Lessons in Externalities from the Entertainment Industry

An externality (this is an economics term by the way) is a cost or benefit that is not transmitted through the prices of goods and services in that it is incurred by a party who was not involved as either a buyer or a seller of the goods or services.

Please take note that when cost is incurred, it is regarded as a negative externality and when benefits are given, it is regarded as a positive externality. In both cases, prices do not reflect the full costs or benefits of producing or consuming the products or services.

This means that when producers can produce goods and services at a fraction of the cost, they over produce and in turn under price the goods and services. And when they discover that the goods and services are delivered at less than the overall benefit gained, they tend to under produce and over price.

Now, lets go back to the entertainment industry with particular reference to Music.

When an artist works hard at a song for over a year and releases a hit track (without knowing it) and put it on the internet and a random guy who did not pay for studio sessions or crack his brain to create the lyrics picks up the song at the least cost, he tends to over produce the song on CD's and under price it to sell as many as possible. This is a negative externality.

When artists decide to shoot music videos and need girls to dance half naked in their videos and they discover that there are many ladies willing to do so at the least cost, there is some form of over production in that too many ladies now appear in the video that none of them will ever really get recognized or celebrated and of course, they will be under priced. This is a negative externality.


When musicians attend live shows and discover that the organizers are charging up to a million naira for a common table (okay, its covered with table cloth at least), and people are willing to pay, then immediately, they discover that they are actually giving more benefits than just producing songs (concerts are some peoples on source of happiness, the opportunity to show they have arrived, the means by which some companies reward their staff, some ladies would do anything to attend, some guys would have low self esteem if they don't attend) then, the artists (actually, their MBA managers) after discovering all these additional would automatically under produce and over price. Thats how one musician asked me a student to pay 1.5 million for a 15 minutes performance (100,000 naira per minute). This is a positive externality.

Then the creation of the iPod by Apple computers that made music readily available in unbelievable volume to the consumers which came at a huge benefit in the sense that one could now buy only the tracks that he or she liked. You can only appreciate this if you ever used a walkman or a discman and of course, the guys at Apple under produced and over priced. This is a positive externality.

So, it's your turn;

1.) When you listen to music on the radio without paying for it, is it a positive or negative externality?
2.) When communication service providers pay artists to appear on their call cards, is it a positive or negative externality?
3.) When young men and women collapse at a concert because of an artist, is it a positive or negative externality?
4.) When teenagers take to drugs, illicit drinking, reckless dressing, carrying of arms, vulgar language and premarital sex owing to examples is it a negative or positive externality?

Remember, its about the cost or benefit to the third parties.


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