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SPA 504: Economics for the PublicSector
Article Review:An Economical, Political and Philosophical
Analysis of Externalities.By:Brian P. SimpsonNational university
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Purpose of the article:
To show the economically, politicallyand 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 ofexternality theory
To provide powerful criticisms on the
externalities theory
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Objectives of the article:
This article will ensure that the readerwill 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
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Method used in the article:
The writer of this article referred to somenoted writers such as Ludwig Von Mises,Murray Rothbard, Ronald Coarse, HaroldDemsetz and Richard Posner who already
provide an economic and political analysis ofexternality theory.
He agreed on what the other authors write on
their analysis only at one legitimate point
where the externality can be remedied byconstantly recognizing and protecting the
property rights.
He then address that most of the analysesrovided is inade uate and deficient.
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Method used in the article:
He critique most of the authors he referredfail to :I. Address the epistemological errors of
externality theory
II. Give the valid premise on their analysisIII. Explain the right idea of property rights
IV. Defines the sphere of responsibility forindividuals in much more details.
Thus, the writer of this article will avoidthe errors committed by the above writersand goes deeper than just a political andeconomic analysis of externality theory.
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The implications of externalities
and market failure: Too many goods will create (-)
externalities (the cost imposed on whoexperienced 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 payfor the benefits)
Example: beautiful garden/home &
passerby
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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 economicstagnation and even regression.
Why?
Example of positive externalities: the large
number of payments that would have to be made tothose responsible for innovations that are easy to
copy but that are not eligible for patent or copyright
protection.
Example of negative externalities: the originalHenr Ford Ford car manufacturer towards horse
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Negative externalities & its
solutions: The writer pointed out the only ones for
which people should be compensatedare those that cause demonstrablephysical harm to a person or his propertyand can be traced back to the actions of
an individual or a group of individualsworking in concert. In order to do this, one must have well
defined and -protected property rights.
Example:-farmer (whose land is upstream) vs. thedownstream land owner-steel mills vs. quality of air
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Positive externalities & its
solutions
The writer believe that individualsshould pay others only for benefitsthey voluntarily contract to receivefrom others.
He wrote Governmentforce neededto increase the supply of goods thatcreate positive externalities violates
the rights of individuals. Example:
-charity (donors & recipients)
-lighthouse & ship owners
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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 beforgotten when determining whether the government
should act or not. It is a distinction that the conceptexternality leads people to ignore.
Positive variations:
The case of property owner against landscaper &passerby
In general, when the government acts to eliminatepositive external effects, it is violating someone's rightsby expropriating money and subsidizing, or completelytaking over the production of, the activity that createsthe effect.
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Deeper Analysis of the concept
externality:The 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 possiblymight want to buy the good.
A person that dresses nicely for a job
interview.
Beautiful and u l eo le.
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Conclusion:
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.