… is from the conclusion of one of the most profound and insightful, yet sadly under-appreciated, articles in all of welfare economics: Carl J. Dahlman’s “The Problem of Externality,” originally published in the April 1979 issue of the Journal of Law & Economics; the quotation below is from pages 226-227 of its reprinted version in The Theory of Market Failure, Tyler Cowen, ed. (1988) (original emphasis):
This is not science; it is metaphysics: value judgments and political goals will enter into the determination of whether externalities occur in our world. You cannot show analytically that the government, in principle and in all cases, handles externalities better than the market; nor can you prove the opposite: it all depends on what point of reference you choose. And that is not a question of positive economics…. It is doubtful whether the term “externality” has any meaningful interpretation, except as an indicator of the political beliefs and value judgments of the person who uses (or avoids using) the term.
