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Does Spending Your Own Money on Yourself Create a Negative Externality?

Summary:
Tyler Cowen thinks so. In a post this morning, economist Tyler Cowen writes: Now consider some older people who have a lot of wealth but very little human capital.  These (selfish) individuals still will pay a lot to avoid death or risk of death, but in essence there is an externality.  They treat their wealth as “disappearing with their death” when in reality that wealth simply is transferred to others.  Therefore they overspend to keep themselves around on planet earth, and they will overpay for risk reduction. It’s true, of course, that their wealth doesn’t disappear with their death but is simply transferred to others. What does that have to do with there being an externality? Nothing. I would bet that almost no one who spends his/her own money on

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Tyler Cowen thinks so.

In a post this morning, economist Tyler Cowen writes:

Now consider some older people who have a lot of wealth but very little human capital.  These (selfish) individuals still will pay a lot to avoid death or risk of death, but in essence there is an externality.  They treat their wealth as “disappearing with their death” when in reality that wealth simply is transferred to others.  Therefore they overspend to keep themselves around on planet earth, and they will overpay for risk reduction.

It’s true, of course, that their wealth doesn’t disappear with their death but is simply transferred to others. What does that have to do with there being an externality? Nothing.

I would bet that almost no one who spends his/her own money on himself/herself treats his/her wealth as disappearing with death. Virtually everyone knows full well that declining to spend when near death will cause the heirs and, if the estate is large enough, the government, to get some of that wealth.

But the person spending is spending it on its highest-valued use. Does the person spending it create pollution? noise? Maybe. But then that pollution or noise is the externality, not the spending per se.

Moreover, if Tyler is right, then everyone spending on himself or herself, whether near death or not, is creating an externality. The reason is: it doesn’t get spent by someone else.

David Henderson
David R. Henderson (born November 21, 1950) is a Canadian-born American economist and author who moved to the United States in 1972 and became a U.S. citizen in 1986, serving on President Ronald Reagan's Council of Economic Advisers from 1982 to 1984.[1] A research fellow at Stanford University's Hoover Institution[2] since 1990, he took a teaching position with the Naval Postgraduate School in Monterey, California in 1984, and is now a full professor of economics.[3]

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