My Hidden Extra Agenda
:Here are four ideas that, as soon as I first heard them, irrevocably
changed my worldview. If you haven't heard them yet, then I hope that
today they infect you the same way they did me.
political space, Left-Right is
slice, not an axis.
Left-right is not a true 1-D spectrum, or even an axis of 2-D political
space, but rather is a diagonal slice through 2-D
goods the government should provide or manage.
Excludability is the ability of producers to detect and prevent
uncompensated consumption of their products. Rivalry is the
inability of multiple consumers to consume the same good.
A public good is a non-rival non-excludable good that
benefits almost everyone in a polity. Because public goods are not
excludable, they get under-produced. The pricing system cannot force
consumers to reveal their demand for purely non-excludable goods, and
so cannot force producers to meet that demand. Thus government should
produce non-excludable goods that aren't supplied by nature -- namely,
pure public goods. (Impure public goods
are those that are partly excludable -- those for which producers can
capture some but not all of the benefits that the goods provide.
Examples are education, technology development, landscaping,
broadcasting, and the
arts. Impure public goods need not be produced by government.)
A natural resource is any
rival non-excludable resource. Because natural resources are not
excludable but still rival, they get
over-consumed. Thus government should police the use of natural
resources, preferably by taxing resource use by the amount that the use
costs the rest of the polity.
A natural monopoly is any non-rival excludable good that
benefits almost everyone in a polity. Because natural monopoly goods
have high fixed costs and vanishing marginal costs, they cannot be
produced efficiently through market competition. Thus government
should regulate the provision of natural monopoly goods.
A private good is any rival
excludable good. Markets are able to manage their production and
allocate their consumption more efficiently than government can.
Efficiently produced and allocated by markets
- agriculture, minerals, artifacts
- labor, services
- land parcels
- rain and sunlight incident on land parcels
High fixed costs, low marginal
costs => inefficient competition
- roads; water and sewage lines
- wired telecom networks (not content)
- power distribution (not generation)
- aggression deterrance; fire protection service
Tragedy of the commons,
negative externalities => overconsumption
- atmosphere, bodies and streams of water, pollution sinks
- sunlight, wind, fish, game
- unowned land and space;
- electromagnetic spectrum; some namespaces
Free riders, positive
- national defense
- scientific knowledge
- prevention of contagion, conflagration, flood
- anti-poverty safety net (assuming most
people favor charity)
environmental problems are
by Negative Externalities.
In economics, an externality is a cost imposed or benefit
bestowed on a person
other than those who agreed to the transaction that created the cost or
benefit. Negative externalities
are costs such as pollution or overconsumption of natural resources. (Positive externalities are benefits
such as scientific discoveries and incremental technical
Instruments for Pollution Control and Prevention, Duncan Austin of
the World Resources Institute explains how market forces can be used to
correct for the market failure constituted by negative externalities:
Economic instruments, which aim to
control pollution by harnessing the power of market incentives, offer a more cost-effective, flexible and dynamic
form of regulation than conventional command-and-control
The underlying premise for economic instruments is to correct negative
externalities by placing a cost on
the release of pollutants.This will
internalize the externalities into the decision making process.
Placing a charge, or a fee, on every unit of effluent transforms the
manufacturer’s decisions regarding how much he
will produce, and how he will produce it. Now, the manufacturer must
minimize total production costs that consist not only of labor,
material, machinery and energy inputs, but also of the effluent output.
the charge level, or the cost attached to effluent outputs, the
regulator can induce a different degree of response from manufacturers,
and hence control the overall level of pollution. By changing the
charge level over time, the regulator has a relatively simple way of
ratcheting up standards.
The key benefit of economic instruments is that they would allow a given pollution target to be met
for lower overall cost than traditional regulations. Economic
instruments grant firms and individuals greater autonomy in deciding
how to meet targets; they create ongoing incentives for firms to design
new and improved abatement technologies ensuring that pollution control
becomes ever cheaper; they reduce the information burden on regulators;
and they provide potential revenue sources for state or federal
governments. In addition, economic instruments may provide greater
flexibility in dealing with smaller and diffuse emissions sources which
collectively contribute large amounts of pollution, but which until now
have been largely ignored in favor of controlling the pollution from
more obvious sources.
