The Case for Small Government

A Libertarian Perspective on Economic and Social Policy

April 08, 2006

Externalities

One version of libertarianism holds that governments should intervene only when private actions harm someone else’s person or property; that is, only when private actions generate externalities. For example, externality libertarianism opposes policies that sanction drug or alcohol use, arguing that any harms accrue mainly to those who consume these goods.

The externality perspective on government policy is a useful rule of thumb. Most government policies that make sense are ones that address substantial externalities like crime or pollution. Nevertheless, the externality perspective is incomplete.

The first problem is that almost any action generates at least some externality. Driving under the influence of drugs or alcohol, for example, causes accidents. More broadly, some might claim they suffer a negative externality from contact with persons of particular races, religions, or political views; or from disparities in wealth; or from seeing messy clothes.

Thus, externalities might appear to justify apartheid, wealth redistribution, or taxes on T-shirts, yet no one would accept such logic. One can attempt to avoid this problem by considering only “substantial” externalities, but this quickly becomes hopelessly subjective. The mere existence of externalities, therefore, is not a convincing basis for government intervention.

A second problem is that even when externalities are substantial, government attempts to reduce them generate their own side effects. In some cases these unintended consequences are worse than the externalities; drug prohibition is a standard example.

26 Comments:

At 11:51 PM, Blogger Mike Huben said...

And so, having suggested a basis of government action, it is ruled out as "subjective" or producing "worse unintended consequences". However, Miron doesn't seem to note that "worse unintended consequences" is equally "subjective".

I look forward to seeing Miron's extrication from his problem of extreme relativism. Having introduced the term "subjective", he offers no way to decide whether anything is objective; indeed, this is a philosophical problem of ideas based on individualism.

"I have discovered, to my infinite regret, that most of the serious debates over the basic principles of any political order have an irreducible empirical content."
Richard A. Epstein, "Skepticism and Freedom"

 
At 12:10 PM, Blogger Mike said...

More broadly, some might claim they suffer a negative externality from contact with persons of particular races, religions, or political views; or from disparities in wealth; or from seeing messy clothes.

Have you considered the possability that the problem lies with the person who claims to suffer the externality rather than the cause.

I think that was one of the first parts of the Coase theorem, that the problems created by "externalities" work both ways.

 
At 12:15 PM, Blogger Mike said...

I forgot to add, regarding the passage I discussed above, that you shouldn't accept people's poor sensabilities when deciding what is and is not an externality. If some people are icked by other races, religions, political views, disparities in wealth, or messy clothes they have to learn that that is their problem and get over themselves.

 
At 3:38 PM, Blogger James said...

"...Miron doesn't seem to note that "worse unintended consequences" is equally "subjective"."

Maybe, maybe not. If by "worse," he means decreased K-H efficiency, that's far cry from the subjectivity of a complaint against yucky tee shirts. I don't see what it is in Miron's post that is unavoidably relativistic. It would make more sense to say that Miron's post presupposes a (small o) objectivist view of consequencse, since the whole notion of "worse unintended consequences" depends on the objective meaningfulness of the comparative operator, "worse."

 
At 8:18 PM, Blogger Mike Huben said...

James, the whole problem is that the measurement of gain and loss due to externalities is subjective (because there is no monetary transaction), making it difficult to determine if one situation is more efficient than another. I don't think Miron could escape from this problem by chanting "Kaldor-Hicks efficiency!"

Effectively, he's yelling "a pox on both your houses", throwing up his hands, and wishing we'd just accept small government.

 
At 6:56 PM, Blogger James said...

huben,

Difficulty of determination is not the same thing as relativism. Relativism (or subjectivity) describes the state of affairs where a claim has no referent outside of the person making the claim. No immediately measurable referent is not the same as no referent at all. Basically, I agree with you that costs and benefits are hard to determine absent transactions, but I don't think difficulty automatically implies relativism.

 
At 8:03 PM, Blogger Mike Huben said...

James, I think you've got the argument reversed.

Miron said "subjective". I've gone along with that. I've also said that because externalities are subjective, it would be difficult to apply K-H efficiency. You're reversing the causality, claiming I said difficulty implies subjectivity.

I suspect we may agree here also.

 
At 12:16 AM, Blogger James said...

mike,

I now see the direction of causation that you intend. And I'm more confused.

Recall your comment about: "the whole problem is that the measurement ... is subjective (because there is no monetary transaction)..."

Ok, let me see if I understand you this time. There is no observable monetary transaction, so therefore the measurement is subjective? This doesn't seem to follow. Nothing in Miron's post seems to support it. Miron only invokes the s-word regarding the idea that some externalities are "substantial." That's it.

If your assumption (that lack of monetary transactions implies subjectivity of measurement) is right, then you are right about KH efficiency. KH is too subjective to actually apply to policy analysis. But you haven't proved this assumption and Miron isn't really making it, so you can't just borrow it and say you are holding Miron to his own terms.

 
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