Tag Archives: Externality

The Quest for a Life of Leisure: Prisoner’s Dilemma in Food Production

In a conversation about “vegan food in the workplace,” I heard a thoughtful comment that reminded me of the Prisoner’s Dilemma. Before I paraphrase the comment, here’s a quick video to refresh your memory on the Prisoner’s Dilemma:

So, now that we have a better understanding of the Prisoner’s Dilemma, let’s get back to the comment. Essentially, the person was making the argument that large-scale commercial agriculture and farming is unsustainable, harmful to plants, and harmful to animals. The person was making the point that this problem stemmed from the business models/practices required to sustain them (and not the animals/plants themselves). Further to the person’s point, they explained that we also play a part in this by the way we purchase food. Regardless of whether we buy local, wild-caught food or buy large-scale commercialized food, there’s still an impact on the environment.

Upon hearing this comment, the first thing I thought of was the Prisoner’s Dilemma. Let me explain. There’s a demand for food. Consequently, businesses will satisfy that demand by supplying food. [Econ 101, amirite?] But how businesses satisfy that demand is where things get tricky. They could do so in a number of ways, but let’s simplify it into two: large-scale commercial agricultural production or small-scale local farming. If businesses were to focus on small-scale local farming, they’d be supplying food for the town (or maybe the town and some neighbouring towns). Businesses that focus on large-scale commercial agricultural production aren’t supplying food for a town, they’re supplying food for a country or – countries.

The two-by-two that I see here is that if businesses “cooperated,” they’d be supplying food for the local town(s) and “everyone” would be satisfied (consumers get food, businesses make money, environment is ‘harmed’ as little as possible, etc.). The possible hitch here is that businesses see an opportunity to make more money, so they scale up production into a major agricultural conglomerate (i.e. food for countries). That’s not to imply that this is “bad,” just that the opportunity exists and many businesses seek to seize it. In so doing, that provokes other businesses to do the same – the businesses are “betraying” each other, leading to externalities borne out by things like the environment. [NOTE: I’m aware that this example is very oversimplified and does not represent the state of food in all countries, especially where food shortages exist.]

The irony of the race-to-the-bottom is that, often times, the people running these businesses are all in it for the same thing:

An American businessman was standing at the pier of a small coastal Mexican village when a small boat with just one fisherman docked. Inside the small boat were several large yellowfin tuna. The American complimented the Mexican on the quality of his fish.

“How long it took you to catch them?” The American asked.

“Only a little while.” The Mexican replied.

“Why don’t you stay out longer and catch more fish?” The American then asked.

“I have enough to support my family’s immediate needs.” The Mexican said.

“But,” The American then asked, “What do you do with the rest of your time?”

The Mexican fisherman said, “I sleep late, fish a little, play with my children, take a siesta with my wife, Maria, stroll into the village each evening where I sip wine and play guitar with my amigos, I have a full and busy life, senor.”

The American scoffed, “I am a Harvard MBA and could help you. You should spend more time fishing and with the proceeds you buy a bigger boat, and with the proceeds from the bigger boat you could buy several boats, eventually you would have a fleet of fishing boats.”

“Instead of selling your catch to a middleman you would sell directly to the consumers, eventually opening your own can factory. You would control the product, processing and distribution. You would need to leave this small coastal fishing village and move to Mexico City, then LA and eventually NYC where you will run your expanding enterprise.”

The Mexican fisherman asked, “But senor, how long will this all take?”

To which the American replied, “15-20 years.”

“But what then, senor?”

The American laughed and said, “That’s the best part. When the time is right you would announce an IPO (Initial Public Offering) and sell your company stock to the public and become very rich, you would make millions.”

“Millions, senor? Then what?”

The American said slowly, “Then you would retire. Move to a small coastal fishing village where you would sleep late, fish a little, play with your kids, take a siesta with your wife, stroll to the village in the evenings where you could sip wine and play your guitar with your amigos…”

And maybe that life of leisure is closer than we think or, maybe, as the above parable suggests, we had that lifestyle before we “betrayed” each other in the Prisoner’s Dilemma. In an article I read recently in The Atlantic [Emphasis Added]:

The Ju/’hoansi [of Namibia] not only managed to feed themselves better than many in the industrialized world, but that they did so on the basis of only around two hours foraging a day, and cheerfully spent the rest of their time on more leisurely pursuits such as napping, playing games, and making art.

