“Externalities” are one of the major types of market failure, the term economists use to describe the situation in which some of the costs or benefits of a voluntary transaction are borne or gained by third parties. Sometimes what is called an “externality” might really be something different: a case where property rights to a resource are not well defined. When this happens, it’s open season on that resource, as everyone has the ability to capture the benefits of using it without paying the full cost. Moreover, when you don’t have clear title you can’t sell or trade it. You can only hoard it.
An obviously critical example of such a problem is poolside lounge chairs. Read More →