Today's Quote of the Day...

…is from Randy Holcombe and Russ Sobel’s 2001 Public Finance Review paper Public Policy Toward Pecuniary Externalities:

If property rights were limited to the right to own and use property unencumbered by the interference of others, and if all scarce resources had clearly defined property rights, technological externalities would be prevented. The political process goes further by allowing individuals to assert claims not only to the use of resources they own but also to the value of those resources. Fluctuations in the value of resources are an integral part of the market process, however, and the efficiency of the market process is impaired when public policy acts to prevent pecuniary externalities. If the legal system made it clear that rights to the ownership of economic resources would be protected but rights to the value of resources would not, the problem would be reduced. However, when political decisions rely more on democratic politics than on legal rules, the opportunity to use the political system to be compensated for pecuniary externalities increases. In a political environment, rent seeking for compensation from harm due to pecuniary externalities may even have an advantage over other types of transfers, because pecuniary externalities do impose costs, increasing the apparent legitimacy of a claim for compensation.

JMM: What Holcombe and Sobel call “technical externalities” are what we currently think of externalities: pollution and things like that which affect a firm or individual’s production (they produce fewer goods with the same input). Pecuniary externalities, on the other hand, are when the value of output is reduced, but not the ability to produce, such as through competition. For example, if Burger King were to open next to McDonalds, it inflicts a pecuniary externality onto Burker King by eating (pun intended) into their profits, but there is no technical externality.