Externalities: Market Failure or Political Failure?


Economists often talk about externalities
as a reason why government should regulate markets. Externalities refer to situations
where in our private actions we may impose costs on other actors without paying appropriate
compensation. So for example, when a factory pumps out noxious fumes into the atmosphere
it’s imposing an externality on the people in the neighborhood who are breathing in those
fumes on an involuntary basis. People often claim that externalities are exclusively the
result of market failures. But before we rush to the conclusion that governments can correct
for these market failures, it’s important that we recognize that most of what government
does reflects the desire of politicians to win elections by promising benefits to some
groups that will be paid for by others. Most of the public policies that we see in
the world are not the result of governments trying to deal with market failures, but they
reflect politicians trying to externalize costs. So when governments subsidize inefficient
farmers, when they subsidize inefficient energy companies, when they subsidize road-building
schemes, when they prop up failing banks, and prop up failing auto companies, they are
taking money from some people and giving it to others on an involuntary basis.
Markets are highly imperfect institutions and there will always be market failures.
But markets do provide at least some incentives for actors to try to internalize costs. Think
of the typical caricatures that many people have of capitalists. Capitalists are often
described as the people who, if they could, would find ways of charging people for things
that they’d previously been receiving for free. If the thing that we’ve previously
been receiving for free is the ability to pollute the atmosphere then these are precisely
the type of people that we want to make us pay for our polluting ways.
The profit motive in the market system may not provide the solution to all externality
problems, but they may just provide more of a solution than the activities of vote-seeking
politicians.

Maurice Vega

63 Responses

  1. I want Externalities reform! Force companies that do this to pay for the damages to the local area. The people would get a monthly / yearly check to paid by various companies for damaging the land / area. This in and of itself, will keep property values up near a refinery for example, as anyone living there gets an extra check each month.

    My only restriction, money must go to the person living there, not the owner of the land.

  2. @bluefootedpig Thats a little extreme and would be subject to too many legal and political obstacles. There are better way to internalize externalities.

  3. that's where you lose me.. it's a wonderful idea, but not everybody thinks that way.. i just don't see how this is realistic.

  4. I'm obviously missing something. So a capitalist might be someone who charges a polluter for polluting, whereas a politician is simply someone who redistributes wealth to win votes. So who is this imaginary capitalist that charges companies for pollution, and how does charging a company in such a way feed into the capitalism?

  5. @bdparks191 Except that politicians trying to win the financial support of industry and the indirect support of voters by supporting job creation, very often side with the industry over the individual in such cases, making the burden of proof so high that cases of damage can never be proven.

  6. If anyone is interested in hearing the full version of this argument, see my video "Is Market failure an argument against government?"
    /watch?v=J5maguX5x8c

  7. @matbroomfield – " .. how does charging a company in such a way feed into the capitalism?" – Are you inferring there is no demand to tackle pollution?
    Are you aware of the calculation debate?

  8. @matbroomfield When a government pays for something like pollution control, it is subsidized by tax payer money. They company that charges the other for pollution hires workers and creates wealth. People might not want to buy from the polluter so Its in that companies best interest to meet standards. So rather than having money pulled from the market you actually build upon it. Government running shit works great in theory the problem its a system that requires the right person to run properly.

  9. @DrunkenGodMode "Government running shit works great in theory" Only when ignoring human action and motivations, and the unintended consequences that arise. Your "solution" – minus the first sentence – amounts to a free market solution. One that does not require government, but only people who factor in the creation of pollution into their economic decisions (i.e. who they buy their stuff from).

  10. There must be a point to this article, but I don't get it. Cleaning up pollution is a cost, so the market is not going to have any interest in it. It's a political thing, since the people living nearby are the only ones who will have an opinion/request/demand related to it.

  11. @thisisbunk No not at all – but I was suggesting that such an effort doesn't come voluntarily from the polluters. Perhaps I've missed the thrust of this guy's agument but he seems to be arguing against goverment regulation in his opening statement, and at the same time he is suggesting that capitalism will take care of the situation, but without regulation, who forces the polluters to use the services of those who help them stop?

  12. @PanzerDivisionBOM Gosh, I don't know. I don't even know if that's relevant. I don't really see what democracy has to do with it. Any regulatory body or person is corruptible, and they seem to be more so in an unaccountable dictatorship. But what does that have to do with allowing capitalism to magically regulate itself and come up with solutions to things that companies are not interested in solving unless they are forced?

  13. @natritious1 Yes, that could be a solution, but again, there is government tnvolvement in deciding how such agencies operate, and the extent of their powers, and such bodies always have a political dimension to them.

