--- John Foster <[log in to unmask]> wrote:
> > One of the problems with externalities is that they are
> >external to any market (hence the name externality) and as such putting
> a
> >dollar value on these costs for any kind of "accounting" analysis is
> going
> >to be very difficult at best.  Not that it shouldn't be attempted, but
> it
> >is not very easy at all.
> >
> >Steve
>
> No this is false. An externality is a cost that is 'external' to a firm,
> not
> to a market. The market is too vague of a term here. The market includes

This is incorrect.  The firm is part of the market.  The supply function
in the market is determined by the firm's marginal cost curve.  (For those
of you who haven't had to sit through boring economics courses on
microtheory, the marginal cost of producing a good is that cost of the
last unit that is produced.)  All variable costs are in the marginal cost
of the firm (since fixed costs don't vary with the amount of output fixed
costs are not part of the marginal cost).

Now, as John has said above the external cost is not being borne by the
firm, hence it is not part of the marginal cost curve, and hence not part
of the pricing problem.  Thus, the externality is not paid by the firm and
is not part of the market.

Further, from an efficiency stand point it is irrelevant who pays for the
externality, provided property rights are complete and transactions costs
are low.  This is the general thrust of the Coase Theorem.

> the
> customer who may purchase a defective product and therefore the cost of
> the
> defective product is not an externality to the market because of product

Whoa, who said defective product?  Simple because there is an externality
does not mean the product is defective.


> There are many ways of costing which can be used to determine the cost
> of
> externalities. It is not difficult at all because there are many ways of
> pricing those externalities. Externalities are not referred to costs
> that
> are external to any market. External costs are only potential costs that

Since externalities are not subject to market transactions the "costing"
of these external cost is going to be difficult.  I am not making this up,
check out the Palgrave Dictionary on Economics.  The local university
should have a copy.

From Britannica.com

http://www.britannica.com/bcom/eb/article/5/0,5716,109005+8+106205,00.html?query=externalities

A second class of limitations consists of things that should be done but
are not performable by a price system. Even when prices are freely
established by competition, there is a class of economic relationships
called "externalities" not efficiently controlled by prices. These may be
illustrated by the air pollution caused by automobiles. Since no single
automobile makes a significant contribution to air pollution, the owner
has no incentive to bear the cost of installing antipollution devices even
though all drivers would be better off if each did so. Yet if there are
many automobiles in a region, it would be prohibitively expensive for
drivers to contract with one another to have each install devices in his
automobile to reduce pollution. The external effects of any one
automobile's exhaust fumes are so diffuse and affect any one person so
triflingly that they cannot be regulated by the price system.

Steve

=====
"In a nutshell, he [Steve] is 100% unadulterated evil. I do not believe in a 'Satan', but this man is as close to 'the real McCoy' as they come."
--Jamey Lee West

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