Occasionally, I buy and launch my own fireworks, generating cheerful positive externalities. Sadly, some amateur launchings end in tragedy – and there is frequent talk of a private firework ban. What is the economically efficient way of dealing with those negative externalities?
Jens Frolich Holte, Norway
If you’ve diagnosed the problem correctly, we can reach for a textbook solution. In a market with zero transaction costs, Coase theorem tells us that your neighbours could, in principle, pay you to hold firework displays, or not to, depending on their enjoyment of the spectacle or fear of injury.
More likely, we would need to approximate the Coasian solution with an externality tax on fireworks (to reflect the risks) or a subsidy (to reflect the benefits). But I am not sure you have correctly identified the positive and negative externalities here.
Unless you are shooting the fireworks down the street, most of the risk is surely borne by you and your friends, who’ve chosen to enjoy the display at close range.
There is no negative externality there: they’ve knowingly taken the risk.
On the positive externality side, I doubt that more distant neighbours enjoy the show as much as you think, not knowing when it is going to start. And they may be aggravated by the noise.
On balance, where are the externalities?
We should focus instead on encouraging more responsible use of fireworks. If your firework display hurts an innocent, you should be liable. An appropriate level of likely damages will encourage you to take exactly the right amount of care with your displays.
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