Economists view externalities askance. Regardless of whether it's regarded as "positive" or "negative," it's always a market failure–and it always carries a stigma. In a nutshell, externalities occur when we feel our microeconomic contributions disproportionately to their macroeconomic effect. I cited resource depletion and litter as examples yesterday. Another great example is cheating the clock at work: lost productivity and an increased risk of bankruptcy creates huge burdens shouldered by employees. They get aggregated together to produce layoffs, benefit cuts, wage freezes, etc. But the individual cyberslackers feel almost no disincentive. That's the sort of disconnect economists hate. The cyberslackers should be "internalising" their costs–i.e., noticing the incremental loss in job security or future earnings accompanying each minute spent on Facebook. But instead that cost goes hidden.
Perhaps externalities are better understood by contrast. Consider an example that's relatively externality-free: every American citizen burning, melting, and/or shredding $10 simultaneously. The money supply would shrink. But it's not like we wouldn't notice. The minute we lit up our Hamiltons we'd feel our share.
But that leaves us with a tantalising question: what if the disconnect works in the opposite direction? What if our petty human minds discount the cost associated with an aggregate gain? To go back to the money example, let's say we all contributed $10 to a national fund and then suffered collective amnesia. Then let's say we ended up with a $3 billion tax deduction that everyone could take advantage of. That would never happen, of course. But if it did, it's not like we'd care if we got our individual write-offs at $8 apiece.
But sometimes it does happen. Enter Wikipedia, whose contributors seem blissfully unaware of the costs they assume in lost time–and the opportunities they miss in the process. The independent utility of supporting a public good can't explain it: most of them would still edit and post even if they never built a resource useful to those who didn't. And neither can the strong network effects: it might be cheaper to contribute to a mass project (readymade templates, code, etc.), but it's not free–and it's definitely not compensatory!
But it is appreciated, guys. The aggregate effect is handy. Really handy. I mean, who else would I reference thrice per entry?
I'm not sure I understand the assertion that positive externalities constitute a market failure. (Then again, it's been three years since I really studied economic theory and I'm a little rusty.) Economic transactions do not take place in a vacuum. That third parties may catch the crumbs that fall from the table (an imperfect, zero-sum analogy) does not make a transaction less efficient. I may derive utility from watching (for free) an amateur athletic event, in which the players derive utility from their (non-remunerative) participation. Similarly, I suspect that the majority of Wikipedia contributors derive utility from their posting activity, and are probably (more or less) aware that they could be devoting their time to any number of alternative activities. That you and I may benefit from their nerdy wisdom does not detract from their enjoyment.
ReplyDeleteThe assumption that the pursuit of utility maximization is a zero-sum game is a "Spherical Cow." (http://en.wikipedia.org/wiki/Spherical_cow)
Am I completely missing the point? It's still early...