Of externalities, elbows, and knowing one from the other

Economists tend to think that murder is a bad thing. Why? Well, despite the murderer presumably enjoying the act, his gain comes at a cost that he doesn't personally bear: the death of his victim. That's the kind of cost that economists tend to call an externality. And so economists tend to support laws against murder. We similarly tend to support laws against theft: while the thief tends to think taking other folks' stuff is a good idea, the thief's victims tend to be hurt by it and the thief won't weigh those folks' losses against his gains. In these kinds of cases, individuals' rational calculation of their own costs and benefits lead to socially bad outcomes because of the substantial external costs.

No, this isn't heading towards commentary on the Clayton Weatherston trial. Rather, consider Adrian Slack's latest response to our critique of BERL's analysis of the costs of alcohol.

“So for example someone who murders someone, from the individual’s point of view, Eric would be, I presume, quite comfortable with that. The person who decides to murder someone else makes an evaluation of what are the benefits and costs to me of this action? Society says ‘well some people do murder other people’, but society says ‘that’s not good.’”

Is this close enough to Godwin's Law for BERL to be deemed as having conceded defeat?

For the record, I do not support murder: I care about the external costs. One of our biggest critiques of the BERL report is that they conflate internal and external costs. I don't think that BERL has a ... conventional ... understanding of the difference between the two. As we reminded BERL in our report:

Externalities can be imposed on private citizens and, conversely, costs to a business of employing an unproductive worker are not externalities. Perhaps this misunderstanding contributed to BERL’s decision to count private costs as social costs. A basic staple of principles-level economics is that costs or benefits are not external if the agents are linked through a contractual nexus: the baby crying next to me on the long-haul flight does not impose an externality on me because I have chosen to buy a ticket that includes the risk of such unpleasantness and was accordingly charged less for that ticket. Similarly, a worker who slacks off on the job or takes inordinate numbers of sick days does not impose externalities on his employer. It is worrying that BERL does not seem to recognize this basic definitional issue.

Adrian, what colour is the sky in your world?

Utilitarianism and meddlesome preferences

Brad suggests that utilitarianism has no way of sorting out how to deal with meddlesome preferences:

Liberals and libertarians need to think very carefully about the kinds of preferences/harms should be considered valid policy concerns. The are obvious cases: I wrong you when kick you in the shin, but not when I wear clothes you find distasteful. It seems that this is so even when you have a very high tolerance for shin pain and a low tolerance for fashion crimes, and the harm/disutility is equal in each case. Most people find it reasonable that people have a presumptive right not to be physically attacked, but no such right not to be visually offended by poor taste. There is a large grey area in between these two cases. Utilitarianism as a moral theory is incapable of considering this question, or even admitting that it is a problem. This, more than anything else, is why I am not a utilitarian. The Mill of On Liberty was not a utilitarian in this respect either. On some readings, not even the Mill of Utilitarianism was really a utilitarian.

I'll disagree. Buchanan and Stubblebine provide a very nice framework for thinking about the problem. Sure, the offense I feel when I see someone in a Che Guevara t-shirt is real. And it can be viewed as an external harm imposed upon me just as my wearing my Hayek t-shirt may impose similar harms on others. But the fact of an external effect isn't sufficient to make it policy relevant. Rather, the externality has to be Pareto-relevant: my willingness to pay to avoid seeing Che t-shirts has to be higher than the other guy's willingness to pay to wear the shirt. If the aggregate sum of all willingness-to-pay-weighted distaste caused by Che shirts is higher than the aggregate sum of all willingness-to-pay-weighted pleasure caused by the wearing of such shirts, then a ban could be efficient. Of course, we have no way of extracting that kind of information about preferences outside of market transactions. But in principle there's no conflict with utilitarianism: it's just the generalized problem of the absence of reliable hedonometers.

In some cases we can draw reasonable conclusions though. In the absence of regulations forbidding or mandating the practice, we'd expect that evidence that a bus company allows smelly people on the bus to be evidence that the money-weighted preferences of those imposed-upon aren't high enough to overcome the transactions costs of enforcing a "no smelly people" rule and the losses to the smelly people. Otherwise, the bus company could earn higher profits by banning smelly folks from the bus and charging a higher ticket price for the better service. Similarly, if a grocery store bans entry of customers wearing neo-nazi t-shirts, they must reckon such bans are worth the effort of enforcement and the lost custom from skinheads. In both cases, the common third party (bus service, grocery store) transforms all into internalities.

In general, for externalities the magnitude of which or the enforcement costs of which are very difficult to ascertain apriori, a rule allowing property owners to make the call is most efficient: Coase operates. Where it's pretty likely to weigh one way or the other and transactions costs among all affected parties are likely to be very high, blanket bans or blanket allowances may be more efficient. I'm certainly not saying that such an approach positively explains the pattern of regulation anywhere in the world; rather that such an approach is consistent with utilitarianism.