Thursday, December 13, 2007

Pecuniary Externalities


Class 22 - definition of externality says that it helps or harms a third party through mechanisms other than price. Definition of percuniary externality is that it affects third party by changing prices. So is a percuniary externality an externality, since it affects through the price mechanism?


Let's call it a pseudo-externality. :) From wikipedia:

A pecuniary externality is an externality which operates through prices rather than through real resource effects. For example, an influx of city-dwellers buying second homes in a rural area can drive up house prices, making it difficult for young people in the area to get onto the property ladder.

This is in contrast with technical or real externalities which have a direct resource effect on a third party. For example, pollution from a factory directly harms the environment.

Both pecuniary and real externalities can be either positive or negative.

I would argue that pecuniary externalities don't fit the technical definition of an externality because they affect people in the market in question rather than third parties.

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