Bad Taste Is An Externality. Now What?
A (somewhat) recent post by Greg Mankiw and the subsequent comments thread demonstrate just how elastic the handy concept of externalities can be:
A friend emails me some economic analysis from his 12 year old daughter:
Our daughter commented yesterday that "almost all cars are silver or gold, which are boring colors" and that "you should only be allowed to have a boring color if you pay extra for a special permit." We weren't sure we agreed with her evaluation of the external effects of car colors, but we were delighted that she'd learned you should use a tax to address an externality!
This cute example raises a fundamental question: When does correcting externalities start to offend principles of liberty?
Imagine your next door neighbor made some horrible aesthetic choices: He cut down all his trees, paved over his lawn, boarded up his windows, painted his house black, and adorned his new black top with statues reminiscent of Edvard Munch's The Scream. Would scaring local children be a negative externality that warranted government intervention? If not, what principle distinguishes this externality from, say, pollution? If so, how far are you willing to go imposing community tastes on others?
You don't have to go all the way to the Edvard Munch example to find people declaring their neighbors' aesthetic choices "visual pollution." And even someone as tolerant as I am has limits. (Here's a bona fide artwork I'd find it intolerable to live near.) The offended often claim that the neighbors' bad taste is driving down property values. There's rarely much evidence in individual circumstances, but since people do pay extra to live in associations that, among other things, regulate asthetics, the argument isn't entirely fallacious.
I addressed this topic at length in chapter 5 of The Substance of Style (excerpt here). One aspect--neighborhood conflicts over paint colors--is the subject of myJune Atlantic column. (Link good for three days.) As I argued in this NYT column (and in the book, though not the excerpt), the best thinking on the general issue is Ronald Coase's classic paper, "The Problem of Social Cost," which has a more complex message than the usual one captured with the term "the Coase Theorem" and represents a devastating critique of the simple Pigouvian formula.
There is no way to please everyone, which is why it's best not to try. Allowing people to sort themselves is one step toward resolving the dilemma. Another is to eliminate cheap talk--not through a strict Coasian bargain, which is rarely possible, but with enough trouble and expense to eliminate frivolous enforcement (or frivolous violations.) In this Dwell article (in two parts, one page each), I looked at some examples of reasonably effective hodge-podge solutions--though, as the Atlantic column suggests, uncertainty itself can lead to conflict.
Spillovers are a fact of life in close quarters, and, as Coase pointed out, usually the objectionable activity has some value of its own. As a reminder that conflicts are nothing new, and that bad paint jobs are a relatively minor annoyance, here's a passage from Giorgio Vasari's Lives of the Artists that explains how Sandro Botticelli dealt with a problematic neighbor:
A cloth weaver came at one time to live next door to Sandro, and set up eight looms, which when they were at work not only deafened poor Sandro with the noise of the treadles, but also shook the house, so that there was no wall strong enough to stand it, and with one thing and another it was impossible to work or to stay in the house. He asked his neighbour many times to put a stop to this annoyance, but he only answered that in his own house he could and would do what pleased him. Then Sandro, getting angry, set up on his wall, which was higher than his neighbour's, and not very strong, a huge stone, poised so that every time the wall shook it seemed to be just about to fall and crush the roof and beams and the looms of his neighbour. The man, alarmed at the danger, came running to Sandro, but he gave him answer in his own words, that in his own house he could and would do whatever pleased him; and the weaver could get no other answer, until at last he was forced to come to terms, and be a better neighbour to Sandro.