Society and You!:Externalities at Work

[The_Q]

There is a simplified version of this post at the very end.


Ah, the far depths of social science: Economics. Probably one of the least respected fields, too. What's to say for economics beyond it's logical reach, measuring everything it can possibly measure and analyzing the data? Well, there is the actual social science part of it; the study of human behavior. Then there is also the grand scheme part of it. To start understanding the grand scheme you must understand the simple things. To start off we have incentives. After that we go to the more comples: externalities.

Incentives: Driving and Your Health

Economics boils down to two things, Incentives Matter and "TANSTAAFL (There Ain't No Such Thing As A Free Lunch)." If you can't understand that you need to stop reading right now. I told you to stop reading, dammit. You stopped? Ok. Incentives: the driving force of any decision you'll ever make. Admit it, there has never been a single decision you've ever made that hasn't been affected by incentive, whether slanted or equal. The amazing thing is, incentive delves so deeply into our decisions you'd never realize it until you look at it closely.

There's a common model that's used by my dad and I when we explain this at dinner parties. It's simple enough for a six year old to understand. Seatbelts kill. Let's admit it, most people wear seatbelts and when they do they feel more secure (no pun intended...kinda) about their driving. Because they know they're safer they'll drive more recklessly. A soccer mom in a 5 star safety rated van is more likely to succumb to road rage and drive at 80 in a 65 zone (Assuming you don't live in Texas. It's 80 everywhere here) than a college kid in a 1968 Volkswagon Deathtrap *ahem* Bug. True or false: If there was a spike on your steering column that extended to your chest and you had no restraints to hold you away from the said spike, you would drive more carefully. Because I like living, I choose to drive carefully. Incentives matter. End of story.

Why in all hell does this matter to the rest of this? Just to cover the reason why the rest of my theory works. Because incentives matter people will do their best to make the best of any opprotunity that has positive incentives involved. With this I move to the wonderful world of externalities.

Externalities: Why I Buy Girl Scout Cookies

There are always two parties in a transaction; the person selling the product and the person buying the product. Out of a stroke of genius, one day someone realized "Hey, other people are affected by my personal life too!" On that fateful day externalities were born.

An externality occurs when a third party is affected by the transaction of two other parties. One example of an externality is buying gasoline. If I buy gas I get gas and the gas station gets money. Both sides are happy (another win for Free Trade!). You're not happy, though. You have to breathe in the extra smog my car creates because I bought gasoline. So does everyone around my car. Let's say I buy a new car, a hybrid, and I go cruising around. I get a car, the dealer gets money, we're both happy (Free Trade seems to be on a roll). Everyone is happier because there is less smog, too. Everyone except Fred down the street. I ran him over. His leg is busted up. Poor Fred. Fred is an example of an externality. Because I bought that car I went cruising and hit Fred. Because I bought that extra gasoline the people around my car breathe more smog.

Don't hate externalities just yet, though. There are also good externalities. Let's say I take up gardening. I really enjoy it so I spend every Saturday gardening. In this case I've got an extra-market situation. The opprotunity cost of me gardening is relative to how much I enjoy gardening so a definate number is not possible to acheive. Anyway, the externality here is my neighbors. They'll get to look at the pretty plants I put up. We could also say that a Girl Scout stops by my house and tries to sell me cookies. Of course I'll buy 'em, but not because I love mint chocolate chip (which I do. Only I have to have them dipped in sweet and sour sauce) but because I get the externalities of the whole transaction: sisters and mothers who look at my name on the list and say "What a nice boy. We owe him a favor." Welcome to the informal market.

Externalities: Shipping Stuff and Picking Fleas

Anyone would have to agree, living in a city is very convenientto everyday life and absolutely wonderful for conducting business, whether it personal or not. Why is it that cities have developed, though? Why is it that they have become so effective at making business and social life so easy?

Why, externalities, of course! Allow me to explain. Somehow it became a trait in our genes or just our behavioral patterns for humans to congregate and socialize. We meet and we tend to enjoy meeting. Social interaction is pleasurable to us (though I don't know why. I just know it is). All I can draw from this is that human nature is economical. The primative ape anticedents benefitted off of the externalities of other apes. One of the most obvious externalities available is that apes need to eat. They spend time (opprotunity cost) finding insects to eat in logs and under rocks to eat (there's your benefit). Unfortunately for apes, the insects have a tendency to climb onto their fur and live on them at times. From this, apes figured that they could keep each other clean and find chow at the same time. The habit of grooming was formed. In order to groom, though, many apes needed to aglomerate. Primative society is born.

