On the nature and structure of externalities

Abstract

This paper contributes to the literature on externalities and their classification by reconciling insights from transaction costs theory with James Buchanan’s and Elinor Ostrom’s analyses of property rights and institutional diversity. We critique the dominant Pigouvian analysis, which assumes only two forms of institutions—namely, governments and private markets—that can internalize externalities. We develop a new taxonomy of externalities that provides relevant conceptual space for a wide array of institutions that the market-versus-state dichotomy obscures. The proposed taxonomy considers two key classes of often-conflated attributes: (1) the scale of externalities, and (2) the assignability, enforceability, and tradability of property rights. This approach enriches the Coasean (transaction cost) perspective by allowing us to unbundle transaction costs in a manner that extends its applicability to nonmarket situations in which market-based transactions are either not permitted or technically infeasible. Thus, by integrating insights from two distinct Public Choice schools, we broaden the theory of externalities to not only encompass market exchanges but also to incorporate cases in which property rights are, and will remain, unclear. We conclude that institutional diversity can offer adaptable solutions to tackle medium- and large-scale externalities.

Two (lay) dogmas on externalities

“…The spillover effects from one party's consumption of a private good can impact just one other party (a purely local externality), or they can impact every single member of the relevant community (a wholly global externality), and of course anything in between. This continuum is nicely captured by the scalar nature of the horizontal dimension of Figure 1 in Paniagua and Rayamajhee [2023]. (This is what they term the "scale/size of externalities" dimension.…”

“…For example, see the horizontal dimension of Fig.1inPaniagua and Rayamajhee [2023] elsewhere in this volume, which offers an explicit attempt to taxonomize externalities with respect to their scope in precisely this fashion.5 Ignoring for now instances of non-voluntary exchange, as might be elicited by (e.g.) instances of coercion or deception or (depending on one's view on the nature of truly voluntary exchange) desperation.6 Or, in a previous era, on "indivisibility" rather than non-rivalry.7 The laity also exhibits a regrettable tendency to improperly deploy the term "public good."…”

Complex externalities: introduction to the special issue

“…The first step towards crafting meta-rules that enable us to develop a framework for matching externalities to appropriate institutions is to take a closer look at the externality's relevant attributes, followed by an empirically grounded analysis of existing and potential institutional choice sets. Vincent Ostrom (2008Ostrom ( [1973) articulated the need for fixing the 'institutional mismatch' half a century ago, yet the area remains underexplored with a few notable exceptions (Furton & Martin, 2019;Paniagua & Rayamajhee, 2023;. Thus, the contributions in this special issue forward that conversation theoretically and by applying them to modern externalities that are increasingly diverse.…”

The Tragedy of the Nurdles: Governing Global Externalities

“…Externalities associated with nurdles share some of the same features of climate change and pandemics that have been used to characterize them as nested global externalities. Paniagua and Rayamajhee [5] define complex global externalities by the following features:…”

“…Our analysis builds on the recent advancements in the literature on the polycentric approach to governing complex global externalities, following the foundational works by Elinor Ostrom and the scholars of the Bloomington School of Political Economy [3,4]. Paniagua and Rayamajhee [5] highlight three key features of complex global externalities: these global externalities involve an exceptionally large number of individuals, organizations, and authorities at multiple scales; identification of the causes of the externalities is challenging because problems are nested in multiple interconnected layers; and discerning appropriate solutions is difficult-even infeasible if the intended beneficiaries of the solutions do not participate in crafting the solutions. We show that these features present insurmountable challenges to monocentric policy design and implementation.…”