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One of the reasons government seems to be encroaching upon more and more areas of our private lives (trans-fats, car safety, etc.) is that statists and technocrats have embraced economics! For someone who aspires to be an economic educator this is an odd thing to believe, no? Well, sort of. Like the old proverb says, a little bit of knowledge is dangerous.

Most activities individuals engage in end up generating some costs or benefits which are not entirely borne by the individuals themselves. In fact, taken to the logical extreme it is hard to think of anything that we might do that does not affect someone else in some way. For example, when I breathe, I emit carbon dioxide into the air, which damages the planet to you and to everyone else in the world. And, in most situations we find ourselves in, more information would be desirable (e.g. which piece of corn is fresher?). And, you can imagine the millions of things that we do not already do ourselves because the transactions costs are too high (e.g. when is the last time you ordered a cup of tea from India, even if the tea cost 5 cents?). However, these are almost always extremely minor inconveniences when compared to the benefits of the status quo.

Well not so say the statists. You see, in a quest to achieve perfect economic efficiency, the modelers of the world use economic to answer people like us on our own terms. If there are individuals producing benefits or imposing costs on others, or if there are large transactions costs, or information asymmetries, then theoretically a third party can step in and do something to improve the situation so that everyone is better off. Now, I never understood why economics textbooks automatically assume that it is governments that are the ideal third party, but be that as it may, this fact alone does not justify intervention by third parties in all areas of our lives. It us using the rhetoric of economics that statists convince the public that taxes are simply ways to make people pay their fair share.

For instance, since everyone enjoys the benefits of national defense, but no one person has an incentive to pay for it once it is being provided, the theory says that everyone ought to pay taxes to support national defense so that there are no free riders. Or, smokers should be taxed because their second hand smoke imposes costs on others beyond themselves. They smoke too much because they do not bear these external costs. And so on. This logic has been extended to all areas of our lives. To see how absurd it can be, just consider women’s fashion. You can make the case that it should both be taxed AND subsidized (and this can be done with most everything we do). When women spend money on fashion, it makes many men happy, since they like looking at well dressed women. But since women do not take into account all of the benefits they bestow on all men when they dress well, they should be subsidized, so that more women dress nicely. On the other hand, women compete for men. And when one women spends money on fashion, she places herself at a competitive advantage over other women, making it more costly for them to secure a good man. Since the first woman does not bear the costs of doing this, she and others spend too much in their quest for fashion. So fashion should be taxed. This is, of course, absurd. But when people hostile to liberty and markets get a hold of an economic theory which is poorly explained in our schools and textbooks, economics can be perverted to be the reason central planners should run our lives. Even if one does not hold as hostile a view against the state as I do, what needs to be considered in all of these externality arguments is that there is no Santa Claus. There are not nearly enough resources for planners to implement every efficiency improving change that they wish. There is not nearly enough knowledge to know how to implement every efficiency improving change. And there is not nearly enough information around to recommend which areas planners should intervene in. Why dedicate resources to legislating and enforcing trans-fats bans? Does that mitigate more of an externality than some other externality reducing effort? And that is even granting that trans-fat consumption does hurt third parties anyway. It sure does a lot to benefit the people selling it.

Finally for now, the issue reminds me of the distinction between law and legislation. When legislation is not enforced uniformly, predictably and fairly, then the law enforcement agencies, and the governments legislating these laws are tyrranical. It is tyrannical that speed limits are so randomly enforced. Similarly, it is tyrannical for planners to use externality and information arguments to justify all manner of intervention, without regard to the cost of these interventions, both in terms if pecuniary costs, but also in terms of individual liberty. Who can refute the fact that having people eat less trans fats will make them healthier? But who is going to stand up and remind planners that people enjoy trans fats. That banning trans fats is costly. That it removes resources from otherwise more productive endeavors. That it requires more and more incentive crushing taxes to support?  

These externality and public goods arguments are extremely seductive. And extermely dangerous.

2 Responses to “Externalities Everywhere”

  1. […] group of individuals would find it in their interest to do, or physically be able to do. Of course, that definition is so vague you can drive a ten ton truck through it, and the statists surely […]

  2. […] products for all Americans? No. But, the cost disease paradigm seems to be gaining in popularity, much like the “externalities” paradigm has, both inside and outside of economics, to justify government intervention into the affairs of […]

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