When should the government intervene? In introductory economics lessons we introduce market failure. We discuss them in more detail in our secondary level economics lessons. In advanced and field courses, we delve into the different ways pure exchange doesn’t get the job done and how, theoretically, government could make things better.
Theoretically. The assumptions most textbooks make about governments, their capabilities and their motivations. A completely benevolent, all-powerful, all-knowing government would impose a tax equal to the marginal external cost of observing an externality. That’s a pretty heroic assumption, and it’s important not to confuse the model with reality and its assumptions for plausible descriptions of the world as it is.
To this end, a presentation by the philosopher Jason Brennan inspired a paper I am participating in a symposium in the Journal for Private Enterprise about the contributions of my late friend and employee of the Liberty Fund Steven G. Horwitz. Brennan and his co-author Christopher Freiman explained how all the arguments for regulating consumer choices apply equally to political choices. Sure, we’re irrational and weak-willed in the supermarket. The problem is worse at the voting booth because our incentives are even worse.
Brennan and Freiman explain that there are therefore a number of conditions that the government must meet before it can override people’s choices. I summarize them here. First, we must ask ourselves whether or not the problem we want government to solve is an unintended consequence of other government policies. Are you concerned about the environment and insufficient urban density? Let’s look at how government policies discourage urbanization and density (single-family zoning, for example).
Second, the private sector has already addressed many market failures. Are you concerned about the external consequences of passive smoking in restaurants and bars? That has already been converted into wages and prices – and an unintended consequence of the city’s smoking ban was that people drove to the suburbs to drink– and then killed people driving home.
Third, it is not always clear which governments we are Actually run by the people we have Actually chosen ones who are confronted with the stimuli Actually face will improve things. “Affordable housing” could be solved tomorrow if we get rid of rent control and the red tape that stands in the way of new construction. Telling people that you support policies that lower the value of their property or challenge their most cherished beliefs is a pretty handy way to ensure that you not be re-elected.
Fourth and fifth, we must ask whether or not the policy passes a cost-benefit analysis and how it changes people’s incentives. The Transportation Security Administration, for example, is a colossal waste of resources, with costs per life that far exceed the cost per life saved by other policies and initiatives. The TSA also made flying less convenient and increased driving, which meant more deaths on the highway.
Finally, even if the policy passes all these tests, people may have rights that trump the proposed policy. Even if eugenic forced sterilization policy If they pass all other tests – which they almost certainly would not – they violate people’s bodily autonomy and are therefore disqualified.
How should we decide when and where to intervene? As Steven Horwitz and I argued long agomarket failure are necessary but not sufficient conditions. Before we try to cure any disease, we must make sure that the medicine is not worse than the disease.
Art Carden is a Professor of Economics and Medical Properties Trust Fellow at Samford University.