Positive Externalities Exist

Positive Externalities Exist

Ed Dolan recently posted on his blog: “Why do we Need Government to Tell Business to be Energy Efficient?”  .

Of course, I wouldn’t blog about it if there wasn’t something I could highlight.   Thanks Ed for the inspiration to write something – I have had bloggers block.   The first issue to comment on is the following:  

“…stopping government subsidies that make the prices of some inputs artificially low. For example, without subsidies to corn farmers and ethanol blenders, we would use less corn ethanol in our automotive fuel. According to most studies I have seen, less ethanol would mean a more efficient fuel mix.”

The thing here is that Ed is not relating the context of why the subsidies in ethanol must occur.  Clearly every action is not about efficiency or even energy itself.   It is a balancing mechanism – though not the best – for the subsidies that occur in several middle east countries for petroleum.   In those countries their citizens are paying a fraction of the world market prices.   As Ed should know those areas are also seeing one of the largest growths in petroleum demand.  We have seen an unprecedented price rise in petroleum prices in such short time period.   The cure for high prices has been high prices.   However if the areas observing the greatest growth for petroleum do not see the high price signal then the responsibility for the demand destruction lies on economies like the US.   Our continued purchases of the high prices support/subsidizes them.   Without stronger trade restrictions, a subsidy on what we produce the most and what the rest of the world needs makes sense;  in this case it is corn.  In essence the US is swapping food for oil to balance out the trade and price discrepancy issue.  It is not perfect, but until we come up with a better way, I wouldn’t want it to go away.

“…fixing government policies that allow businesses to take resources without paying for them. Promarket economists like my early mentor Murray Rothbard have long argued that pollution is a form of “taking” via uncompensated harm to other people and their property. That means harm to people and property owners who live downstream or downwind from a specific factory or power plant, and in the case of some pollutants, it means harms that are felt even more widely, even globally….Look at it this way: A business owner is like a dog owner. Just as the burden of cleaning up the dog’s poop is the owner’s responsibility and becomes part of the cost of owning a dog, the harm that pollution does to downwind residents and property owners is a both a moral and an economic responsibility of the businesses”

This thinking has become very common – the values of externalities need to be incorporated into the price of energy.  However most people assume externalities are only negative value.  I will agree there are negative values for downstream/downwind people who are not directly consuming the energy – e.g. particulate matter.  However even the downstream/downwind people are seeing positive value ,even though they are not directly consuming or paying for energy.   What are those values?  

Societal stability through economic prosperity.  As complicated as tracking negative externalities, there is a complex web for tracking positive externalities.  I will state a few potential examples.  Because the upwind region has local energy to consume, though potentially polluting to downwind. Their ability to use the local resource limits the population from migrating downwind and potentially causing instability through crime, disruption of supply/demand of other resources, etc…  Also there is value that the upwind region is consuming a source of energy.   If they did not consume the local source of energy they may demand the source that the downwind region is using.  This will likely cause economic harm to the downwind region particularly if the upwind region has more capability to buy the resource.   There are numerous examples I could come up with among the numerous examples discussed for negative value externalities.  

The value for the negative externalities is as real as those of the positive externalities.  And how to value each of them is complicated.   The dog poop example Ed brings up really doesn’t work unless you add more reality to the situation.   The caveat could be: by allowing the dog owner to have the dog,  you are reducing your chance,  the owner would be a grumpy and potentially go postal on you one day.   Therefore potentially an occasional poop missed is worth the trade-off on not allowing him to have a dog because he doesn’t always clean up.  There is some level of pollution that balances the trade-off.   What that balance is becomes very variable and will depend on the situation and societal choices.   Ed does note at the end: 

“to safeguard the integrity of energy pricing we can use government fines, or pollution charges, or taxes, or whatever you want to call them. So much per ton of SO2, so much per ton of carbon and so on. Yes, in some philosophical sense, that is a second best, a less elegant solution than one that internalizes all pollution costs through voluntary contracts and the enforcement of property rights. Yes, it is hard to get the prices just right. But I see it as the best hope we have for making our planet cleaner, healthier, more sustainable and–importantly–more efficient.”