[…]

Over time, a more sophisticated picture of the Ju/’hoansi’s affluence emerged—one I saw firsthand living in southern Africa for 25 years and one I describe in my recent book. The Ju/’hoansi had an unyielding confidence in the providence of their environment and in their knowledge of how to exploit it. This meant that the Ju/’hoansi, like other hunter-gatherers, focused almost myopically on the short term—if the environment always supplied food and materials and the seasons were broadly predictable, what point was there in worrying about the future? This confidence also meant that the Ju/’hoansi did not store food for more than a few days and only expended energy on securing just enough to meet their immediate needs.

The Ju/’hoansi shared their food with one another according to a set of social prescriptions that ensured pretty much everyone, including the young, old, or disabled, got a share. As a result the Ju/’hoansi were also thoroughly egalitarian, mercilessly ribbing anyone that developed delusions of grandeur and seeing no point in accumulating wealth or formalizing systems of exchange.

NOTE: This was cross-posted.

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Solutions to Externalities: Social Entrepreneurship and Externalities, Part 3

In the first post in this series, we looked at the definition of social entrepreneurship. In the second post in this series, we looked at the definition of externalities. In today’s post, we’ll look at some solutions to externalities.

Solutions to Externalities

There are a number of different ways to solve the problem of externalities. More generally speaking, these different ways of solving the problem of externalities fall into one of two categories: public or private. Under the category of public solutions to externalities, we have things like government provisions, subsidies, or Pigovian taxes. Pigovian taxes (the name comes from Pigou) are those taxes that are intended to influence a party away (disincentivize) from creating the negative externality. One kind of Pigovian tax is a ‘sin tax,’ which are those taxes that are applied to things like alcohol and tobacco. One of the main arguments for allowing for private sector solutions to externalities is internalization. What is meant by internalization? Consider an example where a fisherman owns a river and a steel plant pollutes the river. The fisherman would demand that the steel plant cease polluting because the fisherman had property rights of the river.[1] The fisherman internalizes the externality of pollution because the fisherman owns the river. The pollution is not an externality to the fisherman; it is a very real and present part of the equation. One of the problems with a solution like this is when the problem is scaled up. Consider the Atlantic Ocean. Who owns it? While property rights may work for some situations, it is most definitely not a viable solution to all issues involving externalities.

Recently, there was a very interesting proposal put forth that, “externalities seem destined to rattle forth from the grave.”[2] In other words, these authors felt that ‘externalities’ was no longer a relevant term in the lexicon nor as a concept to study. Instead, these authors feel that, “externalities do not differ in any substantive way from any other kind of inefficiency.”[3] The argument is quite compelling. They cite two main axioms regarding inefficiencies, “(1) All inefficiencies, including Pareto relevant externalities, represent unexploited gains from trade and (2) When free exchange is allowed and transactions are costless, all Pareto relevant inefficiencies will be negotiated away.”[4] When the argument is phrased in this way, it is hard to disagree. The authors are trumpeting the horns of the free market. In the concluding remarks by the authors, they make it clear that the aim of their article was to highlight the number of policies passed in the name of externalities. To their credit, they are absolutely right. There are a number of laws and regulations put into place in the name of externalities. Now that we have discussed some of the general theories regarding the solutions to externalities, we can dive deeper into the discussion around externalities and social entrepreneurship. Specifically, we can begin to answer some questions about the cross-section of the two concepts.


[1] Gruber, J. (2010). Public finance and public policy (3rd ed.). New York: Worth Publishers.

[2] Barnett, A. H., & Yandle, B. (2009). The end of the externality revolution. Social Philosophy and Policy, 26(2), 130-150.

[3] Ibid.

[4] Ibid.

Defining Externalities: Social Entrepreneurship and Externalities, Part 2

In the first post in this series, we looked at the definition of social entrepreneurship. In this post, we’ll look at the definition of externalities. Before we get into the post, I wanted to let you know that when I copied part of the paper into this post, the footnotes reset and started at 1. However, as we know from yesterday’s post the first footnote from Pigou is actually footnote #10.

Defining Externalities

The process for defining externalities is as muddled as the process for defining social entrepreneurship. Since the term ‘externalities’ came first,[1] it might be more accurate to say that the process for defining social entrepreneurship is as muddled as the process for defining externalities. The first appearance of a definition of externalities comes in the early 1900s from Pigou,[2] a British economist, who comes from the field of ‘welfare economics,’ which focused on maximizing the well being of society. The general understanding of externalities hasn’t changed too much since then, leaving us with the following definition: “An externality is a cost or benefit that is experienced by someone who is not a party to the transaction that produced it.”[3]

