Friday, October 7, 2011

The Enigma of Costs: a note on "Externality" and "Market Failure"

Francis M. Bator, "The Anatomy of Market Failure" (1958): "I think it more natural and useful to broaden rather than restrict, to let 'externality' denote any situation where some Paretian costs and benefits remain external to decentralized cost-revenue calculations in terms of prices." In a footnote, he continues, "Recall that it is the existence of such 'externality,' of residue, at the bliss-point, of Pigouvian 'uncompensated services' and 'incidental uncharged disservices' that defines market failure."

"Perhaps the most important instance [of Type (1), Ownership Externalities] is the training of nonslave labor to skills..." Actually, training would be a relatively minor component of working conditions that enhance labor force capacity compared to wages, hours and unemployment, which would make up a much larger share of potential cost-shifting externalities.

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