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… is from page 212 of one of the most profound and insightful, yet sadly under-appreciated, articles in all of welfare economics: Carl J. Dahlman’s April 1979 Journal of Law & Economics article, “The Problem of Externality [2],” as it is reprinted in The Theory of Market Failure [3], Tyler Cowen, ed. (1988) (original emphasis):
[T]he concept of externalities – insofar as the word is intended to connote … the existence of an analytically proven market failure – is void of any positive content but, on the contrary, simply constitutes a normative judgment about the role of government and the ability of markets to establish mutually beneficial exchanges. That is to say, it cannot be shown with purely conceptual analysis that markets do not handle externalities: any such assertion necessitates an assumption that the government can do better. That this assumption is valid cannot be proved analytically, and it follows that market failure is an essentially normative judgment.
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