This definition of externalities leaves us with the possibility for positive (benefit) externalities or negative (cost) externalities. An example of a negative externality could be the pollution to the air (or water) caused by a factory. An example of a positive externality could be the honey caused by the natural process of bees. Those two examples of positive/negative externalities are simple ones, but there are many more. Some cite traffic congestion as a negative externality[4] and some cite immunization as a positive externality.[5] The concept of externalities came out of economic theory and as such, we can highlight (through economic theory) some of the results that come from negative/positive externalities. “Negative externalities cause overproduction of the good in a competitive market, while positive externalities cause underproduction of the good in a competitive market, in both cases leading to a deadweight loss.”[6]

There is another kind of externality: positional externalities. “A positional externality occurs when new purchases alter the relevant context within which an existing positional good is evaluated.”[7] An example of this could be said to be when a job candidate starts to wear really expensive suits. The side effect of this is that other job candidates don’t make as good an impression upon the interviewer. From the perspective of the other candidates, it would be most beneficial to go out and purchase expensive suits, so as to make a favorable impression on the interviewers. “But this outcome may be inefficient, since when all spend more, each candidate’s probability of success remains unchanged.”[8] The last kind of externality of this similar vein (positive, negative, and positional) is a network externality. This is also referred to as a network effect and is most often seen in technology. Think about your cell phone. The value of your cell phone is somewhat dependent upon the number of other people [network] who also have cell phones. There is a further way to distinguish between different kinds of externalities: ‘internal’ and ‘external’ externalities.[9] Internal externalities are those externalities that are external to the contractual relationship, but internal to those parties within the contract. External externalities are those externalities that are external to both the contractual relationship and the parties within the contract.

At this point, we have talked about the various kinds of externalities (positive, negative, positional, network, internal, and external). To solidify the understanding of externalities, I’d like to provide an example of the creation of externalities by externalities:[10]

Jacksonville, Florida requires apartment complexes to provide 1.75 parking spaces per one-bedroom apartment – despite the fact that 16% of Jacksonville’s renter households even own one [sic] car . . . Most American cities require office buildings to provide four parking spaces per 1000 square feet of office space. Because four parking spaces consume about 1200 square feet of space, this means that a commercial landlord must allocate the majority of his land to parking.

Minimum parking requirements reduce population and job density, because land that is used for parking cannot be used for housing or commerce. Residents of low-density areas tend to be highly dependent on automobiles for most daily tasks, because they are less likely to live within walking distance of public transit and other amenities.

Minimum parking requirements indirectly discourage walking, by encouraging landowners to surround their building with parking. Where shops and offices are surrounded by a sea of parking, they are unpleasant places for pedestrians, because pedestrians must waste time walking through parking lots and risk their lives dodging automobiles . . .

By increasing the number of parking lots, minimum parking requirements may increase pollution from stormwater runoff. Rainstorms cause stormwater to fall on parking lots, collect metal, oil and other pollutants lying on the ground, and then run off into nearby waters, thus making those waters dirtier and more dangerous.

As one can see, this never-ending string of externalities seems to keep going. All of this stems from the initial action of a policy seemingly trying to do well by its citizens. Now that we have talked about some of the different kinds of externalities and explored a concrete example of how externalities can quickly multiply, let’s look at some of the proposed solutions to these externalities. But just before we move into the description of some of the solutions to externalities, I thought it a good place to add a note from Coase, who is often part of the conversation of externalities: “The traditional approach [to externalities] has tended to obscure the nature of the choice that has to be made. The question is commonly thought of as one in which A inflicts harm on B and what has to be decided is; how should we restrain A? But this is wrong . . . The real question that has to be decided is: should A be allowed to harm B or should B be allowed to harm A?”[11] Coase is absolutely right in his critique of the framing of the question. Even in today’s discussion (Coase wrote this in the 1960s) about externalities, rarely is the question framed in the way that Coase has suggested.

~

Note: when we next pick-up this series, we’ll look at some solutions to externalities.


[1] Pigou, A. C. (1920). The economics of welfare. London: Macmillan and Co.

[2] Ibid.

[4] Bento, A., Kaffine, D., Roth, K., & Zaragoza, M. (2011). The unintended consequences of regulation in the presence of competing externalities: Evidence from the transportation sector. Yale Center for Business and the Environment.

[5] Simpson, B. P. (2007). An economic, political, and philosophical analysis of externalities. Reason Papers, 29(1), 123-140.

[6] Gruber, J. (2010). Public finance and public policy (3rd ed.). New York: Worth Publishers.

[7] Frank, R. H. (2003). Are positional externalities different from other externalities? The Brookings Institution.

[8] Ibid.

[9] Buchanan, J. B., & Vanberg, V. J. (1988). The politicization of market failure, Public Choice Society Meetings.

[10] Lewyn, M. (2010). What would Coase do? (About parking regulation). Fordham Environmental Law Review, 22(1), 89-118.

