Saturday, June 25, 2011

An Asymmetry Between Rothbard's Treatment of Positive and Negative Externalities

According to Rothbard, a positive externality is an economically unoperationalizable term, because by definition there can be no demonstrated market demand for the goods alleged to exhibit such externalities. However, he does concede that there exists a perfectly meaningful economic definition of negative externalities - i.e., the effects of transactions between A and B which physically interfere with the property rights of C. How can this conceptual asymmetry be explained? In my view, two things have to be taken into account in order to answer this question.

First, it has to be recalled that non-action with respect to someone else's assets that are alleged to create positive spillover effects can be given a number of equally plausible though mutually exclusive psychological interpretations (free-rider's enjoyment, indifference, dislike, etc.), but only one praxeological interpretation (a preference for non-payment over payment for the ostensible "good" under consideration). Likewise, non-action with respect to one's own assets can be psychologically interpreted in many different ways, but only one explanation makes praxeological sense in this context - namely, a preference for keeping the assets in question over trading them for something else, giving them away or disposing of them in any other manner.

Hence, it becomes visible that an action (payment or other form of voluntary acceptance) is required on the part of the putative beneficiary of a positive externality to prove that he is in fact one, but no action is required on the part of someone whose property is uninvitedly interfered with to classify any such interference as a negative externality. This, as I see it, is because the benefits derived from keeping one's property assets can be traced back to the preceding action of acquiring them (via a regression theorem of social interactions), but the benefits of being affected by positive externalities can be traced back to none of the preceding actions of the ostensible beneficiaries.

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