-Hannah Mead, MCPP intern, 2008
A concept economists tend to get all wound up about is that of externalities. Externalities are costs or benefits of an action that don’t accrue solely to the actor. For example, the driver of a truck is unaffected by the mud his back tires kick up; that is, he does not bear the full cost of driving, and others bear the negative externality of mud splatters. I don’t know if it’s codified or simply convention, but we use mudflaps to minimize that externality.
Similarly, finding a solution to pollution and other issues of environmental quality is fraught with difficulty. Who ought to bear the cost for what, and how do we find that out and enforce it? This is a valuable question, and, Coase theorem notwithstanding, plagues policymaking. Inefficiency abounds as we fail to figure out how to internalize costs and benefits through either governmental or market means.
At the IHS Koch Summer Fellow Program seminar, the presenters took various angles on this issue, but most agreed externalities are likely a market failure. Dr. Mark Pennington, however, made a strong and, imho brilliant, point: “Politics is the art of externalizing costs.” We do well to keep this in mind when automatically looking to the government to address inefficiencies in the economy.