Thursday, 14 May 2009

Hayek and externalities

From The Road to Serfdom:
There are... undoubted fields where no legal arrangements car create the main condition on which the usefulness of the system of competition and private property depends: namely, that the owner benefits from all the useful services rendered by his property and suffers all the damages caused to others by its use. Where, for example, it is impractical to make the enjoyment of certain services dependent on the payment of a price, competition will not produce the services; and the price system becomes similarly ineffective when the damage caused to others by certain uses of the property cannot be effectively charged to the owner of that property. In all these instances there is a divergence between the items which enter in private calculation and those which affect social welfare.; and whenever this divergence becomes important some method other than competition may have to be found to supply the services in question. Thus neither the provision of signposts on the roads, nor, in most circumstances, that of the roads themselves, can be paid for by every individual user. Nor can certain harmful effects of deforestation, or of some methods of farming, or of the smoke and noise of factories, be confined to the owner of the property in question or to those who are willing to submit to the damage for an agreed compensation. In such instances we must find some substitute for the regulation by the price mechanism.


Charlie Marks said...

Cor blimey guvnor - is that Hayek accepting the need for some kind of collective action?

Say Tom, what dya make of this, breaking the financiers' code:

"One of the City's most influential institutional investors is leading a rebellion over fat cat bonuses at Royal Dutch Shell and Next.

"Co-operative Asset Management is so unhappy it has broken the Square Mile's code of silence to publicly rebuke Shell.

"It plans to try to block the re-election of remuneration committee member-Lord Kerr, to highlight the Anglo-Dutch oil giant's intransigence over pay.

"The Co-op's corporate governance expert Abigail Herron said: 'It is now time for members of the remuneration committee to be called to account.'

"She said investors are furious Shell has ignored its own bonus rules on executive payouts. To get the share award Shell needed to be one of the world's top three oil firms. It was fourth last year, but independent directors were given discretion to waive through half the bonus payout anyway --which they did.

"Herron is stunned Shell has failed to heed last year's shareholder rebellion over golden handcuff deals for top directors.

"At Next, the retailer has ripped up its performance targets mid-year to trigger-executive bonuses. In a separate announcement, the Co-op said: 'It is not acceptable to scrap performance targets in difficult times and still provide rewards that are disproportionate to the value created for shareholders.'

"Shell said: 'The remuneration policy aims to reward management for the successful pursuit of strategy.' Next declined to comment."


Tom P said...

Hi Charley

Interesting isn't it that one of the few investors a) willing to vote against management regularly and b) willing to be public about it is the Co-op. In my experience they definitely take a tougher line in terms of how they vote their shares than your typical fund manager.