economic growth.
Two studies:
1) “nations with relatively low income inequality do better at achieving sustained economic growth as opposed to occasional “spurts”
2) “redistribution appears generally benign in terms of its impact on growth”
Concludes:
“Okun's big trade-off doesn't seem to be a trade-off at all.”
Motivating point: “But how can the effects of redistribution on growth be benign? Doesn't generous aid to the poor reduce their incentive to work? Don't taxes on the rich reduce their incentive to get even richer? Yes and yes -- but incentives aren't the only things that matter. Resources matter too -- and in a highly unequal society, many people don't have them.

30. Leach Warning About a Commonly Used Claim that Government is Needed to Offset the Underprovision of “Common Goods”
How much do you pay for your phone’s weather app?
Do you have built-in severe weather alerts?
Does that include tornado warnings?
Don’t just naively argue that all tornado warning systems must be provided by the government due to the inability to constrain receipt of the warning signals to specific parties (willing to pay a fee for the signal).
The world has changed and markets can provide through innovations in revenue production.
(Note: There’s still some government provision of the underlying weather forecasting modeling, data, etc. behind those systems, but who knows about tomorrow…)

31. Liberty and Externality:
Liberty and Externality:
Individual Freedom vs. Society; “Rights” vs. Products
World of Business: Module 3, Day 2