… is from page 26 of Ronald Coase‘s 1988 essay “The Firm, the Market, and the Law,” which is the first chapter in the 1988 collection (with the same name: The Firm, the Market, and the Law) of some of Coase’s articles:
This conclusion [to be wary of government efforts to internalize “externalities”] is strengthened if we assume that the government is not like Pigou’s ideal but is more like his normal public authority – ignorant, subject to pressure, and corrupt. Whether there is a presumption, when we observe an “externality,” that governmental intervention is desirable, depends on the cost conditions in the economy concerned. We can imagine cost conditions in which this presumption would be correct and also those in which it would not. It is wrong to claim that economic theory establishes such a presumption. What we are dealing with is a factual question. The ubiquitous nature of “externalities” suggests to me that there is a prima facie case against intervention, and the studies on the effects of regulation which have been made in recent years in the United States, ranging from agriculture to zoning, which indicate that regulation has commonly made matters worse, lend support to this view.
DBx: One can disagree with Coase (and with me) that studies and analyses of the actual operations of the state compared with the actual operations of the market create a prima facie case against state intervention. But one cannot reasonably disagree that the identification of an “externality” in the market is insufficient to establish a case for state intervention. And yet such a move – from the identification (real or imagined) of an “externality” immediately to the conclusion that government therefore must intervene to ‘correct’ (or ‘internalize’) the identified “externality” – remains typical not only for politicians and pundits, but also for academic economists. Those who make this move are not adequately ‘reality-based.’