  14. @DrunkenGodMode One of the primary reasons that companies pollute is to reduce costs. If Walmart has demonstrated anything, it's that the vast majority of people would prefer to buy cheap than ethical, especially when so many of them are on a low income. It's fine to suggest that market forces would somehow compel companies to clean up their act, but that has not been borne out by past experience.

  15. @thisisbunk BTW, I was not aware of the calculation debate but I just went and read up on it. I can immediately see, as in the case of oil prices, how that belief system does not hold up as a model for self-balancing and regulation. As soon as a good or service becomes critical, the provider holds a disproportionate power over market value; large enough in fact, that even goverments cannot easily intervene unless they are able to provide alternative sources.

  16. @matbroomfield Well the hedge against that is don't allow the oil producer to become a monopoly forcing them to compete with other companies, and alternatives such as Natural Gas, Nuclear, Solar, Wind, etc will ensure oil doesn't become too expensive. All of those are out there( I guess nuclear is being held down by government) they just aren't cheaper than oil yet.

  17. @davidmcaba But, what are the cost of reducing the pollution? You have to ask yourself that. Sometimes preventing the pollution can cost far more than letting it happen. If you reduce production, then that product becomes more expensive. If you incur more cost through expensive pollution reducing tech, that also increases prices and reduces production. Reducing pollution isn't always free especially when government is involved.

  18. @matbroomfield Well companies don't pollute because it reduces cost they pollute because it is part of production correcting pollution would cost to much. a better way to say it is ….reasons that companies don't reduce pollution is to keep cost down. Your absolutely right that people would rather buy cheap than ethical. If ethics matter enough people would boycott the goods. The cost of being ethical just isn't worth it to people. That doesn't justify any government action.

  19. @matbroomfield The companies would be forced by consumers to self regulate if consumers demanded it enough. If companies don't listen to consumers they lose their business. If consumers aren't adamant enough to pay more for goods, or boycott goods so the ethical things happen then it's the consumers fault and they'll deal with the other potential costs of not preventing the bad practice. Private markets aren't perfect, but it's better than government.

  20. @DrunkenGodMode You failed to see what i was saying. The point to that was it takes a perfect person for the situation to properly work. No one is perfect and government is proven motivated by special interest, allowing Jane Doe to slide past regulations John smith must follow. Governments are the the top polluters and don't have to take responsibility but people think they can fix any situation effectively and with less cost.

  21. @StatelessLiberty thanks i am very interested, this issue is fascinating to me since its the biggest gun that collectivists have to pull on libertarians in a debate

  22. StatelessLiberty: I just went to your youtube link and was blocked by Anti-virus software
    "phishing attack" : please explain ?

  23. I disagree (first time I think for learnliberty). The market cannot take care of these things. There is no way for me to go to a local factory and say, "My shirt is dirty, because the air has soot in it. Give me money." The only way to enforce restrictions or compensation on harmful externalities is through force i.e. government. His criticisms of government are valid, but his alternative is not.

  24. @Avidcomp I just logged onto it. How could a youtube link have any sort of phishing? He did not provide the full link just the video extension.

  25. @Keeban3 No, there are plenty of ways to use the markets and NOT government to tell manufacturers what to do. You can mobilize the populace to boycott goods made by those manufacturers until they reduce pollution. If people don't care enough then sucks to your asmar. Two, you can build the factories in a foreign country like China where people are to poor to care about pollution. Or you can move away from the Factory. Non of those require a corrupt extortionist government.

  26. @davidmcaba Wow, I don't think I've ever seen anyone use the word "milquetoast" in conversation, and certain never on youtube. Bravo. I'm going to have to go look that one up! 🙂

  27. @ShamanMcLamie But then you're expecting some controlling power or government to ensure that those alternate energy sources are brought to fruition, and that's exactly the argument for subsidies, because in the short term, they aren't remotely profitable, so are not attractive to the capitalist market, which is largely only interested in the balance book over the next 1-5 years.

  28. @ShamanMcLamie Agree about all except your last statement. Poverty of the populace has always been the justification for mistreatment of our planet, and it's a hard one to argue against, which is why a government needs to rise above the minutia of individual lives and take on the big view. What matters more, the individual ants, or survival of the entire anthill?

  29. @DrunkenGodMode I agree that perfect government can only be implemented by perfect people, which will never happen, but at least those in government are electable and accountable, which is more than can be said of the owners of factories. Imperfect government of the people is better than allowing business to set its own standards.

  30. @ShamanMcLamie I couldn't disagree more. The public are by and large, selfish, ignorant and have little long term view. If something isn't affecting them, they are not sufficiently motivated to bring pressure to bear that will bring about change. Add to that their hierarchy of needs, which often places an affordable roof over their heads and food in their stomach more highly than clean air and water.

