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Jan 30 2012

Regulation and the Nature of Externalities

Mano Singham recently posted a Daily Show video poking fun at libertarian arguments against government regulation by claiming that excessive government regulation is destroying family businesses — namely, the mafia, the ultimate family business. Now I’m someone who has long defended libertarians against some — not all — the attacks from the left and the right, and advocated that liberals and libertarians work together on the many issues that they agree on, so this is a good opportunity to explain what I think is the rational middle on these issues.

I should start by explaining the concept of an externality. Economists generally define an externality as “a cost or benefit not transmitted through prices that is incurred by a party who did not agree to the action causing the cost or benefit. The cost of an externality is a negative externality, or external cost, while the benefit of an externality is a positive externality, or external benefit.”

A simple example: A power company puts up a coal plant to produce electricity for consumers, but the price for that electricity does not reflect the genuine cost of that power because of the many environmental problems that result from it, from mountaintop removal mining to the huge negatives associated with the emissions from the plant (medical bills that result from the particulate matter spewed into the atmosphere, the effects of more greenhouse gasses, the cost of containing the toxic sludge, etc.).

Libertarians generally make two arguments in this regard. The first is that the market can and will control for them, that people will choose not to do business with companies that are highly polluting. This strikes me as being about as anti-reality as any position I can imagine. If that were true, it would never have been a problem to begin with. But history teaches us that companies that were highly polluting were also often highly profitable. Dow Chemical continues to be a massively profitable company despite a horrific track record of pollution. The same is true for coal and oil companies, among the most profitable in the world.

Not only does the market not control for such problems, it encourages them. A company that keeps its costs low by not spending money to abate pollution before it happens will have lower prices and more customers than a company that does spend on such things. And the notion that consumers will punish them for doing so is simply folly. The cost benefit analysis will almost always go the other way. It’s likely to be far more profitable for a company to avoid spending a billion dollars on smokestack scrubbers and the like and to spend a fraction of that money instead on a good PR campaign to show consumers how green they are, even when they aren’t. PR works, and it works very well.

The second argument is that the proper way to control for such externalities is through the courts. An owner whose property is damaged by pollution generated by another property owner can sue them in court and that provides the incentive to not pollute. But here again, I think this argument is absurd. One problem is that many of those costs are so spread out or remote from the point of pollution that there’s no one specifically to sue. We know that the costs in terms of asthma and lung problems from coal generation are very high, but proving a specific source for a specific person is going to be very difficult. And here again, the cost benefit analysis tends to cut the other way; it’s usually cheaper to employ high-powered attorneys to fight such cases than it is to avoid the problem in the first place.

So the only rational solution to problems like this is government regulation. Does that raise costs, as libertarians and conservatives claim? Of course it does. But that’s the whole point of the regulation. The true cost of production is not being taken into account in the price paid by the consumer, so the cost of that clean up has to be paid either in higher prices for the product or the shared cost of taxation.

The libertarians are simply wrong here, but not on everything. They’re right when they say that there are a lot of government regulations that exist not to genuinely solve for an externality but to protect the market share of a large company. Many regulations raise prices for consumers without providing any real benefit either to those who consume that product or service or to the public at large.

Radley Balko recently wrote of a perfect example. In Nashville, the city council recently passed an ordinance mandating that limousine and sedan drivers charge at least $45 and banning any vehicles more than 5 years old from entering the market. The effect is to put smaller limousine companies out of business, boost the profits of the larger companies through reduced competition, and increase prices to consumers — and for what benefit? What externality is being fixed through such a regulation? None that I can think of. One could argue, I suppose, that requiring newer cars will help because they will get higher mileage, but any benefit here is going to be tiny at best. This is pure rent-seeking, a way for larger companies to keep smaller companies out of their market.

Every modern nation in the world long ago recognized that the right type of economy is regulated capitalism. Even China is moving more and more in this direction. Private ownership of the means of production coupled with a regulatory and welfare system. The only serious argument is over where to find the balance, not whether to have either regulation or social welfare. Only those on the fringes think otherwise. The issue shouldn’t be more regulation vs less regulation, it should be smart, effective regulation vs. pointless regulation. And on that question, I think there is a rational middle that we could probably agree on if we stopped yelling at each other.

A good example: A bunch of free market advocates and environmental groups got together recently and agreed on about $100 billion worth of federal spending that should be eliminated, including things like subsidies for corn-based ethanol and oil companies. The right recognizes that such subsidies distort the market in an unhealthy way, stifling innovation. The left recognizes that they drive up food prices, which is particularly bad for the poor, distort land use and hurt the environment.

Capitalism is a good thing. A very good thing. But we’ve already lived through the robber baron era and we know what happens when it is unregulated. At the same time, we should use our understanding of how markets operate to design smart and effective regulation that increases competition rather than decreases it and that protects consumers and the public instead of corporate profits.

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  1. 1
    Reginald Selkirk

    and advocated that liberals and libertarians work together on the many issues that they agree on…

    That sounds great, but you have no doubt noticed that the brand of Libertarianism which is now prominent is not a brand that is good at compromising or working with others.

  2. 2
    jamessweet

    There’s more nuance involved in why the courts are not an adequate solution to the problem of externalities, but it only supports the thrust of your position so I won’t bother to go into it.

    The only thing I disagree with here is possibly on the wisdom of “stopp[ing] yelling at each other”. If anything, the American left (i.e. the international center) needs more yelling.

    We should just be careful that what we yell is true, accurate, worthwhile.

  3. 3
    Kevin, 友好火猫 (Friendly Fire Cat)

    Isn’t the market, by the fact that lobbyists grease the palms of government, almost unregulated anyway? A truly regulated capitalist society would not allow the level of ‘palm-greasing’ that corporate lobbyists achieve to make government look the other way on their numerous tax evasions, environmental defilement, and right-out unfair practices.

