Externalities such as air pollution are often cited as an example of a problem that can be usefully addressed by public policy. In the real world, however, two factors cause externalities to be overemphasized as justification for regulation:
- Transaction costs
- Motivated reasoning
A recent article by Geoffrey Kabat in Reason magazine helps illustrate both problems. In 2003, Kabat and James Enstrom published a study showing that passive smoking had no statistically significant effect on mortality. According to Kabat, the response to their article is a classic example of motivated reasoning:
Since then, that conclusion has gone against the longstanding conventional wisdom behind it state and local bans regarding smoking in public places, our research has understandably sparked controversy in the public health community. But the intensity of the attack on us in the pages of a medical journal—by critics who were certain that our study must be wrong but generally provided no specific evidence of fatal flaws—vividly illustrates what can happen when policy preferences are taken over the status of doctrine prevails over rational scientific debate. . . .
Exposure to environmental tobacco smoke is known to cause eye and throat irritation and worsen pre-existing respiratory conditions. Moreover, for many people (myself included) it is simply unpleasant. But assessing the claim that ETS is potentially fatal requires a sober examination of the available scientific evidence.
Another example of motivated reasoning occurs when people complain that smokers lead to higher taxes due to public health care spending, ignoring the offsetting fact that they live significantly shorter lives and thus receive smaller public pensions. There are good reasons to be annoyed by smoking, but higher tax costs are not one of them.
Kabat points out that a new scientific study came to largely similar conclusions regarding passive smoking:
A recent study Researchers at the American Cancer Society (ACS) underscore this point by showing that, contrary to what our critics have claimed, the cancer risk posed by ETS is likely negligible. The authors present that striking result without commenting on it, which could reflect their unwillingness to re-enter a debate that anti-smoking activists and public health officials wrongly view as long settled.
The other problem with passive smoking legislation is that it ignores the issue of transaction costs. Ronald Coase showed that government policies to address external factors are only necessary when there are large transaction costs associated with negotiating a private solution to the problem. To the extent that passive smoking is a problem, it occurs almost exclusively indoors. This means that the problem is most easily addressed by the owner of the property where smoking occurs.
Governments can regulate passive smoking in government buildings, and private owners can regulate passive smoking in private buildings. There is no clear reason to let the government regulate behavior in a private environment. Property owners already have an incentive to regulate passive smoking when the benefits of such regulation outweigh the costs.
This is not to deny that externalities exist that reflect market failures. I support carbon taxes to tackle global warming. But even when it comes to this issue, which the private sector cannot easily solve, I see many examples of motivated reasoning. Proponents of ‘degrowth’ appear motivated by a distaste for our modern industrial society, using global warming as an excuse to push for a return to a simpler past. Carbon taxes are not an attractive solution for those with such an agenda, because they would allow society to tackle global warming without giving up all our modern conveniences. For some degrowth advocates, the efficiency of carbon taxes would be a bug, not a feature.