However society needs to know all the facts not just the negative side of things.  In Ed’s article, he  did not balance the negative externalities with the positive externalities.  How will the price ever be close to being “right” if we don’t have a comprehensive dialogue’s of both the pros and cons?

I take pride in making sure I take a 360 perspective.   One always needs to challenge one’s own thinking to make sure all bases are covered.  If you are looking for an unbiased well-rounded perspective on energy issues please, consider contacting All Energy Consulting.

Your Energy Consultant,


David K. Bellman



  1. I want to add another comment on this discussion. I understand viewing cost by itself thereby adding all the cost that something impacts on society from environmental to financial. However it would only seem fair and balance to do as much effort on the value side of the equation. There are multiple places of value beyond the simple use of a product. As discussed in the article one value not in the price is social stability as a result of procurring that product versus another e.g. domestic vs. import discussion, cheaper products increase disposable income,etc… Ask yourself when the grid is down how much would you pay at that point to have electricity – what are you willing to sacrifice? This value is very large.

    It amazes me how the economic think tanks / academia are so focused on cost and no one does the value side of the equation. I suspect they want to leave it up to the industry to come up with that? I would think academia would be in a better position to do this. A “FULL” cost analysis should be balanced with a “FULL” value analysis. As complicated as cost is value is just as complexed if not more. Both value and cost is a function of to whom. Whether I am state such as Arizona or New York my cost and value will be different. Some will be the same but many items in cost and value will be different. Those writing papers on Full cost need to make it clear to whoms cost.

    Ultimately society both regional and nationally needs to assess the true balance and trade off (Value – Cost). If you dont have that and society is swayed by propaganda then something in the economy will have to balance the losses and/or society stability will crumble.

  2. Ed,
    You are correct in your statements below. The upwind energy use regardless of subsidy is what it is.

    I only point this issue up because many and somewhat in your own article ask for pollution cost (e.g. SO2, CO2) for the externality issues they cause. Once again I agree upon that. However I would temper the extent of those cost to balance with some of the positive externalities. If for example using the EPA typical analysis for Pollutant X causes the price of Pollutant X to approach astronomical value because of premature deaths (which are valued at a million each) and the value is so severe that the result is no coal consumption (this is hypothetical do not extrapolate unto any current EPA rules) – a whole industry and region would then require cost to maintain some stability. I dont think easterners would take to kindly for a mass migration of welfare recipients into their states. The penalty should balance or at least consider the positive externality of the pollution. Once again let me emphasized this is only an example of thought not that I believe any current EPA rules would produce this extreme.

    Social stability has value.


  3. Thanks for this discussion, David. You raise some important issues. Here is how I see them:

    You write “Also there is value that the upwind region is consuming a source of energy. If they did not consume the local source of energy they may demand the source that the downwind region is using.” The thought here, if I understand, is that because the upwind region is using (subsidized?) energy it produces itself, the downwind region is enjoying less competition for its resources, hence a lower price, and is therefore better off. Is that right?

    I agree that in this and many cases the choices that party A makes about what to produce and what to consume can make party B better or worse off via their effects on market prices. There is not really an agreed term for these effects. I think one useful term is “market-mediated externalities (MMEs).” They are market-mediated in the sense that they act through supply/demand/price channels. In that sense, they are conceptually different from environmental externalities like air pollution that pass Rothbard’s classic “physical invasion” test.

    The bottom line is that MMEs, whether positive or negative, do not represent market failures. Instead, they are an inherent part of the smooth functioning of markets, the natural sharing of consumer and producer surplus, if you like those terms. I do not think that market-mediated externalities justify policy interventions to enhance or preserve them.

    Really, this issue is too big to discuss adequately in a comment box. I will try to do a full post on it soon.

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