  31. @matbroomfield We both know the problem yet we both have two opposite ideas for handling them. Government is not accountable and thats why special interest is on rampant. Activism has made a much better impact in both social and economic issues. We are stuck in a situation of the marriage of big Government and big Business which is inevitable through regulation. Eliminate this union and you'll see the actual impacts of a business out on its own with out buddy government bailing it out.

  32. @ShamanMcLamie Options 1 and 3 are not viable for the poorest people in the community, and option 2 is not often viable for established factories which have a significant cost in relocaion, retraining, etc. Unless they are FORCED to change, they won't.

  33. @DrunkenGodMode I can't disagree with your assessment there. US politics has become utterly corrupted by big business. Perhaps that is the problem when government becomes so big that getting elected is a billion dollar operation. You only have to look at your boycott of Kyoto to see your prioritoies. Fortunately, the US is not the only economy on the planet, and I don't live in the US. I think your days as a power are on the wane…

  34. @ShamanMcLamie
    1) Doesn't happen, mostly because if people decided they don't like something that much, the name changes.
    2) What incentive does the factory have to care whether neighbors are pissed in a free market?
    3) This doesn't work for global or widespread pollution. The air is all connected and flows freely. If I dump in a river, the people downstream don't know who to blame (and can't collect without force anyway).

    But you're right, your 'alternatives' don't require government.

  35. Yeah, I think you missed the big issue. Individuals should be protected from pollution through property rights. That's the worst example of a negative externality because it shouldn't even be considered an externality.

  36. its easy. if it is carbondyoxide, you just capture and store. to decrease the amount of co2 in the air is to grow trees, and cut them down and plant newer ones when the old trees abilty to store co2 is decreased so that in the long term you have maximized the co2 capturing. and the trees you cut, (the evil laughh) will be directly buried deep down 😀 because when they are in industry thy end in garbage, and then they are burned by machines or by bacteria naturally… 😀

  37. @davidmcaba Well, if you don't want to read it you don't have to be such an ass about it. And I was just letting you know I posted an opinion on the matter.

  38. @davidmcaba I wasn't commanding you to read it, you wanted a response I told you where to find it, sorry if it sounded like a command to you. Second instead of being so rude in your next response why didn't you just recommend I copy and paste, I would have been happy to.

  39. @FeelGoodinc91 There's no way to positively link a particular polluter to a particular illness. Look at that outbreak of tourettes like symptoms at Le Roy High School. I'm certain you can find all kinds of local sources of pollution which may or may not be the cause, but which one would you penalize?

  40. @MrConservative608 Nope. Welfare would imply that the person has done nothing. This is reparations for damaging the property value. The payment for the loss in value until the cause is removed. This is no more welfare than getting paid money when someone hits you with their car and damages your property.

  41. The major issue is when corporations prop up those lawmakers into not only voting their wishes into law, but also in getting lawmakers to allow the corporations themselves to write their own regulations…or do away with regulations altogether. Then they lobby to have judges put into place at the federal and appellate level that discourage lawsuits against corporations, or allow the corporations to drag them out until they basically die, the suit and the person. Externalization. Convenience.

  42. i like this channel, but this is a poor answer. suggesting that we shouldn't even bother trying to address externalities politically (by somehow pricing it into the market) because politics simply always fails…

  43. @FeelGoodinc91 I agree! why should proprietors be financially and ethically responsible, but corporate owners not be?

  44. "Without regulation" should really be acknowledged as a straw man argument. Use any example of an organized group, whether a family, corporation, co-op, non-profit, town hall, etc. Which of these, including a lone individual is void of a regulatory body? In the simplest terms, do you not regulate yourself in some capacity? Any body of individuals striving to achieve a common goal will have to abide by some variation of rules.. What business or government body could succeed otherwise?

  45. See "Externalities: Market Failure or Political Failure?"
    See an anti-capitalist critique "Mark Pennington. Robust Political Economy"
    You might also question a premise that you are advancing. To claim that the best way to deal with tendencies toward monopoly, is to create one to rule them all should cause doubt from the outset. Secondly, the very idea that monopoly can exist should be questioned as well. [google: myth of monopoly]

  46. When referring to oil, most of the oil is claimed as state-owned. Multinational corporations are a much smaller fraction of the total ownership.

  47. The Socialist Myth of Economic Monopoly http://iakal.wordpress.com/2014/03/12/the-socialist-myth-of-economic-monopoly/

  48. Someone has to pay to verify, and it won't be either the tax payers, the corporations, or the government but our future children. Good luck everyone!

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