  4. 4
    eric

    Many good points. I’d just add that two points. One likely reason that the free market doesn’t do a good job with things like pollution is because it appears that we humans aren’t great at balancing short-term and long-term interests – and modern Americans are particularly bad at this. We tend to favor short-term interests more than we should. Just look at the lack of savings and retirement. Matching funds like 401K’s are FREE MONEY, for fracks’ sake. And yet, we are terrible at saving. This is no different: we might intellectually acknowledge the hidden costs of (example) coal-burning for electricity, but if paying for that means no xbox for Christmas, we’ll take the xbox instead.

    Second, re: the courts. Agree this is absurd, but not primarily because of the problem of associating a spread-out cost with a source. Its absurd because the social cost of fixing a problem after it occurs is often orders of magnitude greater than the cost of not letting it occur in the first place. Seat belts are a few dollars – hospital care is $thousands or $tens of thousands. Of course we should consider the impact on people’s rights to free expression, but when the civil rights impact is trivial and the cost differential is so great, it is utterly insane not to regulate.

  5. 5
    matty1

    This is exactly right, we need to stop looking at regulation as one thing and labelling it good or bad and focus more on the best ways to deal with specific externalities.

  6. 6
    Jordan Genso

    I view the difference in economic philosophy between libertarians and liberals as being:

    Libertarians feel the answer to “bad governance” is “no governance”, whereas liberals feel the answer to “bad governance” is “good governance”.

    And I liken it to the analogy of corrupt cops. If a police force is corrupt, what is the answer? Do you get rid of the police, or do you punish the guilty parties and implement oversight to prevent future corruption?

    Also, I want to point out why the free market will not resolve the externalities that Ed points out. It is because of a lack of perfect information. If we all had perfect information about every consequence of every economic action we took, then yes, theoretically, the free market could address some of those externalities. But consumers don’t have perfect information, and the businesses have an interest in pushing false information out into the market (through advertising), as Ed mentioned.

  7. 7
    David C Brayton

    Very well written summary. Chapeau.

  8. 8
    ashleymoore

    Spot on. Although this line got me wondering:

    Every modern nation in the world long ago recognized that the right type of economy is regulated capitalism.

    I would say that most modern nations this ‘mixed economy with regulated capitalism’ is the best approach.
    I think most modern nations believe some industries are better run by the government. Normally, mass transit and health and sometimes telecommunication and power.

  9. 9
    abb3w

    @0, Ed Brayton:

    So the only rational solution to problems like this is government regulation. Does that raise costs, as libertarians and conservatives claim? Of course it does.

    Pedantic terminology quibbling….

    At a first pass, it would seem to only raise prices; the externalized costs are internalized, but the total of both internal and external costs remain the same. (At a second pass, it might raise costs, due to the added “friction” cost of political intransigence to the internalization, and expenditures on political PR and lawyers; I’m not sure.)

  10. 10
    Stevarious, Public Health Problem

    I once had a conversation with one of those die-hard libertarians – you know, the type that thinks we should completely overhaul society?

    The question I stumped him with is this: If there are no police, only private security companies who protect you as long as your contract is paid up, what exactly is there stopping me from selling my 12 year old daughter to my neighbor as a sex slave?

    Any society that doesn’t have an answer to this question is a huge step down from the one we’re in.

  11. 11
    Deen

    The first is that the market can and will control for them, that people will choose not to do business with companies that are highly polluting.

    What libertarians often forget is, what is the customer supposed to do when all companies do this? Especially in a market that is dominated by a small number of big players? Which, nowadays, is pretty much any major market. Or to look at it from a different perspective, how long is a company going to last (especially if it’s a small upstart) if they are the only one that wants to do things “right”? How are they supposed to compete with the existing big players, that can offer lower prices by externalizing costs?

    [The libertarians are] right when they say that there are a lot of government regulations that exist not to genuinely solve for an externality but to protect the market share of a large company.

    Too bad that so many libertarians refuse to consider limits on corporate lobbying and campaign donations.

  12. 12
    Raging Bee

    …I think there is a rational middle that we could probably agree on if we stopped yelling at each other.

    Yeah, there’s a rational middle: the system that liberals have been creating since WW-II, in the face of bitter opposition from racists, corporatists, and other reactionaries who now rebrand themselves as “libertarians.” The system that “libertarians” have been feverishly working to demonize and destroy since the 1970s.

    And no, liberals and libertarians are not “yelling at each other.” Libertarians have been demonizing and flat-out lying about liberals and liberal policies, while the liberals just kept on trying to do the right thing, only to see the reality distorted and ignored by the Republican noise-machine behind which the “libertarians” now hide. Your false-equivalency argument doesn’t fool anyone.

  13. 13
    davidct

    “But we’ve already lived through the robber baron era —”

    The robber barons may be less obvious but I would suggest that in many ways they are back.

    Certainly capitalism needs some regulation – Think of football with no referees. Government is a problem but there is no other agency strong enough to keep people playing by the rules. The market consistently fails at this. Libertarians underestimate just how creative humans can be at gaming the system.

  14. 14
    Marcus Ranum

    It seems to me that economists like to use terms like “market failure” and “externality” to explain why economics fails to explain any given situation. It’s like a clever verbal hack that allows “I dunno” to be embraced as part of the model.

