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Barkley asks who was the first to use "externalities."  Howard Ellis and 
William Fellner (AER, 33:493-511, Sept. 1943) published an article 
"External Economies and Diseconomies" in which they comment on the 
Marshall-Pigou proposal for taxes on industries of "diminishing returns" 
and bounties on industries of "increasing returns."  They note that Pigou 
in THE ECONOMICS OF WELFARE drew two positively sloped (inclined) cost 
functions, the first of the "ordinary type" and the upper one called a 
curve of "marginal prices" in which the intersection of the upper curve 
with the demand "schedule" indicated  "correct output under an ideal 
allocation of social resources."    In his review of Pigou's book Allyn 
Young is cliamed by Ellis and Fellner to have "hailed Pigou's S2 curve as 
a new and powerful instrument in economic analysis." 
 
While the article went on to an elaborate discourse on the large issues 
of rent, increasing and diminishing returns, etc. it is clear to me that 
this started the recognition of a divergence of calculations by the firm 
of marginal cost and calculation at the societal level of marginal 
(social) costs--and the divergence thereof.  The debate was always about 
excessive (or inadequate) output in a social sense and this is precisely 
the Pigovian point about smokey factories and abused laundries--an excess 
production of manufactures accompanied by smoke, and too little 
production of laundry output (because of the external costs coming from 
factories). Taxes would "correct" the output.  Ellis and Fellner use the 
term "an external economy" and an "internal economy." 
 
In 1952 in the ECONOMIC JOURNAL James Meade published "External Economies 
and Diseconomies in a Competitive Situation (62:54-67, March 1952).  In 
this article Meade used his famous apple orchard-bee example to talk of 
unpaid factors of production. 
 
In 1954 Tibor Scitovsky followed up with his "Two Concepts of External 
Economies" in the JOURNAL OF POLITICAL ECONOMY (62:143-151, April 1954). 
This was an elaboration of much that had gone before.   
 
My vote for the origin of "externality" is, of course, Farncis Bator 
(whatever happened to him??) in his wonderful "The Simple Analytics of 
Welfare Maximization" (AER, 47:22-59, March 1957) in which as he 
discusses Meade's apples and bees he says, in Fn 41 "The other type of 
externality (!) treated..." 
 
And of course his equally profound paper of the following year ("The 
Anatomy of Market Failure"  QJE, 72:351-79, August 1958) went on to 
connect externalities with market failure. 
 
Dan Bromley 
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