[11] Coase, R. H. (1960). The problem of social cost. The Journal of Law and Economics, 3(1), 1-44.

Maybe We Don’t Need to Workout At All

About a week ago, I wrote a post about the perfect exercise routine. My point was that there is no universal perfect exercise routine because there are so many different people on the planet, but that there may be some universal principles that could be applicable across peoples. It turns out that one of those “perfect” exercise routines might just be not exercising at all. Curious?

I recently came across a post from Harley Pasternak in, of all places, People. The post has a great opening illustrating just how sedentary our lives have become — amounting to the fact that we spend 45 minutes at the gym and the other 23 hours and 15 minutes sitting at our desks or sleeping. I really encourage you to read it because it paints quite a picture.

After I read it, I was reminded of the post I wrote a week ago that I referenced above (perfect routine), but also of the post I wrote about the obesity crisis. In that post, I focused on the neuromarketing aspect. That is, the idea that consumers may not have an *unbiased* choice to make when they reach for that bag of potato chips or for a second piece of chocolate cake. My main point in that post was that neuromarketing is having a large impact on the choices that are leading to the obesity epidemic. Pasternak argues that are innovation is also leading to obesity. Because we’ve worked so hard to make it easier to do things, we’ve cut out a lot of the time we spend getting from A to B or completing task A and completing task B:

They take leisurely daily walks, do their errands on foot, and walk, bicycle, or take public transportation to work. To make my case, consider this: the average European walks 237 miles every year and cycles 116 miles. The average American walks just 87 miles and cycles just 24 miles. No wonder Europeans are healthier – they’re three times as active!

It never occurred to me that public transportation would be linked to a country’s health, but I guess that just goes to show you the power of externalities and unintended consequences. This revelation makes me think that it’s even more important for the US to get on with advancing the infrastructure of the public transportation in the country.

~

This brief bit about public transportation increasing a country’s health does remind me of something I read recently about the amount of time that patrons spend walking to and from public transportation. Something to the effect of it doubling the number of steps they take in a day. I couldn’t find that particular article, but I was able to find something from the CDC (Center for Disease Control and Prevention) that supports that finding:

Walking to and from public transportation can help physically inactive populations, especially low-income and minority groups, attain the recommended level of daily physical activity. Increased access to public transit may help promote and maintain active lifestyles.

If You’re a Senior Executive and You’re Not on Twitter, You’re Doing It Wrong

I’ve seen a number of articles in the past 12 months (here’s one, and another, and another still) that discuss CEO’s and social media. Of the three I pointed to in the previous sentence, two are for and one is against. On the whole, I think the majority of what I’ve read in the popular press is that CEOs should be on social media. There are a number of good reasons (know your market, humanizing your brand, appearance of accessibility, etc.), but I learned of an externality last week.

When I was at the Appreciative Inquiry (AI) event, I was with a number of staff at George Mason University. Our aim at this event was to share positive things about Mason, which is one of the purposes of AI. During this sharing, it was possible to overhear conversations of other groups around the room (especially when there was a pause/lull in my group’s discussion). In a couple of these silences, I overheard groups talking about the President of George Mason University — Angel Cabrera — who is known for, among other things, being on Twitter.

In fact, a couple of these people who were talking about it, mentioned that this was the reason that they joined Twitter — just so that they could follow the President! And this isn’t the only time that I’ve heard of faculty/staff joining Twitter just to see what the President was saying. While these pockets of people saying this may not be a representative sample, it certainly seems like it might be the beginning of a trend, or at least something that’s worth noticing.

In a couple of the articles I mentioned in the opening paragraph, the authors specifically point to social media being a way for CEOs to connect with their employees. After hearing about these folks at Mason who joined Twitter just for President Cabrera, I can see other benefits, too. Once these folks are on Twitter, they may be more likely to follow other conversations and continue their learning/development. But more than that — for the company/brand/organization/school, these employees will be showing potential customers/employees another window into the workings of the company/organization. That may have been a confusing sentence. By being on Twitter, these employees could offer a window of what it’s like on the inside.

So, while there are obvious benefits of CEOs partaking in social media, I think it’s important to point out some of the externalities that result from CEOs being on Twitter  — namely — their employees joining Twitter. As you’ll notice in the title of this post, I would argue that senior executives should join Twitter, so not just the CEO (or President, in the case of George Mason University). In fact, at George Mason University, you’ll find that President Cabrera isn’t the only senior executive on Twitter. Mason’s Provost (Peter Stearns) is on Twitter, the Dean of the College of Humanities and Social Sciences (Jack Senser) is on Twitter, the Dean of the College of Education and Human Development is on Twitter (Mark Ginsberg), etc.