    In my field I’m constantly stumbling over people trying to come up with economic models to explain why, in a given situation, something that appears to be a stupid decision is, in fact, perfectly justified in the warm soft light of convoluted ex-post-facto reasoning. But a better answer often seems to be “people don’t make the ‘right’ decision because someone lied to them.” Have you ever noticed how many economic models seem to try to assume that people make decisions that are in their interest and that their interests are honestly constructed and understood? I think it’s just because it’s painful to admit that we’ve been fooled so easily over and over again. We want the marketplace to correct those polluting companies because that way we don’t have to admit that we have no control over them and/or that we fell for it when they said they shared our understanding of common interest. Accepting that they lied to us, again, and bought off regulators, and are grabbing short-term gains because they are nihilists who know tomorrow will never come (for them) – easy explanation, with the acid bite of truth.

  15. 15
    Michael Heath

    Ed wrote:

    So the only rational solution to problems like this is government regulation. Does that raise costs, as libertarians and conservatives claim? Of course it does. But that’s the whole point of the regulation. The true cost of production is not being taken into account in the price paid by the consumer, so the cost of that clean up has to be paid either in higher prices for the product or the shared cost of taxation.

    Actually, a well-working regulatory frame-work reduces costs, it does not raise them. Instead what’s raised is prices because effective regulation redirects some of the costs back toward the supply chain and its consumers, which in turn increases prices. This also provides an incentive for this supply chain to reduce some cost items altogether to increase their profit margins. I’m certain this is the idea you are trying to promote where your mistake was using the term ‘cost’ instead of ‘price’; I would have ignored this, however it’s important to note that many current negative external costs can be eradicated altogether by effective regulations. So costs can be and are frequently reduced.

    Ed wrote:

    Every modern nation in the world long ago recognized that the right type of economy is regulated capitalism.

    While I’ve long used the same argument, I’ve recently come to adapt a different position based on how world-class operations continually improve and are now achieving results in cost, quality, and delivery considered unimaginable just a few decades ago. I would now change the following to:

    The optimal economy is dynamically regulated capitalism.

    Currently we expect a bunch of know-nothing members of Congress to set regulations in stone. What we really need is an approach where the politicos instead set overall objectives and the various functional groups (Cabinet Dept’s) are dynamically setting regulations. The “check” between Congress and the Executive wouldn’t necessarily be a regulation per se’, but instead the effectiveness of the respective Cabinets to maintain an optimal regulatory structure based on a set of metrics determined and passed between Congress and the Executive.

    From this perspective you can see one reason why I left the Republican party. While I agree Ed’s version replicates an effective model for the early- to mid-20th century, time has passed such an approach by. The world has advanced to what I promote here. So Republicans are now two degrees of magnitude behind best practices, the mode of continual improvement, and
    acknowledging that optimal markets require a regulatory framework.

    The thinking to arrive at this newest approach is also especially noticeable in President Obama’s rhetoric vs. Republicans. Where Obama notes our successes but also points out our weaknesses relative to others and how we must adapt to improve, Obama’s approach is celebrated by the best private companies and industries (though they’re thinking is far advanced from Obama’s, he’s a neophyte). Republicans on other other hand take the very approach which caused so many companies to fail when confronted with competition taking this new approach. Their reactive tendencies to fantasize about a false 1950s does them or us no favors.

  16. 16
    Deen

    @eric in #4:

    Second, re: the courts. Agree this is absurd, but not primarily because of the problem of associating a spread-out cost with a source. Its absurd because the social cost of fixing a problem after it occurs is often orders of magnitude greater than the cost of not letting it occur in the first place.

    No, the primary reason it’s absurd is because of the power difference between the average individual and a big company – the simple fact that the latter has vastly more resources than the former. The average individual can’t afford to be tied up in court for years, while corporations have dedicated legal departments that can stretch a case for years if necessary. Even if you win, you may not get your money back. And even if you do get a handsome reward or settlement, you will not get the time you spent back.

    Of course, people could try to pool their resources into some collective, so they could stand a chance against a large company, but conveniently enough, libertarians generally don’t support that either – that’s basically what a union is, after all. Or a government, for that matter (assuming the government is still guided by public interest).

  17. 17
    Raging Bee

    In Nashville, the city council recently passed an ordinance mandating that limousine and sedan drivers charge at least $45 and banning any vehicles more than 5 years old from entering the market.

    The minimum fare may be there to ensure that operators can afford all the preventive maintenance necessary to keep their vehicles safe (airlines used to have a similar regulation); and the vehicle-age law may be there to ensure that operators don’t keep on driving gas-guzzling polluting antiques.

    “Regs that benefit business and reduce competition” and “regs that serve a valid public purpose” are NOT always mutually exclusive. This is a false dichotomy that “libertarians” trot out to poison public debate and divert attention from the real need for sensible regulation. Any reg that forces businesses to do something they didn’t profit from doing on their own will, almost inevitably, increase the cost of doing business and make competition harder.

    (Besides, isn’t free enterprise SUPPOSED to adapt to the people’s demands?)

  18. 18
    Deen

    @Marcus Ranum in #14:

    But a better answer often seems to be “people don’t make the ‘right’ decision because someone lied to them.”

    This is exactly why the perfectly free market of libertarian pipe dreams will never exist. The seller always has more information about a product or service than the buyer. Especially as products and services get more complex.

  19. 19
    Raging Bee

    Deen: That’s especially true in the financial sector, where the makers and sellers of financial instruments can change, not only the products themselves, but (to a significant extent) the very rules that govern how they work. Physical products are governed by the laws of physics; so it’s easier to verify whether or not they’re performing as promised. This — combined with the importance of the financial sector to all other areas of business, of course — is why dynamic regulation is even more necessary for the financial sector than for most other lines of business.

  20. 20
    Ed Brayton

    Abb3w and Michael Heath make a fair point about the difference between costs and prices; my terminology should have been more precise. Raging Bee, predictably, goes into his usual frothing rage at the sight of the word libertarian. I see no point in trying to engage him; it is pointless to try to reason someone out of a position he wasn’t reasoned into in the first place.

