Nozick on externalities

Recall from our previous post that Nozick has asked us to keep an open and uncontaminated mind in the opening subsection of Chapter 9. He will need us to keep an open mind because he is going to present an unorthodox thought experiment in the next subsection of this chapter (pp. 280-292), a thought experiment motivated by a special type of “market failure”: the problem of positive externalities.

So, what is an “externality”? In a word (or two words), this is just a fancy term for “side effects.” In particular, a positive or beneficial externality (the subject of Chapter 9 of ASU) refers to the positive side effects that an activity or transaction confers on those parties who are not directly involved in the activity or transaction. Such a side effect can arise either on the production side or on the consumption side. By way of example, a positive production externality includes a beekeeper who keeps bees for their honey. A positive side effect of beekeeping is the pollination of surrounding crops by the bees. (In fact, the value generated by the pollination may be more important than the value of the harvested honey.) Similarly, an example of a positive consumption externality includes an individual who receives a vaccination for a communicable disease, for he not only decreases the likelihood of his own infection, but also decreases the likelihood of others becoming infected through contact with him.

Most laws, regulations, and restrictions on individual liberty are designed to deal with the problem of negative externalities or harmful side effects. Nozick, however, poses the opposite question, a question that is rarely asked (p. 280, emphasis in original): “What, though, would the full internalization of all positive externalities involve?” In other words, doesn’t justice require, in Nozick’s words, full compensation for benefits rendered and full payback for benefits received? That is, when a person generates positive benefits to third parties, shouldn’t that person receive compensation for the value of those positive benefits? And by the same token, when a person receives positive benefits from third parties, shouldn’t he be required to compensate those parties for the benefits received from them? Nozick will attempt to operationalize these positive externality principles of full payback for benefits rendered and full payback for benefits received in the next few pages via an ingenious thought experiment. We will describe Nozick’s mind-blowing thought experiment in our next post.

Image result for market failures

Source: University of Melbourne (Australia)

About F. E. Guerra-Pujol

When I’m not blogging, I am a business law professor at the University of Central Florida.
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2 Responses to Nozick on externalities

  1. Kathy H says:

    Loved your bee example. Not that it has anything to do with the discussion. I have a relative who is a bee farmer who transports the bees to different states to pollinate crops depending on the time of year and state. Crop pollination far outweighs the production of honey!

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