A Note on Weddings, Economic Efficiency, and Externalities

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Jason Kuznicki, editor of Cato Unbound, offered the following economic analysis of traditionalists’ refusal to offer their services for same-sex weddings:

Traditionalists, who would like to discriminate against gays and lesbians, should be permitted to do so. It’s not that they’re doing anything noble or even efficient. They are behaving both contemptibly and to some degree inefficiently when they discriminate. (Note that they impose externalities on others, for the sake of a benefit that they alone consume, namely the satisfaction that they take in discriminating. If they could take this satisfaction from some other act, the externality might disappear. They might also be better neighbors.) In a better world, this sort of behavior would not exist. But by the very same token, we should not prohibit it – doing so would also shrink the extended economic order, the one from which we all benefit regardless of belief.

I am unsure what standard of economic efficiency Kuznicki is using in this analysis, because none that I can fathom would consider the behavior of the wedding cake bakers (or whomever) to be inefficient.

There is the concept of Pareto efficiency, which holds under the condition that no one can be made better off without making someone else worse off. In this case, the bakers have demonstrated their preference not to participate; thus, they would be worse off by being forced to participate, resulting in an economic loss. The bakers and the betrothed, failing to reach a mutually beneficial agreement, made no transaction. This is not an indication of inefficiency. Rather, the lack of transaction between the bakers and betrothed is Pareto efficient.

There is the Kaldor-Hicks standard, also known as the compensation principle, which is less stringent. It is usually used in policy analysis in an attempt to determine whether a change in policy would be more efficient. With any policy change, there are typically winners and losers; i.e., some are made better off and some are made worse off. The question from a Kaldor-Hicks view is whether the winners are made so better off that they can compensate the losers so that they are better off than they were prior to the policy change. From a Kaldor-Hicks perspective, the lack of transaction between bakers and betrothed is efficient: in order to compensate the bakers for baking the cake (something which they value less than not baking the cake), the betrothed would have to make them an offer such that they would bake the cake willingly. Since they did not make the offer (presumably because the price would be higher than how much they valued the cake), we see that the efficient outcome was for no deal to be made.

Kuznicki argues that by not engaging in the transaction, the bakers are imposing an externality on the betrothed, but this is not what economists would consider an externality. And it leads to absurdities. That is, any hypothetical transaction that doesn’t occur, under Kuznicki’s conception of externality, would involve an externality. Not only that, the non-transaction would be a mutual externality imposition. The grocery store, by selling beer for a higher price than I am willing to pay, would be imposing an externality on me. By the same token, I would be imposing an externality on them by not offering a high enough price for them to willingly sell me beer. By Kuznicki’s conception, one could just as easily argue that the betrothed imposed an externality on the bakers by not offering them enough money such that they would willingly perform the service. Moreover, even on Kuznicki’s own terms (that the bakers are consuming the benefit of discrimination at the expense of the betrothed), they are not doing so for free – the price they paid to do so is the foregone revenue they could have earned if they had baked the cake, and the “recipients” of that foregone revenue are the betrothed. Thus, even if we were to consider this an example of an externality, it is not inefficient because the betrothed were compensated for it.

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