Textbook Coverage of Inframarginal Externalities
By Joshua Hall
Externalities are an important concept in economics as they are one of the many potential issues with markets. Negative externalities, for example, occur when costs are imposed on others outside the market system. Air pollution is but one example. The presence of externalities is often used as an argument for government intervention to correct these uncompensated effects on third parties. In 1962, James Buchanan and William Stubblebine published an article in the journal Economica that highlighted that some externalities are inframarginal. Externalities that are inframarginal do not distort allocation decisions at the current market equilibrium and thus there is not any distortion for government to correct. Despite the Buchanan and Stubblebine article having over one thousand citations in Google Scholar, most public economics textbooks do not mention the topic. The one exception seems to be Randall Holcombe’s Public Sector Economics text. Why this important point about the divergence between what is good for individuals and what is good for society has not been incorporated into textbooks would be an interesting exercise given the papers widespread use by scholars. The format could be similar to Johansson “Economics without Entrepreneurship or Institutions” (Econ Journal Watch, 2004).