LOOKING BACK: ECONOMICS FORTY YEARS AGO—SMOKE.

LOOKING BACK: ECONOMICS FORTY YEARS AGO—SMOKE. Back forty years ago, when I was in graduate school studying economics, there would be one or two hours a semester where the subject of “external diseconomies” was discussed. Wikipedia gives a good definition: “An externality is an impact (positive or negative) on any party not involved in a given economic transaction…..For example, manufacturing that causes air pollution imposes costs on others when making use of public air.” The example that Wikipedia gives was the example we always used: smoke. Wikipedia also gives the conclusion we then drew: “In a competitive market, this means too much …of the good may be produced and consumed in terms of overall cost or benefit to society…” We drew the conclusion and then we were done. At the time, smoke was considered to be of considerable theoretical interest, but not of great practical importance. Ten years later, environmental economics, dealing with, among other things, air pollution, had become a hugely important subject.