Robert Frank (2008) on Positional Externalities

Robert H. Frank, “Should Public Policy Respond to Positional Externalities?” Journal of Public Economics 92(8–9): 1777-1786, August 2008.

• The quality of a country’s military is almost a completely relative concept – countries compete not to be left behind. The importance of relative position, however, can stoke an arms race, where countries devote tons of resources to arms, without altering their relative positions. An arms control agreement, then, has the potential to make all sides better off, just as an enforceable contract could overcome the usual problem in a (multilateral) prisoners’ dilemma.

• Relative position seems to be an important element in lots of personal consumption decisions, such as the size of houses. But for other consumer choices, such as those concerning safety risks at work, absolute levels seem to dominate concerns with relative ranking. Some goods are more “positional” than others.

• Perhaps Easterlin’s “paradoxical” results are due to income being a positional good.

• Frank suggests that for positional goods, an increase in one person’s absolute consumption constitutes a harm to others – one that legitimately could be controlled by public policy. Frank proposes that we replace our income tax with a proportional consumption tax. And if consumption taxes correct for positional externalities, they are efficiency enhancing. Further, surely the social value of a marginal increase in public services exceeds the value of marginal private consumption – shades of Galbraith's "affluent society."

• If the rate at which house sizes grow were to slow down, there would be little effect on subjective well-being; housing, and celebrations of special occasions, are “hyper-positional” goods.