Economic instruments can create a system for pollution reduction that
achieves the same level of environmental protection for a lower overall
cost (or achieves more for the same cost). Under a command and control
approach, industries invest to meet the standard and then stop. In
contrast, placing a price on effluents creates a permanent incentive for environmental
improvement. Because every emission, or effluent, effectively
has a price attached to it, any profit-maximizing entity has an ongoing
incentive to make further reductions over time.
are determined by
which is determined by capital.
Excerpts from Ten
Principles of the Economics of Capital by the National Center for
Principle 1: Capital is the single most
important determinant of real wages. In a very real sense, the amount
of capital in our economy determines how much wage income we earn, even
if we do not personally own any capital. Workers’ wages and the capital
stock are inextricably linked. The only way that the real wages, and
thus the well-being, of workers can rise is if there is more capital
Principle 2: More than 90 percent of the
benefits of a larger capital stock go to wage earners rather than
owners of capital. Many people believe that owners of capital get most
of the benefits capital creates. This turns out not to be the case. One
of the most surprising findings of the economics of capital is that the
overwhelming bulk of the extra income generated by capital accumulation
flows to people in their role as wage earners, rather than to the
owners of capital.
- For every additional dollar of income produced by a larger
capital stock, two-thirds goes to labor and only one-third to capital.
- After taxes and depreciation, the discrepancy is even greater;
labor receives 43.7 cents of each additional dollar of sales, while
owners of capital receive only 3.7 cents.
- In other words, workers get to keep $12 in after-tax wages for
every $1 of additional after-tax income to investors.
These facts have dramatic public policy
implications. In general, public policies that promote capital
accumulation primarily benefit wage earners, while policies that
discourage capital accumulation primarily penalize wage earners.
Principle 3: The amount of
capital is determined by investment. The nation’s capital stock is the
sum total of all of its capital goods. Because these goods lose value
over time, some level of investment is necessary to maintain the
capital stock at its current size. Beyond that level, additional
investment will cause the capital stock to grow, whereas less
investment will cause it to shrink.
Principle 4: The amount of
investment is determined by the real after-tax rate of return on
capital. The amount of physical capital available in our economy
depends on the willingness of people to invest in productive capital
goods. In making these decisions, investors are guided by the return
they will receive. The income to the investor must be adjusted for
inflation, depreciation, taxes and the riskiness of the investment.
After these adjustments are made, the investor can assess the after-tax
real rate of return on the investment.
Principle 5: Because of changes in investment
spending, the after-tax rate of return on capital tends to be constant.
Suppose something happens to cause the rate of return on capital to
rise above its historic average. There will be an increase in
investment, adding to the current stock of capital. As the capital
stock expands, the rate of return on capital will fall. Conversely,
when the rate of return on capital is below its historical level, there
will be a decrease in investment. As the capital stock shrinks, the
rate of return on capital will rise. Over the past 37 years, the rate
of return on capital in the U.S. economy has tended to be remarkably
stable — averaging about 3.3 percent per year.
Traditional neoclassical economics teaches
that the rate of return on capital must reflect people’s preference for
future rather than current consumption. In other words, to be induced
to save (forgo current consumption) and invest (with the expectation of
greater, future consumption), people must receive a minimum rate of
return on their investment. Because the time preferences of people are
unlikely to change very much over time, the rate of return on capital
will remain roughly constant.
Principle 6: Taxes on capital do not affect the
after-tax rate of return on capital but instead affect the amount of
Although an increase in a tax on capital causes a
one-time reduction in wealth for owners of capital, it does not
permanently affect the future after-tax rate of return on capital.
such an increase, the after-tax rate of return on capital will be below
its historical average. Investors will respond by lowering their rate
of investment. The capital stock will shrink (relative to what it would
have been) until the rate of return reaches 3.3 percent. After the
adjustment has taken place, the owners of capital will receive the same
after-tax rate of return they received before the tax increase. This
does not mean that owners of capital will be indifferent to taxes on
capital. These taxes lower the after-tax future income stream on
existing capital assets. Thus a tax on capital lowers the value of
capital assets and makes current owners of capital less wealthy. For
any new purchase of an asset, however, capitalists will and can expect
the normal rate of return of 3.3 percent.