Naked Economics by Wheelan, Charles (best books to read .TXT) 📗

sense that it encourages individuals and firms to cut corners in ways that make society worse off as a result. If this concept were really as dry as most economics textbooks make it seem, then a movie like Michael Clayton would not have made millions at the box office. After all, that film is about a simple externality: A large agribusiness company stands accused of producing a pesticide that is seeping into local water supplies and poisoning families. There is no market solution in this case; the market is the problem. The polluting company maximizes profits by selling a product that causes cancer in innocent victims. Farmers who are unaware of (or indifferent to) the pollution will actually reward the company by buying more of its product, which will be cheaper or more effective than what can be produced by competitors that invest in making their products nontoxic. The only redress in this film example (like Erin Brockovich and A Civil Action before it) was through a nonmarket, government-supported mechanism: the courts. And, of course, George Clooney looks good making sure justice is done (as Julia Roberts and John Travolta did before him).

Consider a more banal example, but one that raises the ire of most city dwellers: people who don’t pick up after their dogs. In a perfect world, we would all carry pooper scoopers because we derive utility from behaving responsibly. But we don’t live in a perfect world. From the narrow perspective of some individual dog walkers, it’s easier (“less costly” in economist speak) to ignore Fido’s unsightly pile and walk blithely on. (For those who think this is a trivial example, an average of 650 people a year break bones or are hospitalized in Paris after slipping in dog waste, according to the New York Times.)1 The pooper-scooper decision can be modeled like any other economic decision; a dog owner weighs the costs and benefits of behaving responsibly and then scoops or does not scoop. But who speaks for the woman running to catch the bus the next morning who makes one misstep and is suddenly having a very bad day? No one, which is why most cities have laws requiring pet owners to pick up after their animals.

Thankfully there is a broader point: One crucial role for government in a market economy is dealing with externalities—those cases in which individuals or firms engage in private behavior that has broader social consequences. I noted in Chapter 1 that all market transactions are voluntary exchanges that make the involved parties better off. That’s still true, but note the word “involved” that has left me some wiggle room. The problem is that all of the individuals affected by a market transaction may not be sitting at the table when the deal is struck. My former neighbor Stuart, with whom we shared an adjoining wall, was an avid bongo drum player. I’m sure that both he and the music shop owner were both pleased when he purchased a new set of bongos. (Based on the noise involved, he may even have purchased some kind of high-tech amplifier.) But I was not happy about that transaction.

Externalities are at the root of all kinds of policy issues, from the mundane to those that literally threaten the planet:

The Economist has suggested somewhat peevishly that families traveling with small children on airplanes should be required to fly at the back of the plane so that other passengers might enjoy a “child-free zone.” An editorial in the magazine noted, “Children, just like cigarettes or mobile phones, clearly impose a negative externality on people who are near them. Anybody who has suffered a 12-hour flight with a bawling baby in the row immediately ahead or a bored youngster viciously kicking their seat from behind, will grasp this as quickly as they would love to grasp the youngster’s neck. Here is a clear case of market failure: parents do not bear the full costs (indeed young babies travel free), so they are too ready to take their noisy brats with them. Where is the invisible hand when it is needed to administer a good smack?”2

Mobile phone use is under stricter scrutiny, both in public places, such as restaurants and commuter trains, where the behavior is fabulously annoying, but also in vehicles, where it has been linked to a higher rate of accidents. Texting is the second-most dangerous thing you can do while driving a car, next to driving drunk.

In Chicago, Mayor Richard Daley attempted to impose a 1-cent tax on every $2 of take-out food purchases, arguing that the “litter tax” would reimburse the city for the costs of picking up litter, much of which consists of discarded fast-food containers. The mayor’s economics were sound—litter is a classic externality—but a judge ruled the ordinance unconstitutional because it was “vague and lacking in uniformity” in the way it dealt with different kinds of fast-food containers. Now there is talk at the federal level of a junk food tax (or a soda tax) to deal with a different kind of food-related externality: obesity. The health care costs associated with obesity are now roughly as high as those related to smoking. Society picks up at least some of the tab for those bills through the costs of government health programs and higher insurance premiums—giving me a reason to care whether you have a Big Mac for lunch or not.

Global warming is one of the most difficult international challenges in large part because firms that emit large amounts of greenhouse gases pay only a small share of the cost of those emissions. Indeed, even the countries in which they reside do not bear the full cost of the pollution. A steel plant in Pennsylvania emits CO2 that may one day cause a flood in Bangladesh. (Meanwhile, acid rain caused by U.S. emissions is already killing Canadian forests.) The same thing is true in all kinds of factories around the world. Any solution to global warming will have to raise the cost