An Asymmetry

by Don Boudreaux on November 16, 2011

in Other People's Money, Seen and Unseen

Imagine a situation in which A, when pursuing his own interest within institutional setting Z, has inadequate incentives to take account of the effects of his actions on B.  Without intending any harm to B – perhaps without realizing that B might be affected by his actions – A likely harms B whenever A pursues his own interest when he chooses and acts in setting Z.

Economists, of course, have a name for this problem: negative externality.  In the paragraph above, A imposes a negative externality on B.  (Ignore here the important Coasean – Demsetzian consideration of mutual causality and the resulting difficulty in distinguishing the ‘harmer’ from the ‘harmee.’)  The typical conclusion is that, compared to the imaginable situation in which A is obliged to account fully for the costs that his actions impose on B, A’s failure to account for those costs results in outcomes that are subobtimal.

The typical economist insists that the situation in institutional setting Z, as it is, should not be allowed to stand.  It ought to be corrected.  A should be taxed, regulated, restrained, prohibited, something, from harming B.  Certainly it would be the eccentric economist indeed who argued in favor of increasing the number and frequency of A’s decisions that occur in uncorrected institutional setting Z.

So let A be a voter (or, alternatively, a government official).  Let B be a person in his or her capacity as a private citizen – say, as a homeowner, as a business person, as a restaurant diner.  Let Z be majoritarian democracy.

A in this setting Z routinely imposes unbargained-for burdens on B.
The point of the above, utterly unoriginal note is not to suggest that majoritarian democracy (or some other form of collective decision-making) is never the best available means of determining which actions some people will take.  The point, rather, is to provide background for asking why the free-rider, collective-action, externality problems that are regularly identified as sufficient reason for restricting the role and scope of markets are so seldom identified as reasons for restricting the role and scope of government.

Just a question.


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