Externality Accounting

Knowledge Problem

Lynne Kiesling

David Friedman recently had an interesting externality exercise post:

If actions I might take would provide benefits for other people which I am not in a position to charge them for, I have too little incentive to take them. If my actions would imposes costs on other people which I am not required to reimburse them for, I have too much incentive to take them. So let government subsidize or mandate the production of positive externalities, tax or ban the production of negative externalities, thus making us all better off.

I offer the following challenge to readers. List all the positive and negative externalities from educating children. For a second challenge, pick some other public policy commonly defended on externality grounds, and try to list the externalities with the wrong sign–the ones that are an argument for subsidizing what we now tax, or taxing what we…

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