21.12 Policy Application: Social Norms and Private Actions: When asked to explain our actions, we sometimes simply respond by saying “it was the right thing to do.” The concept of “the right thing to do” is one that is often formed by observing others, and the more we see others “do the right thing,” the more we believe it is in fact “the right thing to do.” In such cases, my action “to do the right thing” directly contributes to the social norm that partially governs the behavior of others, and we therefore have an example of an externality.

A. Consider for instance the use of observably “green” technology, such as driving hybrid cars. Suppose there are two types of car-buyers: (1) a small minority of “greenies” for whom green technology is attractive regardless of what everyone else does and whose demand for green cars is therefore independent of how many others are using green cars; and (2) the large majority of “meanies” who don’t care that much about environmental issues but do care about being perceived as “doing the right thing.”