Last nights discussion of Coase, comparative political economy, and market failure inspired me to repost this (attn: Matt Hussmann), However, the mere existence of a negative externality does not ipso facto mean that government can improve on the market. Note that externality problems are market failures only in comparison to the perfectly competitive models equilibrium. In other words, the failure here is not that markets do not work in practice, but that they fail to live up to a blackboard ideal. As it turns out, by that criterion, markets fail all the time! No actual market is ever in perfectly competitive equilibrium, not even the commodity markets we sometimes point to in introductory courses..... Therefore, those who use negative externalities as a justification for government action must show two things: first, that the supposed market failure cannot be corrected either through entrepreneurship or by changes in the rules of the game (e.g., more clearly defining property rights to solve the negative externalities associated with a commons); and second, that the government-imposed solution is both consistent with political incentives and superior to the imperfect market outcome. Unfortunately, people who argue for government intervention to correct externalities rarely carry out this second step. Even more unfortunately, economists rarely carry out this second step.
Posted on: Tue, 06 Jan 2015 15:05:40 +0000
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