  21. 21
    Deen

    Every modern nation in the world long ago recognized that the right type of economy is regulated capitalism.

    The next step, of course, would be to recognize that a global economy will need some global regulation. How are individual countries supposed to regulate multinationals that have more revenue than their entire GDP?

  22. 22
    EricJohansson

    On the myth that conservatives prefer market solutions while liberals prefer government based solution, I highly recommend Dean Baker’s book The End of Loser Liberalism.

    It nicely documents how conservatives rely heavily on government regulation to serve their ends (redistributing wealth from the middle class to the 1%) and how genuine “free” market solutions can have progressive outcomes.

    Baker rightly takes liberals to task for falling into the framing conservatives set-up for many such economic debates.

    The e-book is free to download for the Kindle/Nook so no excuses :)

  23. 23
    Michael Heath

    eric @ 4:

    the social cost of fixing a problem after it occurs is often orders of magnitude greater than the cost of not letting it occur in the first place.

    deen responds:

    the primary reason it’s absurd is because of the power difference between the average individual and a big company – the simple fact that the latter has vastly more resources than the former.

    They’re both valid factors. In addition we’re also seeing citizen-juries lose their power to establish punitive damages to a level that their rulings can change the behavior of industries for the better. The rise of corporatism influencing our court has accelerated since John Roberts and Sam Alito joined the court and a national Chamber of Commerce which lobbies only for a small-set of businesses like the coal company in WV who kills so many of its workers.

    And as Raging Bee smartly noted, as markets evolve, there is frequently an enormous advantage by sellers over buyers in terms of knowledge. We see this in the health insurance market and the primary asset and its hedge which directly led to the housing bubble and burst – CDOs and CDSs. In the latter Wall Street created securities which fooled the credit markets in over-rating them and a whole host of investors weren’t sophisticated enough to understand the actual risk.

  24. 24
    Raging Bee

    Baker rightly takes liberals to task for falling into the framing conservatives set-up for many such economic debates.

    That’s funny, you don’t mention Baker taking conservatives to task for setting up such dishonest framing in the first place.

    I just read the blurb you cited, and there’s a lot of (unnecesary) rhetoric about “loser liberalism” that makes the whole book’s premise sound kinda juvenile.

  25. 25
    D. C. Sessions

    I think most modern nations believe some industries are better run by the government. Normally, mass transit and health and sometimes telecommunication and power.

    That’s because they’re socialist hellholes. The United States is, as always, exceptional: we’re reversing a century of downhill slide into collectivism and selling highways, health, and all kinds of utilities to private hands where they belong.

  26. 26
    abear

    It’s ironic that a Mafioso would complain about restrictive legislation. Prohibition, the war on drugs and prostitution laws have made otherwise lowly street thugs wealthy.

  27. 27
    Modusoperandi

    Deen “How are individual countries supposed to regulate multinationals that have more revenue than their entire GDP?”
    Simple: incorporate and buy out weaker countries (“This border brought to you by NorthAmCo, A Family of Countries®”). You can even get Goldman-Sachs to help set up the IPO.

    D. C. Sessions “That’s because they’re socialist hellholes. The United States is, as always, exceptional: we’re reversing a century of downhill slide into collectivism and selling highways, health, and all kinds of utilities to private hands where they belong.”
    That’s the Free Market at work! The problem with public utilities is that there’s no margin.
    And, look, as a liberalsociocommie you should love this, because since there’s profit there’s something for you to tax (to subsidize the lazy parasites who can’t even afford to buy a city’s worth of parking meters of their own)!

  28. 28
    Raging Bee

    How are individual countries supposed to regulate multinationals that have more revenue than their entire GDP?

    Now that the economy has gone global, we don’t just need global regulation; we need global UNIONIZATION.

  29. 29
    Raging Bee

    Ed: you say that liberals and libertarians should stop “yelling at each other” and work together on sensible regulation; then I speak up as a liberal, and you accuse me of “frothing rage” without even acknowledging any of what I actually said. Thanks for proving my point about who’s really doing the yelling.

  30. 30
    Raging Bee

    Currently we expect a bunch of know-nothing members of Congress to set regulations in stone.

    And this touches on another issue that doesn’t get as much attention as it should: why are members of Congress so “know-nothing?” Because in 1995, the incoming Republican majority voted to drastically cut their own staffs, across the board; and since then, they have simply not had access to the expertise they need to make sensible regulations in any area more complex than “thou shalt not steal.” That’s one reason they let the lobbyists write so much of the laws: under the guise of “small government” and “reducing waste,” they’ve deliberately made it impossible for themselves to function without the continuous direct “assistance” of the big busineses they’re supposed to be watching and regulating.

  31. 31
    Area Man

    The only serious argument is over where to find the balance, not whether to have either regulation or social welfare. Only those on the fringes think otherwise. The issue shouldn’t be more regulation vs less regulation, it should be smart, effective regulation vs. pointless regulation. And on that question, I think there is a rational middle that we could probably agree on if we stopped yelling at each other.

    While I strongly agree, the predominant narrative on the right is that regulations are always bad and “job killing”. This appears to serve an agenda of giving powerful industries whatever they want no matter what it costs the rest of us. So while the right is happy to play up individual cases where regulations appear foolish and don’t accomplish anything, it would strike right at the heart of their professed belief system to address cases where regulations are good, need to be strengthened, or need to be made more efficient. And it would be great if such people really were on the “fringe”, but sadly they’re in control of a major political party.

