Tuesday, March 11, 2008

Asymmetry Between Positive and Negative Externalities

I want to discuss an asymmetry between positive and negative externalities which I think might be important when thinking about how to use the enforcement of justice to determine which actions should be permitted. Sometimes, we let individuals impose costs on others, provided compensation is payed, because their actions produce net social benefits. As Nozick writes in Anarchy, State, and Utopia, "The reason one sometimes would wish to allow boundary crossings with compensation...is presumably the great benefits of the act; it is worthwhile, ought to be done, and can pay its way." In its Climate Change 1995: Economic and Social Dimensions of Climate Change, the IPCC elaborates on this idea, explaining that if an action "...yields positive net benefits, then those made better off could compensate those made worse off with something extra left over. As long as the compensation is paid, the result is an unambiguous gain in welfare, without the necessity of weighing effects on different individuals."

It's worth pointing out that this is not entirely uncontroversial. Nozick writes, "...a system permitting boundary crossing, provided compensation is paid, embodies the use of persons as means; knowing they are being so used, and that their plans and expectations are liable to being thwarted arbitrarily, is a cost to people..." For this reason, Nozick suggests that "Any border-crossing act which permissibly may be done provided compensation is paid afterwards will be one to which prior consent is impossible or very costly to negotiate...But not vice versa." For our purposes, however, we will ignore this problem, and limit our discussion to only those compensated boundary crossings which are not problematic in this way.

So what's the asymmetry? It should be clear that the preceding discussion was directed only at negative externalities. That is, cases where I do something that results in costs being imposed on other people, where I haven't obtained their consent in advance. An entirely different framework applies to positive externalities: cases where, without being asked or promised anything, I do something which results in positive outcomes for other people.

Where we think of negative externalities as demanding of compensation, we generally don't think that we are entitled to payment for the positive outcomes we have generated for others as a result of positive externalities. So when we impose costs without consent, we owe compensation, but when we "impose" benefits without "consent," we are not entitled to payment. This is the asymmetry.

But on the surface, this doesn't seem to be problematic. If I unilaterally decided to do something which had positive consequences for you, then it doesn't seem like you suddenly take an obligation to compensate me for my trouble; I'm the one who decided to do the thing that I did, and presumably I would have decided to do it, even if you weren't around. On the other hand, if I unilaterally do something that has negative consequences for you, then I do take on an obligation to compensate you; you didn't decide for me to do what I did, and presumably you wouldn't have in the absence of compensation. The asymmetry seems simply to reflect the idea that we are not entitled to make people worse off without their consent in the execution of our plans.

However, there are two implications of this asymmetry which might be worth noting. The first can be shown by the following illustration. Imagine that on Bill's roof, there is a machine which produces laser light shows on the bottoms of clouds at night. Bill lives in a large town, but most of the people don't really care one way or the other about the laser light shows; they're typically asleep when they're going on. A few people do enjoy the shows, but not to a huge degree. If put on the spot, they would probably pay a small sum to allow them to continue, but tracking these people down and collecting money from them would be relatively difficult, and they probably wouldn't respond to mass mailers, newspaper ads, or other public fund raising efforts.

On the other hand, Bill's laser machine generates a certain kind of green smoke which is not a health hazard in any way, but which tends to drift into Terry's yard and stain his house a particularly ugly color. The stain can be cleaned, but doing so is somewhat costly, and as Terry does not typically watch the laser light show, he is rightly irritated by Bill's behavior. Being a reasonable person, Terry takes Bill to court to demand that he either pay for his house to be cleaned periodically, or else stop putting on the show.

Now, perhaps the people who enjoy the show would be collectively willing to pay enough to completely cover the costs of cleaning Terry's house. But without their contributions, Bill would not be willing to pay this amount. What would end up happening is that Bill would put a stop to the show, and though they'd be disappointed, the people who enjoyed the show would likely not be motivated enough to get together and pay the amount necessary to get it going again.

Let's imagine that Bill knew who these people were. Even though he knows that they were benefiting from his show, the burden is on him to convince them to voluntarily contribute to getting the show going again. The effort necessary might be prohibitive. On the other hand, this burden does not seem to be on Terry; Bill has the obligation to compensate Terry for whatever costs are done to him. This illustration shows that if we say that one is obliged to compensate for negative external effects, but one is not entitled to payment for positive external effects, then the costs of organizing people would result in the cessation of an entire class of net beneficial effects.

Confronted with this possibility, we might shrug our shoulders and say, "That's a shame, but we're not particularly concerned." We might point to the fact that our alternatives are somewhat limited. We can try to calculate net benefits and then either fine or tax alleged beneficiaries in order to pay compensation to harmed parties, or else we can simply allow allegedly "net beneficial" acts to be undertaken without any compensation for the victims.

