Individuals often make decisions that are in their own best interest, and often disregard the impact they may have on other people. Whenever this happens, individuals are creating an externality. Someone else either benefits or is harmed by that outcome. In the case of someone putting on deodorant, that could have spillover benefits from people getting to smell a “fresh scent.” If too much is applied, it could annoy others are turn to a negative externality.
Tony joins his colleagues for lunch at a local pub to discuss potential leads for their newspaper, but he’s disturbed by a gentleman loudly munching on chips behind him. The man appears to be ignorant of the external costs he’s imposing on those around him and is focused on only his own satisfaction.
When people are unaware of the external costs they are imposing on others, they tend to overconsume, literally. Since there aren’t clear property rights, it’s not clear who should make the determination of appropriate volume. Tony could pay the man to stop eating his chips, but Tony may argue that the man should have to pay for the right to eat his chips so loudly. It’s harder to reach a solution without clearly defined property rights.
Monica decides she wants to makes candy for the neighbors even in an attempt to get to know them better (or to liked?) She decides to place the candy in a basket on her door so that anyone can take a piece, but a tragedy of the commons ensues. Her neighbors are taking more than their “share” of the candy and are bothering her throughout the day to get more candy from her. When the commons has been exhausted, the neighbors form a mob.
Thanks to Dawn Renninger for the clip recommendation!
This opening cartoon depicts Dre dutifully maintaining his castle and describing the lengths men go to in order to protect their castle. Unfortunately, we can’t always control what neighbor’s do with their castle and their decision to throw parties and disturb us is (seemingly) out of our control. The Coase Theorem would argue that so long as transaction costs are low, people should be able to bargain and sort out external costs imposed by private actions. The insinuation by Dre in this scene is that the transaction costs may be just a bit too high.
Clip recommended by James Tierney:
Howard and Bernadette are bothered by their neighbor’s (Andy) new flood lights, which appears to look out over their backyard and right into the hot tub they have built. Andy doesn’t see the problem because his flood lights are in his backyard and provide him some sense of security, but they are a nuisance to Howard and Bernadette.
Instead of talking to their neighbors directly, like the Coase Theory would suggest, they head to the city zoning office to try and report the issue in the hopes that he has violated some city zoning ordinance. When they realize that will take too much time, they try to get Sheldon’s help, but Sheldon is cautious because Bernadette and Howard didn’t get permission to build their backyard deck, nor renovate their shower.
In Howard and Bernadette’s mind, government regulation should only be used for externalities. Their deck and bathroom aren’t affecting third parties so they don’t see the need to have them approved.
Things seem off in The Good Place, but it turns out that the as the world becomes more complicated, seemingly identical actions (like giving flowers) can have unintended consequences that most people don’t realize. Our private actions can have social costs that we’re unaware of and would probably try to avoid if we were fully informed of their costs.
Larry David teaches Christian Slater the social etiquette surrounding overconsumption of hors d’oeuvres a party. To start, Slater’s over consumption represents the individual incentives surrounding common resources. Ostrom’s Noble Prize in Economics explored the way social conventions, which David explains, can solve overconsumption issues even when laws aren’t in place.
Joe wants to go on a cross country road trip, but he’s being a bit of a bother. He isn’t taking into account his actions and how they may be impacting others. For example, his decision to goof off in the drive-thru line for food bothers Cleveland, but also the people waiting in line to get food. Negative externalities occur when an individual is making private decisions (like goofing off), but not considering how that impacts the people around them (like the others in line).
This clip was submitted by Isaac Messinger.
The boys get into a chugging match to see who can put down a bottle of maple syrup the fastest (they’re in Vermont!), but it bothers some of the other patrons who would like syrup for their pancakes. Not only do they not take into account the costs their actions impose on others, but we see a clear example of the rivalrous nature of private goods. While they don’t possess a property right in order to sell the syrup to other diners (the restaurant would have that right), their use of the product prevents others from being able to consume the product.
Harry (Jeff Daniels) and Lloyd (Jim Carrey) pick up a hitchhiker, but proceed to drive him crazy with their childish antics. While the two of them see no problems with their behaviors, they don’t take into account the cost they impose on the hitchhiker. The hitchhiker quickly realizes that the cost of the trip may not be worth the benefit he gets from the no-cost ride.
Thanks to Michael Romano for the suggestion.