Friday, November 26, 2004

Study: Cigarettes Cost Society $40 a Pack

In Econ 101, there was a short footnote that talked about the concept of "externalities." This is the concept that the price of a product or service does not always reflect all of its costs. The trivial example used is the case of a beekeeper next to an apple orchard. The price of apples does not include the cost of pollination, which the orchard gets for free; the price of honey does not include the cost of the pollen the bees pilfer from the apple trees.

That one is trivial, in part because positive externalities are as rare as hen's teeth. Negative externalities are things like pollution, and they are everywhere.

Classical economics spends little time talking about externalities. Not because they are unimportant, mind you -- they are hugely important. Economists ignore them for two reasons -- first, because they are difficult; calculating the true cost of, say, the price of a gallon of gas, is very complicated, and requires wading into a lot of discussions that economists find messy. The other reason is that economists don't like where this line of thinking takes them, because a market economy frankly does a piss-poor job of dealing with them, and getting serious about externalities requires you to acknowledge that there are some things you need a strong government to do -- and market economists would rather eat worms.


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