Two (lay) dogmas on externalities

Abstract

I argue that much current thinking on externalities-at least among "lay political economists" (but even, on occasion, among professional economists)-is saddled with two analytical errors. The first is what I call coextensivism: the conflation of public goods and externalities. The second error is what I call externality profligacy: the conflation of economic and "social" externalities. The principal dangers presented by these two "dogmas on externalities" are that, while in their grips, we are under-disposed to seek negotiated, market-based solutions (of a broadly Coasean nature) to challenges posed by economic externalities, and overdisposed to seek coercive, state-based solutions (of a broadly Pigouvian nature) to challenges posed by social externalities.