================= HES POSTING ================= 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 [log in to unmask] ============ FOOTER TO HES POSTING ============ For information, send the message "info HES" to [log in to unmask]