THE MYTH OF SOCIAL COST.pdf - Institute of Economic Affairs

SOCIAL COST
and those not. Whether the effects command a positive value
(such as the value of shoes) or a negative value (such as
pollution), the Pareto condition is satisfied whenever the cost
and the return balance at the margin. The presence of uncontracted
effects such as pollution may result in an imbalance,
but this is viewed simply as a situation where the marginal cost
of an action deviates from its marginal returns, without regard to
any divergence between private and social costs. In other words,
however varied the effects of an action may be, their values
may be similarly aggregated, and the return and cost of the
action can then be balanced in a way similar to that where
uncontracted effects are absent.
Let us turn to some examples other than the polluting
factory. It is well known that the uncontracted effects of an
action may be beneficial, as in the classic example of apple
farming and beekeeping. 1 An apple orchard produces not only
apples but also nectar, and a neighbouring beekeeper is said to
collect nectar from the apple blossoms free of charge. In maximising
his private gain, it is argued, the orchard owner will not
take into account the valuable nectar his apple blossoms bestow
upon the beekeeper. Hence apples will be 'under-produced',
and to attain maximum social gain a 'corrective' subsidy must
be granted to apple farming or a compulsory compensation paid
by the beekeeper to the orchard owner. (We return to this
example in a different context in Section VI.)
Uncontracted effects and unjustified government action:
the case of the piano player
Less publicised, but far more important, is another case where
the uncontracted effects imposed by one party upon another
start out with positive value, decline to zero, and then become
negative. My favourite example concerns Individual A, who
plays the piano in his own home so that Neighbour B can hear
him loud and clear. The length of time A plays per day is
determined by equating the marginal value of piano playing
to him with his marginal cost in time. Even though B is a
music-lover, there will be a point at which he finds A's excessive
playing a nuisance.
We illustrate this case by retaining the values in Columns i
to 3 in Table A, except that we now interpret the input units
1 J. E. Meade, 'External Economies and Diseconomies in a Competitive Situation',
Economic Journal, March 1952, pp. 54-67.
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