How understanding externalities is critical for both economics and public policy, but also how the claim of harm is often without merit but used as an argument against change, to protect one’s self-interest, or otherwise for political purposes.
This discussion is a deeper dive into one of the market failures discussed in the first podcast, Laissez Frog, that of externalities. An externality is an effect (positive or negative) on an individual or entity that is not a party to a transaction between others. Externalities are everywhere, but we just tend to ignore the positive ones as well as minor negative ones. Significant major negative externalities can be ones on a local level or a national level.
Generally, the existence of an externality is a good justification for government intervention, even if it comes to otherwise restricting rights or economic freedom. We can’t yell fire in a crowded movie house, despite our free speech rights. All communities require residential homes to have functional bathrooms so as to prevent health and safety hazards to neighbors.
However, the excuse of externalities can also be either intentionally or incorrectly invoked even when the person or entity claiming harm really hasn’t been. This often happens when an action by others may offend our sensibilities, religious beliefs, or just our general preferences. This false, or tautological externality, is something to be on guard against, both by the public and policy makers.