    And yes, I’m know I’m lumping libertarians in with the “right” more broadly defined, but when it comes to regulations and environmental issues, I’ve seen very little difference (e.g. Cato hiring a global warming denialist as its go-to guy for climate change). In fact, libertarians are often the worst offenders. You’ll get more headway trying to reason with a squishy center-right Republican than a out-and-proud libertarian like Rand Paul.

  32. 32
    Raging Bee

    This is exactly why the perfectly free market of libertarian pipe dreams will never exist.

    Of course it exists, o ye of little faith. Haven’t you ever heard of Somalia?

  33. 33
    Michael Heath

    Raging Bee writes:

    And this touches on another issue that doesn’t get as much attention as it should: why are members of Congress so “know-nothing?”

    I’ve written quite a bit about this in Ed’s forum. Including my frustration with then-Speaker Gingrich getting rid of the non-partisan science and technology office Congress used to rely on, along with voters voting for a certain type of tribal candidate that scares away most functional experts – like economists, scientists, and scholars.

    So my root-cause here goes to two items. One is the world is increasingly complex which requires expertise beyond those outside the profession, and the second is our own defective voting behavior – in spite of the fact our context increasingly cries out for a more technocratic approach to governance as we advance from a technological perspective and interact in more sophisticated ways. Couple that to our greatest challenges: climate change, interacting within a global economy, and the virtual world we’re creating. All of which demand being tuned-in to the world as it now exists coupled to a certain level of intelligence which is demonstrably beyond most of Congress to even absorb. Consider the current and past Speaker of the House (Bohner and Pelosi), Harry Reid, and Mitch McConnell. These people are not capable of even absorbing summary views on these topics – they’re all clueless. And yet they’re leaders.

  34. 34
    John Phillips, FCD

    As Michael Heath posts, Eric #4 and Deen #16 are both correct. I also agree with Deen #21 with regard the need ultimately for global regulation in many financial and industrial operations. Otherwise, as happens now, corporations where possible will only transfer their polluting operations or dodgy financial services to less regulated regimes. Though ironically, in financial services terms, the US is a third world nation when it comes to adequate regulation, or at least in the actual implementation of what little there is.

  35. 35
    Modusoperandi

    Michael Heath “These people are not capable of even absorbing summary views on these topics – they’re all clueless. And yet they’re leaders.”
    Sheesh. It’s a democracy. The leaders represent the people.

  36. 36
    EricJohansson

    Raging Bee

    That’s funny, you don’t mention Baker taking conservatives to task for setting up such dishonest framing in the first place.

    Actually yes Baker deals with this subject in his earlier free ebook:

    http://deanbaker.net/index.php/home/books/the-conservative-nanny-state

  37. 37
    ethanol

    People have been pointing out that externalities cannot be solved through informed customer choice (avoiding polluters) because it is impossible to have sufficiently informed consumers, or because of the ubiquity of polluting suppliers. However there is an even more fundamental problem with purported solution. Even if customers have perfect knowledge about the negative externalities produced by supplier, the combination of distributed harm (i.e pollution) and localized gain (i.e lower prices) rewards parasitic and selfish behavior. The only way that “perfect knowledge” could solve this problem would be if that knowledge included not only the negative effects of suppliers, but also the individual purchasing choices of all other customers, combined with a willingness to deny services on the basis of those choices (no I won’t sell you a hamburger because I see here that you get your electrical power from coal). This moral system actually works quite well in small groups with little privacy, otherwise not so much.

  38. 38
    juice

    Externalities are a form of unintended consequence. A regulation is put in place that attempts to control these unintended consequences, but the regulation cannot be perfect, so it creates more unintended consequences. Attempts are made to correct for these with another regulation, etc.

    I think the financial sector, where external costs and other unintended consequences are difficult to pin down, is the best example of this. The government (with its obviously good intentions, right) attempts to correct some problems with the banking system and sets up the Fed, FDIC, etc. This gives the banking system a lot of power and profit, creating further external costs and unintended consequences (some of which are actually intended). So there has to be an ocean liner full of new regulations to whack those moles.

    Now the regulations have become a byzantine labyrinth that only expensive lawyers can navigate, and that can and will be used against you by those with more resources or power than you.

    Talking about “smart” regulation is fine, but it’s mostly a bunch of wishful thinking. People are paid much more than you to work the system full time. It’s their job and they do it well.

  39. 39
    juice

    Libertarians feel the answer to “bad governance” is “no governance”, whereas liberals feel the answer to “bad governance” is “good governance”.

    If only we could find the “right people” and put them in charge. Conservatives agree with you. Conservatives also want “good governance” done by the “right people.”

  40. 40
    pinkboi

    One simple idea I’d like to see more from both liberals and libertarians is the idea of taxing negative externalities as a way of raising revenue. After taxing externalities, if the government still needs more money, then income tax can enter the picture, but it’s more efficient if pollution taxes and carbon taxes (for example) are at least partly offsetting the need for other taxes.

    I would also add that there is a great deal of legislation that shields firms from paying the full costs, creating an artificial externality or socializing the cost. Consider the case of IP protection. In a world where it’s cheap to copy bits, it’s expensive to prevent said. Firms could adjust their business models accordingly (by, for example, moving software to the server-side or implementing copy-protection) or they can impose the cost on everyone else – through legislation.

  41. 41
    Aquaria

    Raging Bee, predictably, goes into his usual frothing rage at the sight of the word libertarian. I see no point in trying to engage him; it is pointless to try to reason someone out of a position he wasn’t reasoned into in the first place.

    Total ad hominem. Raging Bee was intense, but perfectly rational and composed, unlike your response.

    If you don’t like the points RB made, then address them, rather than making bizarre accusations about his emotional state.

