Posted by: Tobias | October 23, 2008

Should every externality be addressed?

Pro Köln is a party in the city of Cologne that describes itself as “right populist” and got itself elected to city council in 2004 mainly by opposing the construction of a large mosque in Köln-Ehrenfeld, a part of town that already has a large Muslim, primarily Turkish population. And even though their efforts so far seem to have been in vain – the city council gave the go-ahead for the mosque a few weeks back – they do not appear to have given up completely and are now trying a different argument. A current post on their website reads:

In der Bundesrepublik gibt es gegenwärtig weit mehr als 150 Moscheeneubauten oder Projekte für die das entsprechende Genehmigungsverfahren läuft. Ein bekanntes und seriöses Frankfurter Sicherheitsunternehmen, zu dessen Beraterstab auch ein namhafter Islamexperte gehören soll, begutachtet bei derartigen Projekten unter anderem im Auftrage von Banken seit Jahren die Preisentwicklung der umliegenden Grundstücke. Zu den Kunden dieser Gutachten zählen neben privaten Investoren und bekannte Industrieunternehmen auch kreditgebende Banken. Selbstverständlich sind die Ergebnisse der jeweiligen Gutachten nicht immer ganz einheitlich. Doch es gibt eine klare Tendenz, die der öffentlichen Debatte über das Für und Wider von Moscheebauten in der Bundesrepublik eine nicht zu unterschätzende wirtschaftliche Komponente hinzu fügt. Allein zwischen der Einreichung des Bauantrages für einen Moscheeneubau und der Erteilung der Baugenehmigung sinken danach die Preise der umliegenden Grundstücke im Bundesschnitt um fast 20 Prozent! Nach der Fertigstellung ist in den meisten Fällen ein weiterer gravierender Preisverfall festzustellen.

[At the moment more than 150 mosques are either under construction or are awaiting the grant of a construction permit in Germany. A well-known and respected Frankfurt security company, whose staff of advisers allegedly includes a renowned expert on Islam, has been studying the effect of such construction projects on the values of surrounding properties on behalf of several banks for some years now. The customers of such studies include not only private investors, but also well-known industry and lending banks. Of course the results of such studies are not always in agreement with each other. However, there does exist a clear tendency that adds an economic dimension to the public debate about the pros and cons of building new mosques in Germany. Between the application for a construction permit and the granting of such a permit alone, prices of neighboring properties drop by almost 20 percent. After completion, prices depreciate even further in many cases]

I wouldn’t be posting about this if it didn’t allow me to rant about one of the shortcomings of economics education as I see it. In the parlance of economics, a transaction (in this case the building of a mosque) that has an effect on a party other than those involved in the transaction itself (in this case the owners of neighboring properties) is called an externality. And externalities, the standard textbook on public economics will say, are clearly bad and a common case in which market exchange, though mutually beneficial to the parties involved, may be bad for society as a whole.

What is to be done? The standard textbook will tell students that the externality should be ‘internalized’ by included it in the price of the transaction. This can be achieved either by levying an appropriate tax on the activity or, alternatively, by assigning property rights to all resources in question and then letting the different parties bargain it out. A deceptively neat and much misunderstood piece of math, the Coase theorem, then assures us that irrespective of who was initially assigned the property rights, an efficient solution (one where a transaction will take place if its social benefits exceed its social costs) will be reached.

So, how would one analyze the building of the mosque? One would say that the building of the mosque imposes a negative externality on the owners of the surrounding lots in the amount of 20 or more percent of the value of these lots. One would then proceed to sum up the (projected) losses and tax the building of the mosque in this amount. Either the mosque would be built despite the tax, in which case the tax would be paid out to the neighbors to compensate them for their losses, or the benefit people would derive from building the new mosque would be less than the construction costs plus tax, in which case the mosque wouldn’t be built. Alternatively, in the Coasian approach, one would grant the neighbors a “right to a mosque-free neighborhood” and let the Muslim community bargain for the purchase of that right, which would yield the same result (under certain assumptions that is, another one of my pet peeves).

What bugs me to no end is that most textbooks make it seem like there is a very general principle that any externality should be addressed. Indeed, there is an implicit ethical judgment that it is morally good to do so.

This is, of course, complete bunk. Even if building a mosque depresses the values of the surrounding properties, it is still a moral (and ultimately political) choice whether there exists a right of these property owners to be made whole. The mere existence of an externality in no way implies a moral obligation to correct it. This is only the case if you both espouse a particularly narrow interpretation of utilitarianism in which all consumer preferences, however racist, sexist, ignorant or otherwise detestable, are unconditionally permissible and think that there are no other moral principles which may supersede or amend the purely utilitarian calculus.

Count me, however, amongst those who think that there are such principles and values, chief amongst them the basic human rights and freedom, and that the consumer is not sovereign always and everywhere. I find it unconscionable to even consider taxing a black family for moving into a white neighborhood in Casper, WY just because it might upset people. I find it unconscionable to give family members of those considering a sex change operation veto rights over the operation because it might cause them emotional and social harm (a point I remember Deirdre McCloskey making in an essay that I unfortunately can’t find at the moment). And, to pick a much less crass case, even as a life-long non-smoker and someone who hates coming home after a night out smelling like an ashtray I think that the case for a general smoking ban is extremely weak, even on the narrow economic question, let alone on the broader question of freedom.

I don’t expect everyone to share my moral precepts. But it would be nice to teach students of the dismal science a wee bit more about ethics, enough for them to be able to make up their own mind and make an informed political decision on the question. And if that political decision should go the other way and we do start taxing the construction of mosques, you can be sure I’ll be the first to demand the same treatment for churches.



  1. Nothing useful to add, just want to say that it is a really a very good piece you wrote.

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