14 August 2008

Everyone's an Economist, Externalities Version

Standard economic theory predicts goods with positive externalities will be underproduced because the producer cannot capture the full value of what is produced (some people can enjoy it for free, without compensating the producer). From a biography of Al Wight, who, writing as James Herriot, became the world's most famous veterinarian and made the Yorkshire dales world famous, is this lovely example, which occured one day when Wight went shopping for fireworks.
[H]e made a visit to a shop [and] asked for rockets.
Another customer overheard his request and leaned towards him. "Don't buy rockets, Mr. Wight," he whispered, "they 'ave a good selection o' Roman candles an' some right good Catherine wheels, at good prices an' all!"
Alf was mystified. "My kids love to see rockets soaring to the sky. Anyway, what's wrong with rockets?
the man eased in closer. "Why, everyone else can see 'em!"


Scott Hanley said...

I guess kids with car stereos aren't economists. Pity.

James Hanley said...

Oh, sure they are. That creates a negative externality, and so is expected to be overproduced. They know damn well they're not bearing the whole cost of their choice to blast their stereos--if they had to compensate those of us who don't want to hear them, they'd turn it down real quick.

James K said...

So this means we should subsidise rockets, yes? ;)

James Hanley said...

Well, in the U.S., at least, we do have a grand tradition of public fireworks displays.

But how to explain the $100 of fireworks I set off on the 4th of July, clearly visible to my neighbors? (Although, come to think of it, most of my neighbors are old people, so perhaps it was a negative externality!)

James K said...

That is the trouble with externalities yes, one person's positive is another persons' negative. That's why it pays to be careful before breaking out Pigou to solve an externality problem.