  42. 42
    juice

    The question I stumped him with is this: If there are no police, only private security companies who protect you as long as your contract is paid up, what exactly is there stopping me from selling my 12 year old daughter to my neighbor as a sex slave?

    This shouldn’t be a stumper. Let’s start with the cultural concerns. In some cultures this would be an acceptable practice. In typical Western cultures it’s absolutely not acceptable. So in your neighborhood or town a vast majority of the population would not be cool with your selling your minor daughter into slavery. With that said, slavery would go against the non-aggression principle and any other libertarian principle. The protection company, or any neighbor for that matter, could defend the child from this by doing whatever it took to extricate her from the situation. That is, if the daughter did not consent. The parent and the slave buyer could be brought up on charges of violating the daughter’s right to liberty (if you want to word it that way). The daughter’s rights were violated. Problem is that rights are really general agreements held among people within a culture. If it’s culturally acceptable for this to happen, it would happen in the presence of a state and a police force anyway since no one would recognize it as a violation of rights.

  43. 43
    TCC

    RB@12:

    And no, liberals and libertarians are not “yelling at each other.” Libertarians have been demonizing and flat-out lying about liberals and liberal policies, while the liberals just kept on trying to do the right thing, only to see the reality distorted and ignored by the Republican noise-machine behind which the “libertarians” now hide. Your false-equivalency argument doesn’t fool anyone.

    This paragraph should win awards for lack of self-awareness and oversimplification. Libertarians are evil bastards who have done nothing but vilify liberals and attempt to destroy our country, while liberals have offered only good governance and a puppy for every home; I reject your false equivalence.

    Aquaria:

    Raging Bee was intense, but perfectly rational and composed, unlike your response.

    We clearly have different standards of rationality and composure.

  44. 44
    eric

    Michael Heath (but paraphrasing Raging Bee?):

    In the latter Wall Street created securities which fooled the credit markets in over-rating them and a whole host of investors weren’t sophisticated enough to understand the actual risk.

    Which brings up yet another type of regulation, different from ones that account for hidden costs: ‘truth in advertising’ regulations. Sellers gain a market advantage when they can fool buyers about either their product (positively) or their competitor’s (negatively). Any large market is going to require such regulations the same way the corner store requires laws preventing them from selling you a folex in a rolex box. If the basis of the free market is informed and rational choice, there must be regulations preventing misinformation.

    I believe (but am not sure), that such truth in advertising regulations are exactly the sort of regulations Heath is thinking about when he mentions that regulations can often decrease the price of commodities, they don’t always just increase them. The price of that watch drops significantly when the seller has to tell me whether the stones on it are real diamonds or just cubic zirconia.

  45. 45
    Raging Bee

    This paragraph should win awards for lack of self-awareness and oversimplification.

    So it should be ridiculously easy for you to correct me, right? I’m still waiting…

    I think the financial sector, where external costs and other unintended consequences are difficult to pin down, is the best example of this.

    “Difficult to pin down?” Speak for yourself, moron. The consequences of financial deregulation have been VERY EASY to pin down, at least since the second half of 2008 (and that’s only the most recent example of something that’s been happening for centuries). IF you can’t keep up with the class, then maybe you should do more listening and studying, and less pretending no one else is smarter than you are.

    Now the regulations have become a byzantine labyrinth that only expensive lawyers can navigate, and that can and will be used against you by those with more resources or power than you.

    This is an argument that libertarians and other uncaring simpletons have been pushing for decades: life is complicated, and smart people can’t be trusted, therefore we can’t ever trust ourselves to make god laws. It’s not reason, it’s anti-rationalism with a dose of laziness, paranoia, and bogus anti-elitist rhetoric. Wanna live in a simple place with simple laws? Move to Somalia.

  46. 46
    pinkboi

    I believe (but am not sure), that such truth in advertising regulations are exactly the sort of regulations Heath is thinking about when he mentions that regulations can often decrease the price of commodities, they don’t always just increase them. The price of that watch drops significantly when the seller has to tell me whether the stones on it are real diamonds or just cubic zirconia.

    Regulations can also drop the price of commodities in a bad way, where taxpayers are paying part of the cost (think of corn products). But to the specific point of good regulation decreasing costs, I must say that the challenge is in having a government with such a power to regulate not using it even more often to create bad laws.

    Libertarianism isn’t a dogmatic assertion that there’s no such thing as a good law. It’s rather the recognition that you can’t wave a magic wand and have exactly the government you want; good laws and bad laws tend to come in packages with the powers that allow them. We end up with laws that protect large firms from competition or mandate use of their products. I like to believe that we can structure things so that we can have truth in advertising laws and things such as carbon taxes, but ultimately we have to forsake a number of good laws because it’s the only way to prevent even more bad laws.

  47. 47
    Area Man

    The protection company, or any neighbor for that matter, could defend the child from this by doing whatever it took to extricate her from the situation. That is, if the daughter did not consent. The parent and the slave buyer could be brought up on charges of violating the daughter’s right to liberty (if you want to word it that way).

    Yeah, that’ll work. We’ll just have the neighbor, or whoever else feels like it, take care of things. No need for a professional paid force. What could possibly go wrong?

    Problem is that rights are really general agreements held among people within a culture.

    No, norms are general agreements held among people within a culture. Rights are by definition codified into law. It may be a norm that you don’t have sex with children, but strangely enough it happens anyway. To prevent it from happening, and to protect the rights of children, you must have laws and the means of enforcing them. Rights are not magically protected by public expressions of disapproval, or by vague hopes that someone steps up to play vigilante.

  48. 48
    TCC

    So it should be ridiculously easy for you to correct me, right?

    It was, so ridiculously easy in fact that you whizzed right past it. (Hint: Read the italicized part. I was parodying you.)

