What about government externality?

I’ve written on this blog a few times that government begets more government and regulation begets more regulation.

Few people realize that many of the problems that we’re trying to solve with government today were caused by government actions of the past.  Too often they believe these problems were caused by free markets.

A commenter on Cafe Hayek helped me figure out a way to articulate this process.  Out of the comments of Russ Roberts’ Cafe Hayek post, A Theory of Government,  Jonathan Catalan writes that:

…government itself is an externality!

As Russ Roberts points out, one theory of government is that it:

…exists to correct externalities and provide public goods.

An externality is a cost not included in the price of a product paid by the consumer.  Rather, that cost is covered by other unwilling parties.

For example, many folks think that gasoline has an environmental cost from its pollution that is not included in the price of gas that we pay at the pump.  If it were, the theory goes, then the price of gas would be higher and folks would use less of it.  Since this environmental cost is not included, these folks call this a market failure.

They think that a legitimate function of government is to correct for such market failures.  One way to do this would be to collect a big tax on gas.

Perhaps the idea that government should correct externalities causes a blind spot.  Since government is the arbiter of externality, who would think that it would be externality itself?

But, the reason government begets more government is exactly because government causes externalities.  Catalan does a nice job of explaining it in this article.  He writes:

The root of our current medical problem lies in the collectivization of the consequences of an individual’s irresponsible choices. The issue is that the costs of one person’s decisions are spread equally throughout society, to the point that that individual hardly feels the penalties of his value judgments — short of illness and death.


3 thoughts on “What about government externality?

  1. Seth:

    Most excellent post.

    “Externality” supposedly is always solved by a tax. It’s a highly simplistic view. Maybe some of the best questions regarding tax as the supposed fix-all to externalities is: Then what, what next, with the tax revenue? Money into the hands of politicos? More externalities and/or more government and more government externalities?

    Below is a link to maybe the best and simplest explanation of Pigouvian taxes [A. C. Pigou] vs. Coase Theorem [Ronald Coase].


    Try this as well regarding government failure [government as an externality]


  2. I’ve always thought of externalities as highly dubious; an excuse to justify increasing amounts of government control over society. For if one accepts that externalities are the costs imposed on third parties, and it is the state’s role to correct this so-called failure, then logically, every human action causes externalities and requires government intervention.


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