Steve Levitt

It's a kind of market failure.

And that's really interesting to economists because we certainly see a lot of cases where we have negative externalities.

But this idea of the positive externality, we don't have so many examples of those.

OK, so let's go to negative externalities because we have a lot of those in the world and economists think we understand those.

So examples would be the pollution from factories, the stench from pig farms, traffic jams on the roads because too many people are trying to drive to work, secondhand smoke.

It goes on and on and on.

OK.

So when there is a negative externality associated with an activity, then economists worry that the free market provides too much of that activity, right?

The pig farmer, the polluting factory, they aren't responsible for the full damages of their pollution.

And they don't factor those costs into their decisions about how much to produce.

And so they make too much.

So negative externalities are a problem.

How do economists try to fix that problem?

And that's a way of internalizing the externality, making the producer take that into account.

So it seems logical if a negative externality leads to market failure where there's too much production and then you tax it.

Well, then with a positive externality, it would stand to reason that with the free market, there are too few bees around and maybe too few apple orchards.

And that's what James Mead conjectured.

But then in 1973, Stephen Chung gathered some data

And it didn't seem to be true.

It's interesting because as you pointed out, there are reciprocal benefits.