Yesterday, John linked to (a slimmed down) Mike Moffatt's post on Bryan Caplan's take on negative externalities and the Pigou Club (follow that?). Caplan says:
My view is that people have a right to create all sorts of negative externalities, and other people basically just have to live with them. Unhappy campers have a right to complain about the externalities, refuse to associate with those who create them, or buy a large bloc of land and require visitors to abide by their rules. But they have no right to pass laws to do anything about most externalities.
The post piqued my interest enough to post a comment (below the jump). The upshot: Caplan's wrong.
Here's the comment I posted on Moffatt's site:
I think I am missing something here. I understand the property rights/individual rights argument that Caplan is making, but as an economist, he is failing to account for the efficiency argument. That is, the economic argument for the regulation externalities is about the misallocation of resources to their most productive uses. The market system that Caplan holds so dear (as do I) works if all costs and benefits are internalized by all actors in the market. Failure to capture external costs or benefits, by definition, results in an inefficient allocation of resources. To alleviate the inefficiency, a price for the externality has to be established. The tax is simply one way of doing this. To me, I prefer a trading system that allows the participants in the market to establish the price, but that is the point of the tax v. cap and trade debate. If we want to see whether the public cares about the cap, set the cap above current pollution levels and see if the public buys up the excess.
After thinking more about it last night--while waiting for another deluge to subside at the softball fields--I missed something in that last sentence. The cap plays an important role in establishing the market. It eliminates the incentive for the public to free-ride off each other. Suppose the cap is set at current pollution levels in the hopes that everyday citizens will jump into the newly created market and buy up any excess permits, resulting in the efficient level of pollution.
What would an everyday citizen do? Buy up permits, or wait for their neighbor to do so? Even if I am willing to pay $200 to reduce a ton of carbon, I might not actually have to pay that to get the benefits. If everyone else pays what they are willing, then I get the benefit and incur no cost--a win-win for me. But if everyone thinks like I do (a scary thought, I know) then no one will buy permits and no one benefits. It's the classic public goods problem. Because it is impossible to establish clear property rights for global pollutants--air is funny that way--it is nearly impossible to eliminate the ability of certain groups to capture benefits without incurring the true cost. That's a market failure and means that markets are not working the way most reasoned-thinking libertarians would hope.
I agree with the basic premise of libertarianism: Governments should not limit individual freedom. But, when individuals take advantage of market failures to limit each other's freedoms, then the government has a role in correcting the market failure. I should have as much right to decide how much clean air I am willing to pay for as you have to decide how much you are willing to pay to pollute. If the market is working properly, then the government should butt out. If the market however doesn't allow such decisions, then I want the government to establish a system that allows me to decide how much damage I am willing to pay to avoid.
In my opinion, Caplan's "tough shit" approach to policy is anti-market.
