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

SOCIAL COST
cost. However, there is a difference only in degree, not in
concept, between the two cases where:
(i) market transactions or contractual arrangements are
totally absent for some effects, as is allegedly the case for
pollution; and
(ii) market transactions are available for a good but the contractual
arrangements somehow fail to reach a condition
where social gain is maximised.
Again, in the case of a 'public' good, or a good amenable to
concurrent use by many people without additional cost, such
as a lighthouse or a television programme, it has been accepted
as a foregone conclusion that its production fails to equate the
private cost and the social benefit at the margin. For some
reason, efficient contracting is not attained.
For what reason? To say that a factory owner will not be
concerned with his polluted neighbourhood, a beekeeper will
not pay for the orchard's nectar, or a television viewer will
take a 'free ride', is simply to say, self-evidently, that every
individual wants to capture beneficial effects and to push away
harmful ones. But to assert that he is able to do so freely is to
claim that the world is without constraints. At what margin
the performer of an action will operate can neither be determined
nor explained without an appropriate specification of
the constraints involved.
Furthermore, economists who propose corrective policies
tend implicitly to assume unrealistic constraints on governments.
It is assumed, for example, not only that situations
exist which entail divergences between private and social costs,
but also that some state agency will incur a sufficiently low,
if not zero, cost in correctly assessing the values of various
marginal schedules, even for complex situations where multiple
uncontracted effects will have an impact on large numbers of
individuals. The blithe assumption of low costs of government
is further extended to the administration and enforcement of
the proposed policy. And finally, in the event that a subsidy or
a tax is proposed, it is assumed that the provision of tax
funds or the appropriation of their proceeds will not, in
themselves, lead to further problems of resource allocation and
income distribution.
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