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SPA 504: Economics for the Public Sector Article Review:

An Economical, Political and Philosophical Analysis of Externalities.

Brian P. Simpson National university

Purpose of the article:

To show the economically, politically and epistemologically why externality does not provide a valid critique of the markets To show why the market actually succeeds with respect to externalities To reveal the logical implications of externality theory To provide powerful criticisms on the externalities theory

Objectives of the article:

This article will ensure that the reader will be familiar with the economics, political and epistemological analysis of externality theory This article also will assist the reader to understand the nature of externality theory

Method used in the article:

The writer of this article referred to some noted writers such as Ludwig Von Mises, Murray Rothbard, Ronald Coarse, Harold Demsetz and Richard Posner who already provide an economic and political analysis of externality theory. He agreed on what the other authors write on their analysis only at one legitimate point where the externality can be remedied by constantly recognizing and protecting the property rights. He then address that most of the analyses provided is inadequate and deficient.

Method used in the article:

He critique most of the authors he referred fail to :

I. Address the epistemological errors of externality theory II. Give the valid premise on their analysis III. Explain the right idea of property rights IV. Defines the sphere of responsibility for individuals in much more details.

Thus, the writer of this article will avoid the errors committed by the above writers and goes deeper than just a political and economic analysis of externality theory.

The implications of externalities and market failure:

Too many goods will create (-) externalities (the cost imposed on who experienced it did not take into account) Example: steel manufacturers & the people who breathes the dirty air Too few goods will create (+) externalities (the recipients do not pay for the benefits) Example: beautiful garden/home & passerby

The politic and economic implications of externalities:

According to analysis referred by the writer, it is assumed that negative externalities could be corrected by tax and positive externalities could be compensated by subsidy. However, the writer claimed it would led to economic stagnation and even regression. Why? Example of positive externalities: the large number of payments that would have to be made to those responsible for innovations that are easy to copy but that are not eligible for patent or copyright protection. Example of negative externalities: the original Henry Ford (Ford car manufacturer towards horse

Negative externalities & its solutions:

The writer pointed out the only ones for which people should be compensated are those that cause demonstrable physical harm to a person or his property and can be traced back to the actions of an individual or a group of individuals working in concert. In order to do this, one must have well defined and -protected property rights. Example: -farmer (whose land is upstream) vs. the downstream land owner -steel mills vs. quality of air

Positive externalities & its solutions

The writer believe that individuals should pay others only for benefits they voluntarily contract to receive from others. He wrote Government force needed to increase the supply of goods that create positive externalities violates the rights of individuals. Example: -charity (donors & recipients) -lighthouse & ship owners

Deeper Analysis of the concept externality:

Negative variations: The comparison of Henry Ford case with the downstream landowner. This is a fundamental political distinction that cannot be forgotten when determining whether the government should act or not. It is a distinction that the concept externality leads people to ignore. Positive variations: The case of property owner against landscaper & passerby In general, when the government acts to eliminate positive external effects, it is violating someone's rights by expropriating money and subsidizing, or completely taking over the production of, the activity that creates the effect.

Deeper Analysis of the concept externality:


externality supposed to identify and help one understand some significant phenomenon, However, it turns out the term identifies a phenomenon that is meaningless and implies many absurdities. Example: Any good (such as loaf of bread): those who bought good & those who possibly might want to buy the good. A person that dresses nicely for a job interview. Beautiful and ugly people.

The writer believes that the concept of externality should be discarded. There are 2 valid arguments presented by the writer which are: 1. It leads to greater confusion because of the absurd implications of the concepts. 2. Externality could led to false conclusions and harmful actions.