ABSTRACT
Two examples of externalities internal to an activity is surely enough. And were I restricted to two examples I should have left out one of the two given in the last chapter and insisted in bringing, in its stead, that of agriculture. Familiarity of economists with the case of agriculture makes it the more illuminating example, in particular as it is not usually recognized as being an instance of externalities that are internal to the activity. For the competitive equilibrium turns out, after all, to be equal to the optimal output, in contrast to the preceding two cases. And the reason is that in agriculture there is (implicit) acknowledgement of the existence of property rights in the factor land, as a result of which land also has a competitive price on the market, one that enters into the cost of the agricultural product. In the preceding two examples, nobody had property rights, respectively, in the fishing grounds or in the road. Neither factor therefore had a market price. Each was treated as a free factor, a defect in the system that caused overproduction of the good using that factor.
