<p>A negative externality arises when the private net marginal benefit (i.e. the marginal benefit minus the marginal cost) of an activity exceeds the net social benefit. In such cases, the self-interested private decision maker will increase their participation in the activity even though it is socially inefficient for them to do so.</p>

<p>A positive externality arises when the private net marginal benefit (i.e. the marginal benefit minus the marginal cost) of an activity are smaller than the net social benefit. In such cases, the self-interested private decision maker will not increase their participation in the activity even though it is socially efficient for them to do so.</p>

<p>This is a semantic distinction to the extend that if one thinks activity $A$ has a negative externality then one can define a new activity $B$, which is simply the "act of not doing $A$" so that $B$ has a positive externality. On this basis, one can argue that every externality is positive or that every externality is negative. For example, many people think that education has a positive externality because educated people make better citizens (e.g they make more informed voting decisions that benefit others). As a matter of semantics, one could argue that this is, in fact, not a positive externality and that what is really going on is that people who do <em>not</em> educate themselves are exerting a negative externality on those who do by virtue of their ignorance.</p>

<p>Whilst there is some merit to this reasoning, I do not find it helpful. Often, when we study the effects of behaviour, we are interested in comparing those effects to some baseline or benchmark in which the behaviour is absent. When communicating economics to others, it is usually the case that some benchmarks are more intuitive that others. We could, for example, rewrite all of consumer theory in terms of "the dis-utility people experience from not having goods" and look at the "problem of non-consumption dis-utility minimisation". Doing so would be formally equivalent to the more conventional approach of consumption utility maximisation (only the language changed), but would probably be less intuitive for people trying to understand the economics.(*) At least to me, it is more intuitive to think that people actively choose to undetake some level of education and exert a positive externality on others than to think that everyone receives infinite education by default and the choice of abstaining results in a negative externality.</p>

<p>Besides education, another example that I think fits most intuitively into the positive externalities box is network effects. If I buy a telephone then all of my phone-owning friends are made better off because now they can use their telephone to call one more person that they couldn't reach before. It seems weird to think of the negative externality of not owning a phone.</p>

<p>In terms of taxes versus subsidies: to get to the socially optimal intensity we need to ensure that the private net marginal benefit is zero precisely when the social net marginal benefit is zero. In the case of a negative externality this can be done either by increasing the private marginal cost (via a tax) for the activity or by increasing the private marginal benefit of <em>not</em> participating in the activity via a subsidy. For example, we could either subsidize low carbon firms or tax heavy polluters. As far as aligning incentives are concerned, the two are equivalent. In most practical cases, the more important consideration is likely to be that of budget constraints and politics:</p>

<ul>
<li>In the case of a tax: can the person you are taxing afford to pay the tax and can the tax be levied without seeming vindictive (for example, I think that taxing people without a university degree would be a no-no on these grounds).</li>
<li>In the case of a subsidy: can the government raise enough popular support and funding for a subsidy without leaving people with the impression the some parties are receiving unfair government hand-outs?</li>
</ul>

<p>In most cases, thinking about these political and financial constraints makes it clear whether a subsidy should be used. Sometimes a combination of both is used. For example, in the UK the government both taxes petroleum consumption and subsidises electric car ownership.</p>

<hr>

<p>(*) Nevertheless, economists do often find it useful to convert the utility maximisation problems into their dual expenditure minimisation problems, which is somehow similar. This technique, though, is usually reserved for more advanced students who already have a well-developed intuition for the economics.</p>

CC BY-SA 3.0
2014-11-20T16:12:57.943Z
2014-11-20T18:10:24.787Z
2014-11-20T18:10:24.787Z
Ubiquitous
<p>I hope this isn't overly semantic, but I'd like to gain some clarification on the use positive (or negative) externality. </p>

<p>I usually shoot down suggestions for examples of positive externalities like organic agriculture. We can grant that organic agriculture is better than conventional, but that doesn't mean it is producing additional external benefits. Instead, organic agriculture might feature fewer negative externalities compared to the status quo. </p>

<p>I've even seen examples like smoking being a positive externality because smokers die sooner and save governments money on Social Security (perhaps that accounting might be questionable, but let's grant it for the sake of argument). Again, my semantic preference would be to label this as the absence of status quo negative externality.</p>

<p>If the semantics aren't interesting, might there still be something interesting on the tax vs. subsidize side? Returning to the agriculture example, taxing the negative externalities associated with conventional agriculture seems smarter than subsidizing organic. This seems like a case where it's more efficient to regulate the end and not the means. But what market characteristics might make subsidizing specific not-negative-externality-producing things more efficient?</p>

CC BY-SA 3.0
2014-11-18T22:13:43.827Z
My professor, Walter Block, actually loves to go into the semantics of externalities. Other professors joke that he argues away market failures by saying, "These aren't externalities you're looking for." I'll try and return with a competent answer incorporating his work.
rosenjcb
CC BY-SA 3.0
2014-11-18T23:09:28.360Z
It'd be helpful if you briefly indicated what the negative externalities associated with regular agriculture actually are (you mean like fertilizer runoff?) just so we're all on the same page...
Steve S
CC BY-SA 3.0
2014-11-18T23:23:53.030Z
What is "more efficient" in your terminology?  Bang for your buck?  Effectiveness of purpose?  Something else?
Brythan
CC BY-SA 3.0
2014-11-18T23:52:42.807Z
@SteveS The externalities don't need to be explicitly named. I'm charitably granting that conventional is bad (producing pollutants or other external costs). 

