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of our currently perceived societal problems. Let us be clear. With most of
our observations concerning the exploitation of supposedly solid economic
doctrine, the problem stems from overzealous or inappropriate use of the
theory, and not directly from the theory. Practitioners, businesspeople, and
those who purport to be boosters of a local or regional economy often misuse
economic concepts if they are perceived to be supportive of their own par-
ticular policy interests. This behavior can give the discipline an undeserved
bad image, when in actuality it is the villainous application of the principles
that is problematic.
This is not necessarily the case with the theory of externalities, because the
structure of the accepted dogma invites nothing less than the tragic applica-
tion of that theory. The place to start is with the jargon. Depending on the
theoretical application of economic analysis, several terms to define exter-
nalities can be used, which, under certain conditions, are synonymous with
externalities
. These include:
• External benefits
• External costs
• Spillover effects
• Market leakages
• Market failure
• Imperfect property rights
Notice that anything directing resources in directions other than
through markets is labeled a
spillover, failure, imperfection
, or
leakage
.
Inherent in these terms is a profound implication. Namely, there is the
clear presumption that all worthwhile, or “valid” economic activity is
assumed to occur within markets. In effect, the only socially optimal
resource allocation (such as the distribution of wealth, goods, and ser-
vices) is that which is bestowed on people and businesses through the
activity of private markets. The implied premise can be stated even more
clearly:
Free-market capitalism is unambiguously the best way to organize an
economy.
This statement is critically important and clearly values based. At first
glance, it may seem to involve an unwarranted leap in logic. To those accus-
tomed to viewing themselves as favorably disposed to capitalism, making
this assertion will seem to involve a sweeping and unwarranted accusation.
That said, we are not taking sides on the values-based ideology of either
pro- or anticapitalist arguments. Rather, our purpose is to dissect the impli-
cations of the discipline
as it is structured
. Accordingly, the assertion calls for
considerable explanation, additional terminology, and cogent examples if it
is to be substantiated. That is the purpose of this section.
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