It has been a while since I wrote my last entry. I want to talk about two main things which I noticed recently: Instagram and STD. How are they related? The answer is quite simple: externalities.
I remember when I was studying as an undergrad that my micro professor taught that marriage and prostitution are essentially similar contracts, with the simple difference that one was more binding to a certain extent. However, I think they are significantly different, mainly because the one with prostitution implies a huge health risk, let alone the criminality that usually surrounds it, as well as the drug markets. Furthermore, there is a high moral cost that is hard to quantify and is idiosyncratic to the person’s beliefs. All those things are basically what in economics are considered externalities. On the other hand, good marriage has all the positive externalities that surround it, meaning trust in one another, sharing spending, and all the good deeds that come with it.
Relatedly, I have recently noticed that Instagram has some videos where on the left part of the screen a person is nodding, creating the psychological effect of having someone watch the video with whoever is playing it. This is effectively guiding the viewer to react the way the creator wants, similar to what happened in those 80’s shows in which the audience would clap or cheer as the actors performed. This is a minor thing that can add significant value to the promoter of the video. Can we think of it as an externality? I think so. First of all, from the viewer’s perspective, it is the same video with a minor adjustment. In terms of the creation of the video itself, one has to ponder whether the cost of production is the same or not, but the benefit extracted is certainly not the same, and that does not necessarily go through the pricing system.
I hope this blog helps understand the importance of externalities in simple everyday examples, and it shows how powerful the economic tools are for making policy.
Here is a picture of some delinquent friends (should they charge for the use of the stairs in the ticket?):