GCC Students for Liberty

An externality exists whenever the action of an individual brings added costs or benefits to another individual. Phrased differently, externalities exist when the participants of an action don’t reap all the costs or all the benefits of that action. An example of this can be the nocturnal bagpipe player who waits until midnight in his quiet neighborhood to play. The cost of his action can be seen on the sleepy faces of his neighbors the next morning.

In much the same manner people can experience benefits of other people’s action. A classic example is the construction of a lighthouse along a rocky coastline. The merchants who initially pooled their resources to construct the lighthouse bore all the cost but can not keep others from receiving the benefits. Every ship will be able to see the lighthouse regardless of their contribution towards its construction.

Government action is called for by both collectivists and individualists based upon these two examples. Even Murry Rothbard, in his book Man, Economy, and State, advocates government action in dealing with these externalities. Rothbard advocates that judicial action be taken against those people who introduce costs on others through there actions writing:

In so far as the outpouring of smoke by factories pollutes the air and damages the persons and property of others, it is an invasive act. It is equivalent to an acto of vandalism and in a truly free society would have been punished after court action brought by the victims.[i]

Rothbard calls for judicial action against the externality of air pollution because it is an invasive act. Note that Rothbard does not advocate for a regulatory commission but only judicial action. It is to be handled in much the same way as theft or other property violations.

Paradoxically, the external benefits of an action are used by collectivists to advocate for government public works projects and subsidization. Thomas Cowen writes in The Theory of Market Failures, that the common understanding is that “markets will under produce goods and services whose provision would entail positive externalities.”[ii] The argument of the collectivist is that the capitalist will just sit and wait for someone else to build the lighthouse so no lighthouses will ever get built. They then conclude that no lighthouses will ever get built and therefore the government must build them.

Yet when the value saved by a lighthouse exceeds the cost of constructing it the private company will build the lighthouse. It becomes in their best interest to construct the lighthouse. The notion that just because people can’t be excluded from consumption of the services a lighthouse offers doesn’t mean that the free market won’t produce a lighthouse. The argument for government involvement really is quite silly when put into simpler terms: Government is going to tax everyone to provide for a service because other people could benefit from that service without paying anything at all! Simply because some people can receive positive externalities from an action in no way prevents the actions occurrence. At some point the lighthouse becomes profitable and it will be built. This is the triumph of capitalism: that even when everyone benefits, the free market will provide for goods and services without taxes or forced coercion.

[i] Rothbard, Murry N. Man, Economy, and State. Auburn, Alabama. Ludwig von Mises Institute, 1962. pg. 156

[ii] Cowen, Tyler. “Public Goods and Externalities: Old and New Perspectives.” The Theory of Market Failures. Tyler Cowen ed., Fairfax, VA. George Mason University, 1988.

Tags: capitalism, Communism, external benefits, external costs, externalities, market failure, market failure theory, public goods, public goods theory, public works