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Geoff332 · Oct 27, 2003, 06:34 pm

Economic theory is based on the idea that where individuals make a free choice based on their own self-interest, the society as a whole benefits. One of the assumptions of economics is that the valid information about an exchange is contained within the price.

One of the core problems of economics is externalities. The technical definition of an externality is when a purchase or use decision of one party effects others, who had no choice in the matter, and whose interests are not taken into account. Externalities generally refer to economic events whose value is not fully captured within the economic system (one definition is "when the actions of one agent affect the interests of another agent other than by affecting prices").

The classic example of a negative externality is polution. When a factory opens and starts generating polution. This effects other people around the factory. When this is done without their consent or without taking into account their interests. This has a direct economic effect, which is generally not built into the economic system -- that is the factory owner does not incur any costs associated with the economic effect they have on other people.

A an example of a positive is when a customer buys a product that needs after-sales service (eg linux). This increases the demand for that after-sale service, which will decrease the over-all cost of that after-sales service for all owners of that product.

There's no question that externalities exist and are surprisingly large. The question I have is, within a capitalist system, "how does one take into account externalities?"

Impenitent · Oct 28, 2003, 09:16 am

-The technical definition of an externality is when a purchase or use decision of one party effects others, who had no choice in the matter, and whose interests are not taken into account. Externalities generally refer to economic events whose value is not fully captured within the economic system (one definition is "when the actions of one agent affect the interests of another agent other than by affecting prices").

this opens a whole new market to the entrepeneur... big bad business is busy doing business for the major market while not concerning itself with the myriad of externalities which are left for the profiting entrepeneur...

ignore away... let the entrepeneurs make their bit... if you are worried about unseen and uncomputatable factors, buy "boogeyman insurance"...

Geoff332 · Oct 28, 2003, 04:46 pm

That works for a small sub-set of positive externalities. A fair number of externalities are costs that should be incurred by businesses -- not opportunities. They are neither unseen nor uncomputable: they simply fall outside of the market. Many of the positive externalities are not genuinely exploitable (the example I gave does nothing to create additional exploitable opportunities). In either case, entrepreneurship is a very limited partial solution.

Impenitent · Oct 28, 2003, 06:51 pm

Geoff

-(the example I gave does nothing to create additional exploitable opportunities).

yes it does... have you ever heard of the EPA? have you ever seen the fringe environmentalist groups? they make tons of money exploiting people's fear about the destruction of the environment... just as religions exploit people's fear of death...

enviro-friendly products industry has cropped up exactly because of pollution... not limited at all...

Geoff332 · Oct 28, 2003, 06:57 pm

But the EPA is not a 'market' agency -- it doesn't any provide goods and/or services on a competitive market. It exists (and has power) because it is a government institution, not because of it's market behaviour.

But you have given me one answer, of sorts -- that agencies operating outside of the market can be created to regulate a market.

Hyberidinckt · Oct 29, 2003, 04:06 am

my thoughts on externalization;

(what do you mean 'take into account'?)

that's exactly what's happening with externalization.
someones taking something into their account.
where did it come from you may ask.
oh, i sold something, he may say.

I believe some companies take it into account by giving a hoot about the world and being a good little human, and then looking at their business decisions constatly with their own personal morals motivating their every action. It isn't hard to understand where your companies externalizations/exploits may be too destructive for the planet or local/global community to handle. Once I heard tell of a man who, for his living mind you, travels to 'manufacturing facilies' in other countries where governmental regulations are lax, and he checks on the observeable moral goodness of the operation. True, not all can be seen in this way, for on a documentary I learned that often when there are inspectors of whatever type coming by, they have been known to call ahead. weeks ahead.
My wish is for individual investors to recognise that they hold responsibility for the actions of the company, and thus be concious of the externalizations which their portfolio supports.

Geoff332 · Oct 29, 2003, 06:18 am

</span><blockquote><span class="smallfont">Quote:</span><hr size="1" />Originally Posted by
My wish is for individual investors to recognise that they hold responsibility for the actions of the company, and thus be concious of the externalizations which their portfolio supports.<hr size="1" /></blockquote><span class='postcolor'>The vast majority of investment is held by large, annonomous funds (pension and insurance funds). Most individual investors are several steps removed from the actual companies that they are investing in. The idealism of investors being responsible for their investment is all nice and good, but unfortunately doesn't happen in reality.

(there is a similar argument with respect to organic foods -- a small minority of the population will pay significant premiums for organic food; the majority are highly price sensitive)

My own pension had an 'ethical fund'. The returns on this fund were lower than the standard fund (and far lower than the agressive growth fund). The kind of active involvement you talk about is all very nice, but exceptionally rare, when you get into the real world of investment. More importantly, it's contrary to the assumptions of self-interest and market value that drive economic theory.

Geoff332 · Oct 29, 2003, 06:23 am

Oh, 'take into account' in economics is very specific. In a perfect market, all information necessary to make a decision about the transaction is contained within the price of the product. Externalities occur when there are economic effects that are not reflected in the price -- a negative externality is usually a cost of production that is not incurred by the producer.

