For economists and other social-scientists working in the rational-choice tradition, a major rationale for government – indeed, perhaps the rationale for government – is that it eliminates (or dampens) externalities. Without the state, the argument goes, factories will spill too many pollutants into the air, harming millions of people without their consent. Preventing this negative externality requires government. Similarly, without government everyone tries to free-ride on other people’s provision of territorial defense against hostile outside aggression. The result is that too little defense is supplied because it is a positive externality; therefore, government must supply such defense.
This argument for government, though undoubtedly plausible, might or might be conclusive. I don’t join that debate here. I wish instead to point out that government creates as well as eliminates externalities.
One externality created by government – a negative externality – is the grouping of all citizens of a nation into one lump. For example, I’m an American. People who dislike (for whatever reason) policies pursued by the U.S. government often blame all Americans, even those who disagree with the particular policy in question.
If those people who dislike U.S. government policies seek to terrorize Americans because of these policies, every American is at greater risk of being a victim of a terrorist attack – even those citizens who strongly oppose the policies. This is a negative externality.
Another example: even those French winemakers and cheese merchants who opposed the French government’s position on the Iraq war suffered from Americans’ boycott of French products simply because these winemakers and cheese merchants happened to be French. This is a negative externality.
The above is not an argument against the positions taken by the U.S. government or the French government. It is merely a warning to avoid any fantasy that government eliminates (“internalizes”) all externalities. It might eliminate some; it inevitably creates others. Such is the inevitability of tradeoffs in reality.