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Thursday, September 22, 2005

Economic Literacy & Externality

William Polley:
"In a way, this brings us back to the question of the value of economic literacy. If the only reason for becoming economically literate was to become a more intelligent voter, then ignorance would be individually rational. However, the economic world would keep right on spinning. Markets would keep right on working -- except to the extent that policy makers, not subject to the constraints of an economically literate population, get in the way. However, there is a larger social issue at stake. Economic literacy has positive externalities. For me the most compelling argument for economic literacy is not to make sure everyone can shift a demand curve, but simply to teach people how to avoid being taken in by fallacies of composition and other logical fallacies.

[. . . .]

. . . . There's a great deal of social value in a citizenry able to recognize free lunch claims and refute them."
What? Positive externalities? This couldn't be another example of externality abuse could it? Probably not. After all, the implication of there being positive externalities would be to subsidize economists.

The precise application of externality is new to me.

Is it better to view lawmakers as a comodity or to view votes as a comodity? Or are they just 2 ends of the same transaction?

If voters select people who generate a proponderance of perverse laws, based on perceived personal benefit then that transaction would have significant negative externality. In many cases this is manifest in direct cash transfer via taxes from one group to another.

I have encountered people who really believe that just because they pay no income tax, that they are not taxed much. Some are more spophisticated and understand that the FICA tax is real, but still believe that they only pay the amount listed on their paycheck. Similarly, there are people who believe that "Federal Money" appears a not cost to them.

"They're insured, it won't cost them anything if I loot their shop (or smash it)." is a similar manifestation. Talk about externality!

Perhaps economic literacy allows people to avoid negative externality in their decisions more than it actually has direct positive value.

That last sentance is so true. TINSTAAFL
I had a conversation about this very topic this weekend and it was suggestest that economic literacy has negative externatlities because the economically educated free ride more often. I don't buy this as a negative externality though. What do you think?
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