The citizen and the State by George J. Stigler

Author:George J. Stigler
Language: eng
Format: epub
Tags: Economic policy -- Addresses, essays, lectures
Publisher: University of Chicago Press; First Edition . edition
Published: 1975-09-19T16:00:00+00:00

Traditional Theory of Economic Functions of the State 105

efficiency unless all the results, good and bad, of an investment (that is, its marginal social product)accrue to the person making the investment.

The first systematic account of externalities was undertaken in 1912 by Professor A. C. Pigou. The Pigovian analysis has since been refined to levels of purity exceeding those once proclaimed for Ivory soap, but his immensely influential exposition has not been improved upon with respect to the issues I wish to discuss. But first let us briefly review his treatment.

Pigou divided into three classes the individuals who might be affected by an economic decision. The first class was the owners of durable productive instruments such as land. A tenant would not make an improvement which would last beyond his lease because the landlord, not the tenant, would benefit from its usefulness after the lease expired. I shall ignore this class of discrepancies between private (tenant) and social (tenant plus landlord) products after one remark: if you ask why the lease is not written by the transacting parties to overcome this problem, properly compensating the tenant for the improvement, I give two answers. The first is, of course they will, unless it isn't worth the trouble. The second is, Queen Victoria's Parliament was much exercised with this perhaps nonexistent problem for decades and passed laws seeking to ameliorate the tenant's situation.

Pigou's third class of individuals—I postpone for a moment the second class—affected by decisions were other persons in the same industry, fellow producers (or consumers). A simple example will illustrate the problem here. Suppose I import skilled workers and some subsequently leave me to work for a rival, the next time I will not import so many as would be desirable and even profitable if my rival would bear his share of their transportation costs. A more common example arises when my purchases of some input allow the producer to lower its price to my rivals as well as myself—I take no account of the benefit to them. Industries whose costs fall when their output expands are generally too small under competition, and industries whose costs rise with output are sometimes too large (the two kinds of industry are not strictly symmetrical for reasons we need not discuss).

We are left with Pigou's second class—those instances in which

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