Oct 28, 2003, 09:16 am	#2 (permalink) (top)
Impenitent Hot Lava Posts: 1,859	-The technical definition of an externality is when a purchase or use decision of one party effects others, who had no choice in the matter, and whose interests are not taken into account. Externalities generally refer to economic events whose value is not fully captured within the economic system (one definition is "when the actions of one agent affect the interests of another agent other than by affecting prices"). this opens a whole new market to the entrepeneur... big bad business is busy doing business for the major market while not concerning itself with the myriad of externalities which are left for the profiting entrepeneur... ignore away... let the entrepeneurs make their bit... if you are worried about unseen and uncomputatable factors, buy "boogeyman insurance"... "I really like this jacket, but the sleeves are much too long..." insanity is doing the same thing over and over again, but expecting different results...

Oct 28, 2003, 06:51 pm	#4 (permalink) (top)
Impenitent Hot Lava Posts: 1,859	Geoff -(the example I gave does nothing to create additional exploitable opportunities). yes it does... have you ever heard of the EPA? have you ever seen the fringe environmentalist groups? they make tons of money exploiting people's fear about the destruction of the environment... just as religions exploit people's fear of death... enviro-friendly products industry has cropped up exactly because of pollution... not limited at all... "I really like this jacket, but the sleeves are much too long..." insanity is doing the same thing over and over again, but expecting different results...

Oct 27, 2003, 06:34 pm	#1 (permalink) (top)
Geoff332 Igneous Magma Location: New Zealand Posts: 309	Economic theory is based on the idea that where individuals make a free choice based on their own self-interest, the society as a whole benefits. One of the assumptions of economics is that the valid information about an exchange is contained within the price. One of the core problems of economics is externalities. The technical definition of an externality is when a purchase or use decision of one party effects others, who had no choice in the matter, and whose interests are not taken into account. Externalities generally refer to economic events whose value is not fully captured within the economic system (one definition is "when the actions of one agent affect the interests of another agent other than by affecting prices"). The classic example of a negative externality is polution. When a factory opens and starts generating polution. This effects other people around the factory. When this is done without their consent or without taking into account their interests. This has a direct economic effect, which is generally not built into the economic system -- that is the factory owner does not incur any costs associated with the economic effect they have on other people. A an example of a positive is when a customer buys a product that needs after-sales service (eg linux). This increases the demand for that after-sale service, which will decrease the over-all cost of that after-sales service for all owners of that product. There's no question that externalities exist and are surprisingly large. The question I have is, within a capitalist system, "how does one take into account externalities?"

Oct 28, 2003, 04:46 pm	#3 (permalink) (top)
Geoff332 Igneous Magma Location: New Zealand Posts: 309	That works for a small sub-set of positive externalities. A fair number of externalities are costs that should be incurred by businesses -- not opportunities. They are neither unseen nor uncomputable: they simply fall outside of the market. Many of the positive externalities are not genuinely exploitable (the example I gave does nothing to create additional exploitable opportunities). In either case, entrepreneurship is a very limited partial solution.

Oct 28, 2003, 06:57 pm	#5 (permalink) (top)
Geoff332 Igneous Magma Location: New Zealand Posts: 309	But the EPA is not a 'market' agency -- it doesn't any provide goods and/or services on a competitive market. It exists (and has power) because it is a government institution, not because of it's market behaviour. But you have given me one answer, of sorts -- that agencies operating outside of the market can be created to regulate a market.

Oct 29, 2003, 04:06 am	#6 (permalink) (top)
Hyberidinckt Sedimentary Rock Posts: 1	my thoughts on externalization; (what do you mean 'take into account'?) that's exactly what's happening with externalization. someones taking something into their account. where did it come from you may ask. oh, i sold something, he may say. I believe some companies take it into account by giving a hoot about the world and being a good little human, and then looking at their business decisions constatly with their own personal morals motivating their every action. It isn't hard to understand where your companies externalizations/exploits may be too destructive for the planet or local/global community to handle. Once I heard tell of a man who, for his living mind you, travels to 'manufacturing facilies' in other countries where governmental regulations are lax, and he checks on the observeable moral goodness of the operation. True, not all can be seen in this way, for on a documentary I learned that often when there are inspectors of whatever type coming by, they have been known to call ahead. weeks ahead. My wish is for individual investors to recognise that they hold responsibility for the actions of the company, and thus be concious of the externalizations which their portfolio supports.

Oct 29, 2003, 06:18 am	#7 (permalink) (top)
Geoff332 Igneous Magma Location: New Zealand Posts: 309	</span><blockquote><span class="smallfont">Quote:</span><hr size="1" />Originally Posted by My wish is for individual investors to recognise that they hold responsibility for the actions of the company, and thus be concious of the externalizations which their portfolio supports.<hr size="1" /></blockquote><span class='postcolor'>The vast majority of investment is held by large, annonomous funds (pension and insurance funds). Most individual investors are several steps removed from the actual companies that they are investing in. The idealism of investors being responsible for their investment is all nice and good, but unfortunately doesn't happen in reality. (there is a similar argument with respect to organic foods -- a small minority of the population will pay significant premiums for organic food; the majority are highly price sensitive) My own pension had an 'ethical fund'. The returns on this fund were lower than the standard fund (and far lower than the agressive growth fund). The kind of active involvement you talk about is all very nice, but exceptionally rare, when you get into the real world of investment. More importantly, it's contrary to the assumptions of self-interest and market value that drive economic theory.

Oct 29, 2003, 06:23 am	#8 (permalink) (top)
Geoff332 Igneous Magma Location: New Zealand Posts: 309	Oh, 'take into account' in economics is very specific. In a perfect market, all information necessary to make a decision about the transaction is contained within the price of the product. Externalities occur when there are economic effects that are not reflected in the price -- a negative externality is usually a cost of production that is not incurred by the producer.