    “Difficult to pin down?” Speak for yourself, moron. The consequences of financial deregulation have been VERY EASY to pin down

    You imbecile,* Juice was talking about the consequences of regulation, not the consequences of deregulation. I’m not even sure that deregulation was the implied recommendation in that comment, only a recognition that no regulation is going to be perfect and so regulation is not an easy fix.

    —–

    You know, attitudes like this about libertarianism annoy me for the same reason I tire of rabidly anti-religious views. It seems that for many people, their ideological switches are “hearty endorsement” or “fiery hatred.” I am not really sympathetic to libertarianism, and I don’t support smaller government for the sake of smaller government; but conversely, I don’t think that libertarianism is the pinnacle of human malice or ignorance. (Likewise, religion can be wrong without being the root of all evil, in case you were wondering about that connection.) Why libertarianism, of all ideologies, elicits such hyperbole is beyond me.

    __________________________________
    *I usually refrain from namecalling, but hey, what’s good for the goose…

  49. 49
    Azkyroth Drinked the Grammar Too :)

    Now I’m someone who has long defended libertarians against some — not all — the attacks from the left and the right, and advocated that liberals and libertarians work together on the many issues that they agree on, so this is a good opportunity to explain what I think is the rational middle on these issues.

    The thing is, from what I can tell you’re primarily a civil libertarian and an economic moderate. Most attacks on “libertarians” without qualifier is aimed at the narcisso-capitalist types who have basically co-opted the label.

  50. 50
    Area Man

    However there is an even more fundamental problem with purported solution. Even if customers have perfect knowledge about the negative externalities produced by supplier, the combination of distributed harm (i.e pollution) and localized gain (i.e lower prices) rewards parasitic and selfish behavior.

    Right. Believing that consumer choice will solve the problem of externalities requires assuming that consumers as a group are somehow perfectly moral and self-sacrificing, while the producers, who are no less human, are allowed to act entirely in their self-interest. Why would anyone believe such nonsense? It’s just a way to devolve moral culpability away from the people actually causing the problem.

  51. 51
    Improbable Joe, bearer of the Official SpokesGuitar

    What is this desperate need from the left to bend over backwards to find some sort of common ground with people on the right? Libertarians are by and large an evil joke, and they are correct on issues for the wrong reasons, in the way a stopped clock is right twice a day.

  52. 52
    juice

    Yeah, that’ll work. We’ll just have the neighbor, or whoever else feels like it, take care of things. No need for a professional paid force. What could possibly go wrong?

    Hey, I’ve got problems with anarchy too. I’m not an anarchist. I’m just explaining the scenario as an anarchist would. But “we” won’t have the neighbor do anything. The neighbor will act on his own if he chooses. A professional force would be preferable, I suppose.

    No, norms are general agreements held among people within a culture. Rights are by definition codified into law.

    Ok, then what do you make of the 9th amendment?

    And are you saying that rights are given by government to its citizens or subjects?

    It may be a norm that you don’t have sex with children, but strangely enough it happens anyway. To prevent it from happening, and to protect the rights of children, you must have laws and the means of enforcing them. Rights are not magically protected by public expressions of disapproval, or by vague hopes that someone steps up to play vigilante.

    Rights are claimed and defended, not bestowed.

  53. 53
    juice

    This is an argument that libertarians and other uncaring simpletons have been pushing for decades: life is complicated, and smart people can’t be trusted, therefore we can’t ever trust ourselves to make god laws.

    I wasn’t going to reply to you, but that Freudian typo made me laugh.

  54. 54
    pinkboi

    What is this desperate need from the left to bend over backwards to find some sort of common ground with people on the right? Libertarians are by and large an evil joke, and they are correct on issues for the wrong reasons, in the way a stopped clock is right twice a day.

    If you don’t have common ground with libertarians, you’re not a liberal.

  55. 55
    dingojack

    Careful there Juice (#52), in context you’re sounding a little like a member of NAMBLA.
    “I claim and defend my right to manipulate and abuse boys, let no government tread on my right!”
    :) Dingo

  56. 56
    exdrone

    I became wary about fundamentalist libertarianism when I listened more to John Stossel. I used to think he was just a skeptic. Someone once suggested that the government should provide some safety oversight and asked if he didn’t think that the FAA was a necessity. He countered that, if the FAA didn’t exist, the airlines would collectively implement a similar system and for less cost. I did a Colbert eyebrow raise.

  57. 57
    Area Man

    “Ok, then what do you make of the 9th amendment?”

    I make that it says that just because a right isn’t enumerated, it doesn’t mean that people don’t have it. In other words, the Bill of Rights does not exhaust all possible rights. I’m not sure what this has to do with anything though.

    “And are you saying that rights are given by government to its citizens or subjects?”

    Yes. Do you think rights magically spring forth from the head of a god, or get revealed through magic crystals or something? Even if you think that rights somehow exist as external abstractions floating about in the aether, rather than as social constructs, they are meaningless unless defined and protected by society. In practice, that requires recognition and enforcement by the state.

  58. 58
    Stevarious, Public Health Problem

    The protection company, or any neighbor for that matter, could defend the child from this by doing whatever it took to extricate her from the situation. That is, if the daughter did not consent. The parent and the slave buyer could be brought up on charges of violating the daughter’s right to liberty (if you want to word it that way)

    The protection company is heavily incentived to look the other way – they’re going to lose two customers if they come barging in. After all, their job is to make money by protecting paying customers, and she never gave them a dime!

    And, as you say, maybe the twelve year old girl consents to the arrangement.
    *retch*
    Fuck you very much for reminding me just how little libertarians have in common with liberals and other non-sociopaths. (In case you can’t tell, suggesting that a 12 year old girl can consent to being sold for sex is something that sociopaths do.)

