Re: PEN-L Digest - 1 Jun 2007 to 2 Jun 2007 (#2007-156)

[Bill Lear <rael@xxxxxxxxxx>]

On Monday, June 4, 2007 at 14:28:00 (-0400) Walt Byars writes:
>I don't really understand Hahnel's snowballing inefficiency argument. I've
>only read his presentation in ABCs of Welfare Economics but it seems to
>require that  if there are some goods which have negative externalities in
>their production and some which don't, that over time people's preferences
>for the former will increase relative to those for the latter. I'm not
>sure why it would be like this rather than the other way around.
>
>Is the idea that business will produce a set of goods which is comprised
>of more goods which produce negative externalities than consumers "want"
>so that as preferences acclimate towards these goods business will produce
>even more goods involving negative externalities. If so, this would make
>sense. Is this the explanation in Quiet Revolution in Welfare Economics?

If I remember correctly, I think the argument is simpler than that.
Think of supply and demand curves.  If prices reflected externalities,
you would shift your curves.  The intersection of supply and demand
with externalities factored in is the "true" spot.  Relative to this
the "free market" spot shifts toward higher consumption and
production.  Can't remember the shift direction: up and to the right?
Again, from memory, so not sure...


Bill