So — if you’re a senior executive, make your way to social media — now! And for all the employees out there, head on over to social media to check and see if your company’s/organization’s senior executives are on Twitter… you never know.

Could “General Managers” Have Stopped JP Morgan’s Loss?

Jamie Dimon (CEO of ) has been in the news for the last couple of weeks and I’m sure he’d much rather not have been (at least not in the news for the reasons he and his firm are in the news). The :

JPMorgan Chase says losses from a massive trading blunder in the bank’s London have reached $5.8 billion and could go as high as $7 billion.

That’s a . I think that this occurrence (and probably the kerfuffle with ) is tied to something I read in the Harvard Business Review last week. It was an article by in that talked about the :

At one time general managers were at the center of the action. Two decades ago, organizations were designed around stand-alone business units, so all managers had to understand finance, technology, manufacturing, sales, marketing, strategy, human resources, and more. . . However starting in the 1980’s, many companies evolved to “functional” structures to cut costs and reduce duplication. The transition consolidated those support functions which were common among the BU’s [business units]. GE, for example, went from hundreds of discrete BU’s to a dozen large businesses with each one having strong, centralized finance, HR, engineering, marketing, and manufacturing units. . . In fact, for many chief executives I’ve recently worked with, the first real GM job that they had was CEO!

While I can see how this trend has helped to save companies lots of money, I find it a tad worrisome. I’ve about having an eye towards the bigger picture and I wonder if by consolidating these business units that this eye towards the bigger picture has been shielded. That is, not having a general manager there to act as “oversight” may have made it easier to shirk long-term goals and focus on short-term profits.

Tying this back into the JP Morgan Chase loss: I wonder if the firm had a number of general managers (at more levels than the ) would this have happened? Would a general manager responsible for the trader in question have allowed this kind of trade to happen? The same question could be asked about Barclay’s and LIBOR. Would a general manager have created an environment where it was okay to behave so unethically? It’s nearly impossible to answer these questions either way. Nonetheless, it is worth considering the trend of the organizational structure of firms. Is it really in the best interest of the firm to eliminate all general managers? Are the short-term gains worth sacrificing the long-term sustainability?

When the Wisdom of the Crowd Fails

A couple of weeks ago the  (SCOTUS) ruled that the (otherwise referred to as ) was . This ruling did not come without controversy because, as with most cases brought before the Supreme Court, there were people who disagreed with the ruling.

More to my point though, is that there was controversy because of the lack of agreement amongst the news agencies as to what the ruling was in the first few minutes that it was released. If you like political humor/satire, then you’ll definitely want to check out about the mixup. Interestingly, one of the best on the morning that the decision was released comes from the same website that is being of the decision.

As you’ll have seen if you watched the coverage, read about it, or clicked through to the clip from , CNN was the first agency to report on the decision — but — their reporting was wrong. Immediately after CNN reported the (wrong) decision, those with access to technology began perpetuating the wrong news to their social networks. Shortly after CNN incorrectly reported the news, SCOTUSblog put forth their interpretation and the subsequent major news agencies fell in line reporting the right decision. Even after this happened, CNN and FOX News continued to report the news incorrectly.

This situation brings to light what I see as a potentially major of our ability to connect with hundreds of millions of people in an instant (read: ). As soon as the reports from CNN and FOXNews came out, everyone began telling everyone else the wrong news. This spread quickly. When the right information was thrown into the mix, it became hard for people to know who was right. Were CNN and FOX News right because they had it first? Were SCOTUSblog and other news agencies right because they took the time to read more than the ?

Regardless of who’s right and wrong in this situation, it left people confused and unsure of whom to trust. Different news agencies were telling them different things (about the facts). Now, this happens on a , but that doesn’t make it any less frustrating.

~

I’m beginning to wonder about the and it would appear that I’m not the only one. I came across an interesting article this weekend from called, “.” There were some interesting points made by Leonhardt, particularly as they relate to how some folks have begun to trust the “wisdom of crowds” as showcased by websites like  (an online trading exchange website where people can bet on events in a similar fashion to how people can buy/sell stocks).

Some folks think that the internet can be viewed in the same way (wisdom of the crowd). I’m not sure how I feel about this, especially when a well-respected news agency like CNN that’s been operational for over 30 years can make a mistake like this and set the internet ablaze. I like the last paragraph from Leonhardt:

After several years in which the market was often celebrated as a crystal ball, the Supreme Court ruling was a useful corrective. The prediction-market revolution, like so many others, initially promised more than it could deliver. But it’s not as if the old order was working particularly well.