As if that wasn't cool enough I'll have to continue. Why do modern cities exist? We were already having a ball picking the bugs off of each other, why did we change? It suited us to. See Jared Diamond's book Guns, Germs, and Steel: The Fates of Human Societies to get the filler. I'm far too lazy to write 500 pages of human history for a simple econ post.

Why do cities exist? Externalities! In most cities there was a natural resource that was beneficial to a certain person or group of people. In silicon valley it was silicon deposits. When that person or people become more successful more people follow to internalize the externalities of both the area and the nearby predecesors. After the first few companies sprang up in Silicon Valley more came to capitalize on the opprotunity of getting cheaper silicon and the added benefit of the other companies to get resources from. The process continues and continues until massive cities are born.

How does this apply to an area that is not business oriented? Let's say that there's a family that settles in a fertile area near Oregon. The land is virgin at the time they get there and a small river flows nearby. These are prime conditions to excel at raising children and starting a community. When more families arrive and the children grow older they begin to settle there too. Now that there are multiple families they don't all have to rely on themselves. One large family might be able to plant more than another and they begin to grow in the field of agriculture (no pun intended). The family that loses their hold on agriculture might switch to blacksmithing as a specialization. In exchange for food, the blacksmith would trade manufactured goods to the farmer.

Specialization has occured and the beginnings of free trade are peeking through into this new community. In time, almost everyone there would specialize in something. Trade back and forth would exist all over the place. The community would continue to grow, assuming nothing disasterous would occur, until they become a city.

And there you have it, my view on cities.

The Really Short Version of What You Just Read

People live together in order too mooch off of each other as much as possible.

[FFR4EVA_00]

Originally Posted by The_Q

People live together in order to mooch off of each other as much as possible.

That sounds about right.

[evilbutterfly]

So?

And economics can't explain everything, don't kid yourself. It's annoying to see you going around proclaiming that.

[Chrissi]

I also am not a pussy.

[Chromer]

Are you one? No.

Do you have one? Obviously yes.

Besides, that was standard information known since the beginning. WHy do you think high school students bunk up with other friends in apartments and houses after graduation? Because the cost to live alone is too great to be handled by one person and another person is needed to share the load.

[The_Q]

Originally Posted by EB

And economics can't explain everything, don't kid yourself. It's annoying to see you going around proclaiming that.

Economics is the physics of social sciences. It quantifies, it analyzes and objectively reasons better than any other field in the social sciences. It is the most trustworthy field in the social sciences.

No, you can't know everything with economics. You can learn more about people from it than from philosophy and history combined.

Originally Posted by Chromer

Besides, that was standard information known since the beginning. WHy do you think high school students bunk up with other friends in apartments and houses after graduation? Because the cost to live alone is too great to be handled by one person and another person is needed to share the load.

That's not an example of an externality. That's a joint-stock venture. The externality in your model is that the roommates were friends instead of strangers, that way the tenentsdon't have to deal with the bad-habits they're not used to, only the externalities they've learned to handle.

Q

[Chrissi]

Originally Posted by Chromer

Are you one? No.

Do you have one? Obviously yes.

Besides, that was standard information known since the beginning. WHy do you think high school students bunk up with other friends in apartments and houses after graduation? Because the cost to live alone is too great to be handled by one person and another person is needed to share the load.

What what... no....

I was quoting Samir from Office Space...

[Chromer]

I was joking along Chrissi. =P

Also, it's not uncommon for people to bunk up with complete strangers in order to survive. Have you checked out the Classifieds in your local newspaper recently? I promise you it will have people wanting to roomate with complete strangers in order to live comfortably.

[The_Q]

Originally Posted by Chromer

Also, it's not uncommon for people to bunk up with complete strangers in order to survive. Have you checked out the Classifieds in your local newspaper recently? I promise you it will have people wanting to roomate with complete strangers in order to live comfortably.

And to meet new people, but the transaction cost is higher in these situations. Roommate interviews do happen. The point being to minimize negative externalities and maximize positive ones.

Q