Both of these alternatives seem objectionable. As we said before, my decision to do something which benefits you doesn't seem to generate an obligation in you to pay me. And as Nozick writes, "Using...[someone] for the benefit of others, uses him and benefits the others. Nothing more. What happens is something is done to him for the sake of others. Talk of an overall social good covers this up...To use a person in this way does not sufficiently respect and take account of the fact that he is a separate person, that his is the only life he has. He does not get some overbalancing good for his sacrifice, and no one is entitled to force this upon him..."

We find ourselves in a situation where we are forced to choose the best of a set of evils. Nozick writes, "Because great transaction costs may make the fairest alternative impracticable, one may search for other alternatives...These alternatives will involve constant minor unfairness and classes of major ones." As far as "unfairnesses" go, the ones we face here seem rather minor.

[It has come to my attention that I'm an idiot and apparently can't tell the difference between the word "defendant" and "plaintiff." I apologize to anyone who may have been confused by the rest of this post.]

But this leads to the second implication of the asymmetry between positive and negative externalities, which I find significantly more troubling. This problem arises from an interesting fact about the way that rights are enforced. In his essay, "Science, Public Policy, and Global Warming: Rethinking the Market Liberal Position," Edwin Dolan writes, "Certain defenses are allowed against a charge of assault or trespass. Consent of the victim is one. Also, if no causal relationship can be shown between the action of the defendant and the offense to the victim, the tort is not proved. However, certain attempted defenses are not recognized as legally valid..." Of these, one is "A showing that the defendant gained benefits from the tort, the value of which exceeds the costs to the victim."

This means that an individual can perform an action which is beneficial to everyone, and still be required to compensate people for any individual negative effects resulting from the action. It is important to note that the issue is not whether it could be proven that the action produced beneficial consequences for the victim that were more significant than the costs imposed. Rather, even if this were proven, the boundary-crosser would still be required to pay the victim.

I'm struggling to figure out what I think about this. I need some time to think; any thoughts or opinions would be very welcome.


Anonymous said...

Just a few thoughts.

I'd like to point out that if you unilaterally do something that has an effect on me, you do not get the right to compensation, neither you take on an obligation to compensate me.

If I decide that effects of your actions on me are negative enough to warrant complaint and I do complain against your actions (confront you or take you to court) and I am successfull (you or the judge agree with my view), only then are you obligated to compensate me. After all, Mary, the other neighbour might even enjoy the new color of her house :-)

The same holds true for positive effect. If I decide the effects are positive enough to warrant payment to you, then I will track you down and pay you (maybe Mary really enjoys the new color).

There of course is an asymmetry. Not because of the incomplete or wrong rules, but because of human nature - we tend to value less the things that are free and value more the things that we call our own.

Danny Shahar said...

Well hold on, are you saying that the only reason I have to compensate you when you take me to court is that the court says so, and I am obligated to do what the court says? I would think it better to say that I was obliged all along, and the court simply recognized, or upheld that obligation.

Anonymous said...

I'm not saying that. I'm saying that you have no obligation before we settle our dispute. I'm not talking about the means of settling (neither good nor bad). And mutual agreements, mediators and courts are just means to end our dispute.

Let me try breaking it down (on negative effects):
1. you take actions
2. I decide for myself if your actions have an effect on me (nobody else can).
3. I decide for myself if this effect (on me) is a negative one (nobody else can).
4. Because of previous (2 and 3) decisions, I decide to confront you (nobody else can).
5. You decide that you don't believe me or think I'm overreacting or you are certain your actions have no effect on anybody (let alone negative one).
6. Now we have a dispute.

To this point, you are not obligated to compensate me. We are just a couple of people in dispute over the color of my house.

7. Now we settle it. And by settling it (agreement, courts...), the losing party agrees or is forced into by courts, to take on an obligation to compensate the winning party.

The force involved in settling (courts) does not change the fact that the obligation arises only after/with the settlement of dispute.

To put it bluntly; you cannot be obligated before we settle, because only I can characterize the effects of your actions on me either as negative or as positive ones.

Danny Shahar said...

The point that's confusing me is that you sound like you're saying that the court's reason for awarding you damages would be that you decided that my actions had a negative effect on you. It seems to me that the reason that the court would decide to award you damages would not be because you felt worse off as a result of my actions, but rather because you had a right not to be made worse off in some way, and I infringed on that right. By doing so, I acquired an obligation to compensate you. In other words, it seems to me that the question the court would be answering is not whether your hurt feelings had been hurt, but rather whether your rights had been infringed upon.

But your paint example brings up a good point in that not all negative externalities generate an obligation to compensate. It seems like the focus is not in fact on making people worse off, but rather on infringing upon their rights. I'll have to think about this some more, but it seems like a promising idea.

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