… is from page 4 of Harold Demsetz’s deeply insightful 2011 article in Vol. 7 of Review of Law & Economics, “The Problem of Social Cost: What Problem? A Critique of the Reasoning of A.C. Pigou and R.H. Coase (link added):
In response to the inefficiencies that he sees, Pigou turns to the State to levy taxes or confer subsidies that result in equality between private and social costs. His manner of doing this idealizes the State, which somehow knows the facts and is able to employ them at less cost than could private parties. He writes of idealized State-directed solutions to the problems that … are likely to have been caused by the State itself. A Nirvana State is a dangerous tool, for it diverts attention from the real underlying problem.
It is child’s play to identify all manner of ways in which reality in fact falls short of perfection. (It’s even easier to identify the many instances in which reality fails to satisfy the observer’s own preferences, although reality in those instances might in fact be the best attainable state of affairs given the preferences of everyone involved and given the constraints that those countless people confront.) And it is equally easy to imagine a superior being – one who is better informed, more powerful, and more magnanimous that ordinary humans – taking control of reality and adjusting it in ways that better serve the interests of ordinary humans. But as Demsetz warns, any real-world state invested with such a duty and mistakenly assumed to possess such sure knowledge, great powers-to-achieve, and fine motivations is itself a danger far worse than is the decentralized actions, choices, and exchanges of individuals operating in a regime of private property rights.
