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