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

J. BURTON
IV. CONCLUSIONS FOR PUBLIC POLICY
What conclusions may we draw for public policy?
First, the Pigovian policy rule—that externalities necessitate
'corrective' government action—is dangerously over-simplistic.
It is incorrect as a general rule for efficiency in resource allocation.
Its application often leads to a more serious misallocation
of resources than that arising from the externalities which
government action is supposed to correct. The Pigovian analysis
has provided a pretext for a long list of intervention measures
in urgent need of re-examination.
Second, the Pigovian analysis contains an implicit bias
towards 'intervention solutions' for externalities, in the form of
taxes, subsidies, regulations and prohibitions.
Third, recognition of the fundamental role of attenuations of
private property rights in generating externalities leads to
consideration of the alternative policy of re-defining property
rights. The advantages of this approach are that it harnesses
the incentives for individuals, and the relative cheapness of the
price system as a means of generating and utilising information,
in the interests of conservation. 'Intervention solutions', on the
other hand, suffer from the defects of administrative complexity,
high costs, and political and bureaucratic bias. A private
property approach is not applicable in all instances, but
insufficient attention has been paid in the past to the possibilities
of applying it. It deserves further exploration by
economists, technologists, and environmentalists.
The general conclusion for public policy is the classical one:
given the inherent defects, complexity, cost and bias of an
intervention solution, the general rule should be to let the
price system deal with externalities wherever possible: by
re-defining property rights and removing barriers to trade due
to externalities. Government intervention—domestic or supranational—is
best kept as a 'solution of the last resort': to be
used only when and where high and irreducible transaction
costs prevent the internalisation of externalities by private
action. Even on these grounds, government intervention must
be carefully scrutinised, because the costs and external side-
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