THE MYTH OF SOCIAL COST.pdf - Institute of Economic Affairs

PROLOGUE
occupation with imposing damages for past events and a prejudice
in favour of injunction for potentially continuing activities.
Clearly, these interventions do not appear to be adequate. In
such circumstances, government intervention will appear
appropriate, and indeed the vast majority of the literature on
externality has argued for its use. The instruments recommended
range from a Pigovian tax (Cheung, pp. 27-29, 30-32), through
a Coase-type tax-subsidy (Cheung, pp. 33-34), to 'public' (i.e.
government) ownership of the offending activity (e.g. nuclear
power stations). Whatever method of intervention is adopted,
Professor Cheung's Paper will warn the wary reader not to overlook
four fundamental issues usually ignored in the writings of
'welfare' economists who have not been reared in the modern
traditions of public choice, Virginia-blend.
Fundamental issues
First, no-one should expect that governments will behave
simply as social agencies whose sole or primary purpose is to
maximise welfare. Research during the past decade (by
Buchanan, Tullock, Breton et alia) has confirmed lay suspicions
that politicians maximise their own objectives, including power,
income, ideology and patronage subject to the 'constraints'
imposed by elections. 1 For the most part, politicians are
interested in externalities for their own sake as much as
alcoholics are interested in the profitability of brewers. In
practice, the consumer interest in the environment is likely to
be dominated politically by producer interests, so that activities
producing externalities adverse to consumers will be excessive.
Second, the evidence is mounting 2 that government sector
interventions are themselves excessively costly. The bureaucracy
necessarily involved in imposing the political will upon
the populace always has an 'opportunity cost' in activities forgone
that could have benefited the public. But recent developments
in the economics of bureaucracy 3 suggest that these
1 This subject is discussed fully by economists and others in The Economics of
Politics, IEA Readings No. 18, IEA, 1978.
2 As recent issues of Public Choice and The Journal of Law and Economics clearly
indicate: published respectively by the Center for Study of Public Choice,
Virginia Polytechnic Institute and State University, Blacksburg, Virginia, and
the University of Chicago Law School.
3 William A. Niskanen, Bureaucracy and Representative Government, Aldine-Atherton
Inc., New York, 1971, and Bureaucracy: Servant or Master?, Hobart Paperback 5,
IEA, 1973; Gordon Tullock, The Vole Motive, Hobart Paperback 9, IEA, 1976;
The Economics of Politics, op. cil.
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