Externalities and You: Why Do Cities Exist? Part I of II

[The_Q]

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.

(PART II comes later)

Q

EDIT: Next part of the post is here!
http://www.flashflashrevolution.com/...wtopic&t=23373