  59. 59
    Improbable Joe, bearer of the Official SpokesGuitar

    If you don’t have common ground with libertarians, you’re not a liberal.

    In theory, sure. In some sense, in some instances, possibly. In practice, not so much. Like I said, libertarians can be right for the wrong reasons, and that makes them a dangerous ally. Doubly so if they are Ron Paul-types who are wrong on every issue once you scratch the surface.

  60. 60
    corkscrew

    Davidct @13:

    Certainly capitalism needs some regulation – Think of football with no referees. Government is a problem but there is no other agency strong enough to keep people playing by the rules. The market consistently fails at this. Libertarians underestimate just how creative humans can be at gaming the system.

    Actually, if anything, I’d say libertarians overestimate just how creative humans can be. They assume that anyone who truly wants to game the system will head straight for the system’s chewy centre: the government.

    As we’ve seen with the famously supine Environmental Protection Agency, getting the government involved only changes the battleground, not necessarily the verdict. However it also means that, once the battle is won, the victor has a whole series of scary powers that would otherwise not have been available to them. Any sufficiently bribeable referee is worse than no referee at all.

    The libertarian solution is quarantine: accept that the government will by its nature be subverted and so take steps to limit the damage it can do. I’m less happy with this approach than I used to be – there are a lot of situations where government intervention is clearly necessary, even if none of us agree about what they are… But I still think that skepticism is a good default position, especially in a world of people yelling “there oughta be a law”.

  61. 61
    juice

    I make that it says that just because a right isn’t enumerated, it doesn’t mean that people don’t have it. In other words, the Bill of Rights does not exhaust all possible rights. I’m not sure what this has to do with anything though.

    You said that for something to be a right it has to be codified into law. The 9th amendment is codified law that says that all rights are not codified.

    Yes. Do you think rights magically spring forth from the head of a god, or get revealed through magic crystals or something? Even if you think that rights somehow exist as external abstractions floating about in the aether, rather than as social constructs, they are meaningless unless defined and protected by society. In practice, that requires recognition and enforcement by the state.

    Actually, sometimes rights must be enforced against state intrusions. Rights do need (at least) two to tango. You need someone to claim the right and someone to recognize and accept it. The party that accepts it need not be the local, national, or global state though. You also don’t need an entire society.

    The protection company is heavily incentived to look the other way – they’re going to lose two customers if they come barging in. After all, their job is to make money by protecting paying customers, and she never gave them a dime!

    I’m not an expert on how private protection companies are supposed to work in an anarchist society, but from what I understand, the model (that doesn’t need to be followed) would be that neighborhood associations (that would also take care of other things) would collectively fund a protection/security agency that would then protect the rights of anyone that was within the boundaries of the neighborhood. They wouldn’t lose money if they were contracted by the neighborhood association. Or something.

    Look, I don’t even agree with it. I’m just explaining the proposition.

    And, as you say, maybe the twelve year old girl consents to the arrangement.

    If she does, what business is it of yours?

    In case you can’t tell, suggesting that a 12 year old girl can consent to being sold for sex is something that sociopaths do.

    Well, you seem to know it all and know the mind of every 12 year old on the planet.

  62. 62
    Raging Bee

    Actually, sometimes rights must be enforced against state intrusions. Rights do need (at least) two to tango. You need someone to claim the right and someone to recognize and accept it. The party that accepts it need not be the local, national, or global state though. You also don’t need an entire society.

    And that means…what?

    …but from what I understand, the model (that doesn’t need to be followed) would be that neighborhood associations (that would also take care of other things) would collectively fund a protection/security agency that would then protect the rights of anyone that was within the boundaries of the neighborhood.

    In other words, you’re replacing one government with something else that acts like a government without being called one. (My HOA is better than most, but I sure as Hell wouldn’t trust it to uphold anyone’s basic rights, or protect children against pedophiles or traffickers.)

    Look, I don’t even agree with it. I’m just explaining the proposition.

    Why are you so eager to explain and defend a proposition you don’t agree with and feel a need to run away from?

  63. 63
    Raging Bee

    He countered that, if the FAA didn’t exist, the airlines would collectively implement a similar system and for less cost. I did a Colbert eyebrow raise.

    Libertarians say that about workplace-safety regs too: take them all away, and business owners will immediately rush to take responsibility for worker safety. Just like they all did before the regs were written. It’s a classic case of magical thinking, from people who pretend to be so much more rational than those bleeding-heart Stalinist liberals.

  64. 64
    Stevarious, Public Health Problem
    And, as you say, maybe the twelve year old girl consents to the arrangement.

    If she does, what business is it of yours?

    The statement was sarcasm. A twelve year old girl is a child. Children do not have sexual agency and cannot consent to sexual activity. Even if they can be convinced or coerced into thinking they are okay with it. How did you get to adulthood in America without discovering that it is NEVER okay to have sex with children? Are you one of the people who thinks that everyone is giving the Catholic Church a hard time for no good reason? And how do you think that you can possibly be taken seriously in the future now that you’ve repeatedly stated that it’s okay for adults to have sex with children?

    Well, you seem to know it all and know the mind of every 12 year old on the planet.

    So you really don’t have any ethical objection to selling a 12 year old girl into sexual slavery, as long as she can be coerced into agreeing to it? Really?
    Gosh, why do people call libertarians sociopaths? You seem like a stand up guy to me! (This is also sarcasms, BTW. You are a terrible person.)

  1. 65
    On Externalities and Libertarianism « Threads from Henry's Web

    [...] Ed Brayton has written an excellent summary, and all I can say is I couldn’t agree [...]

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