Monday, October 18, 2010

Should people voluntarily take external costs into account in their actions?

From what I've seen the microeconomics texts don't ask this question. They simply make the assumption that the rational narrowly-self-interested person does not do that and has to be compelled to do so by a Pigovian tax, for example. Does this assumption of socially irresponsible behaviour subtly legitimate it and influence students' own attitudes and behaviour?
  I only really thought about this implicit assumption myself when I saw a book that was different: Avi Cohen and Ian Howe's Microeconomics for Life: Smart choices for you (2010, Pearson Canada), a new introductory book that is also unique in having no diagrams(!). They state that people should take all costs into account, both those they face privately and those they impose on others. Writing about 'smart choices' for businesses, they say: "Be sure to count all additional benefits and additional opportunity costs, including implicit costs and externalities." (p.194)
  Oddly enough, they don't discussing why a firm (or a person) should do this. Isn't the firm supposed to be maximizing profits? Apparently they're assuming something beyond narrow self-interest. (If a government had already imposed an appropriate Pigouvian tax, that would appear as an explicit cost like any other, and would require no special consideration.) Of course, a class using the book could be prompted by the instructor to think about this in more detail. To what extent to businesses have leeway to raise their own costs voluntarily? How would they know what the appropriate action is in the absence of a price signal like the Pigouvian tax?


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