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situation like this, a transaction doesn’t often take place, simply because the cost of organizing the transaction is too high. So the smoker will end up smoking and the passengers will bear the cost of her decision to do so. Therefore, we often adopt rules (like prohibiting smoking on elevators) to mirror the likely outcome if such a market did exist.
    The house-painting positive externality is a little more interesting. Externalities in real estate transactions can have huge financial and quality-of-life rewards. Everyone likes a good neighbor, and we would all like to live in neighborhoods where people keep up the appearance of their property. Unfortunately, few people are willing to undertake projects because they benefit neighbors. A popular solution to this problem is the use of restrictive covenants in real estate developments, which require owners to adhere to certain appearance standards to guarantee positive spillovers to neighbors. While you might think that buying a piece of property with a catch is not as desirable as buying one without—most certainly you would prefer not to be burdened by rules—these covenants are popular because they ensure that all of the owners in the area do the things necessary to keep neighboring property values high.
    But now back to baseball. The hitting externality in baseball doesn’t have the negative consequence of influencing market transactions. It’s just a spillover, and this spillover is interesting for a different reason. Quantifying the impact would be of great help to general managers, agents, and arbitrators in evaluating talent. Managers might learn how to better arrange their batting orders for the best run production. If player hitting abilities do influence one another, then we ought to learn how to evaluate the influence of talent properly.

Measuring the On-Deck Influence
    In order to properly estimate any potential externality in hitting, we need to hypothesize about the possible external effects we are looking for. The traditional model of protection states that a good on-deck hitter prevents a pitcher from pitching around a good batter. This means that the batter is more likely to see good pitches to hit, which will result in more frequent and powerful hits. It should also lower the likelihood that he walks. For simplicity, we’ll assume that the improved hitting is more valuable to the hitting team that the forgone walks. Conversely, a poor on-deck hitter means a good hitter will see fewer pitches in the strike zone, which limits his ability to hit. He may walk more, but his hitting production will suffer. In economic terms, a good on-deck hitter generates a positive externality, while a poor on-deck hitter generates a negative externality.
    However, there is another possible spillover that we need to consider. It’s also possible that good on-deck batters have a negative impact on the batters who hit in front of them. A good on-deck hitter becomes even more dangerous if the hitter in front of him reaches base; that is the reason we expect pitchers not to walk protected batters. However, it’s also reasonable to assume that the pitcher will put forth more effort against protected batters with the pitches he throws in the strike zone. The traditional hypothesis of protection discussed by baseball fans assumes that pitchers can only vary their pitches by throwing in the zone or out of the zone, which is not really the case.
    Pitching a baseball game is like running a marathon. Going full speed all of the time is not the way to succeed. If a pitcher throws as hard as he can on every pitch, he’s going to wear out quickly. This is why most pitchers vary their pitch speeds throughout the game. The difference in effort from batter to batter may be small, due to the quality of all major-league hitters, but pitchers do pitch slower to some batters and faster to others. Veteran manager Tony La Russa explains it this way:
    If you have a veteran pitcher who may