Brythan, efficiency is measured by comparing total welfare in each case, or seeing when DWL is lower. So we care about consumer surplus, producer surplus, external costs, and external benefits.
Pburg
CC BY-SA 3.0
2014-11-19T00:30:59.550Z
@Pburg: Yeah, I know you're referring to Externalities in general, I just thought that it might add a little bit of context (you know, for posterity).
Steve S
<soft-question><externalities>
Differentiate a positive externality and the absence of a negative externality. Tax or subsidize?
Pburg
# Differentiate a positive externality and the absence of a negative externality. Tax or subsidize?

(Asked by: username_0 on 2014-11-18)

I hope this isn't overly semantic, but I'd like to gain some clarification on the use positive (or negative) externality.

I usually shoot down suggestions for examples of positive externalities like organic agriculture. We can grant that organic agriculture is better than conventional, but that doesn't mean it is producing additional external benefits. Instead, organic agriculture might feature fewer negative externalities compared to the status quo.

I've even seen examples like smoking being a positive externality because smokers die sooner and save governments money on Social Security (perhaps that accounting might be questionable, but let's grant it for the sake of argument). Again, my semantic preference would be to label this as the absence of status quo negative externality.

If the semantics aren't interesting, might there still be something interesting on the tax vs. subsidize side? Returning to the agriculture example, taxing the negative externalities associated with conventional agriculture seems smarter than subsidizing organic. This seems like a case where it's more efficient to regulate the end and not the means. But what market characteristics might make subsidizing specific not-negative-externality-producing things more efficient?

**Tags:** soft-question, externalities
> **Comments:**
> **username_1**: My professor, Walter Block, actually loves to go into the semantics of externalities. Other professors joke that he argues away market failures by saying, "These aren't externalities you're looking for." I'll try and return with a competent answer incorporating his work.  
> **username_2**: It'd be helpful if you briefly indicated what the negative externalities associated with regular agriculture actually are (you mean like fertilizer runoff?) just so we're all on the same page...  
> **username_3**: What is "more efficient" in your terminology?  Bang for your buck?  Effectiveness of purpose?  Something else?  
> **username_0**: @SteveS The externalities don't need to be explicitly named. I'm charitably granting that conventional is bad (producing pollutants or other external costs).   Brythan, efficiency is measured by comparing total welfare in each case, or seeing when DWL is lower. So we care about consumer surplus, producer surplus, external costs, and external benefits.  
> **username_2**: @Pburg: Yeah, I know you're referring to Externalities in general, I just thought that it might add a little bit of context (you know, for posterity).  

---

## 1 answers

### Answer by username_4 on 2014-11-20. Score: 3 | Accepted answer

A negative externality arises when the private net marginal benefit (i.e. the marginal benefit minus the marginal cost) of an activity exceeds the net social benefit. In such cases, the self-interested private decision maker will increase their participation in the activity even though it is socially inefficient for them to do so.

A positive externality arises when the private net marginal benefit (i.e. the marginal benefit minus the marginal cost) of an activity are smaller than the net social benefit. In such cases, the self-interested private decision maker will not increase their participation in the activity even though it is socially efficient for them to do so.

This is a semantic distinction to the extend that if one thinks activity $A$ has a negative externality then one can define a new activity $B$, which is simply the "act of not doing $A$" so that $B$ has a positive externality. On this basis, one can argue that every externality is positive or that every externality is negative. For example, many people think that education has a positive externality because educated people make better citizens (e.g they make more informed voting decisions that benefit others). As a matter of semantics, one could argue that this is, in fact, not a positive externality and that what is really going on is that people who do *not* educate themselves are exerting a negative externality on those who do by virtue of their ignorance.

Whilst there is some merit to this reasoning, I do not find it helpful. Often, when we study the effects of behaviour, we are interested in comparing those effects to some baseline or benchmark in which the behaviour is absent. When communicating economics to others, it is usually the case that some benchmarks are more intuitive that others. We could, for example, rewrite all of consumer theory in terms of "the dis-utility people experience from not having goods" and look at the "problem of non-consumption dis-utility minimisation". Doing so would be formally equivalent to the more conventional approach of consumption utility maximisation (only the language changed), but would probably be less intuitive for people trying to understand the economics.(\*) At least to me, it is more intuitive to think that people actively choose to undetake some level of education and exert a positive externality on others than to think that everyone receives infinite education by default and the choice of abstaining results in a negative externality.

Besides education, another example that I think fits most intuitively into the positive externalities box is network effects. If I buy a telephone then all of my phone-owning friends are made better off because now they can use their telephone to call one more person that they couldn't reach before. It seems weird to think of the negative externality of not owning a phone.

In terms of taxes versus subsidies: to get to the socially optimal intensity we need to ensure that the private net marginal benefit is zero precisely when the social net marginal benefit is zero. In the case of a negative externality this can be done either by increasing the private marginal cost (via a tax) for the activity or by increasing the private marginal benefit of *not* participating in the activity via a subsidy. For example, we could either subsidize low carbon firms or tax heavy polluters. As far as aligning incentives are concerned, the two are equivalent. In most practical cases, the more important consideration is likely to be that of budget constraints and politics:

* In the case of a tax: can the person you are taxing afford to pay the tax and can the tax be levied without seeming vindictive (for example, I think that taxing people without a university degree would be a no-no on these grounds).
* In the case of a subsidy: can the government raise enough popular support and funding for a subsidy without leaving people with the impression the some parties are receiving unfair government hand-outs?

In most cases, thinking about these political and financial constraints makes it clear whether a subsidy should be used. Sometimes a combination of both is used. For example, in the UK the government both taxes petroleum consumption and subsidises electric car ownership.

---

(\*) Nevertheless, economists do often find it useful to convert the utility maximisation problems into their dual expenditure minimisation problems, which is somehow similar. This technique, though, is usually reserved for more advanced students who already have a well-developed intuition for the economics.


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