Let’s say the federal government has 1 billion dollars at its disposal, and it has to choose between spending it on buying me a huge mansion, or on installing teleportation booths in every major city across the U.S. Which spending outlay should the government commit to?
I personally want them to buy me the mansion. But you, as an economy-minded citizen, understand that with the teleportation booths installed, Americans can now live in Atlanta, work in New York and hang out in Los Angeles, all in one day. This will improve efficiency because sellers and buyers who are good matches can meet each other more easily, meaning more economic activity will take place in any given week. Of course, for the good of society, you’ll want the government to build the infrastructure (you bastard).
Here’s something to appreciate though: this network of booths, like our highways and our train stations, wouldn’t be possible without the government. No individual organization will spend a billion dollars just to improve transportation. As individuals, they couldn’t possibly get a return. You know who will get the return instead? Most of the public.
So if the public is the main benefactor of infrastructure, and if no individual organization is willing to take on the burden of paying for it, it only makes sense for us to be the ones to invest in it. Together, via our tax dollars.
Note: Transportation isn’t the only kind of infrastructure that can improve economic efficiency. There’s also infrastructure for telecommunications, waste management, primary education, electricity grids and irrigation; basically anything whose foundation would make a profit for society, but not for investors in the free market.
Say a man asks you to jump out a third story window for 1000 dollars. He tells you there’s a giant invisible trampoline outside that he invented himself. I assure you that the man is a renowned physicist and that there have been five people before you who took the jump and came out injury free. You know me enough to know that I, of all people, would never make up a lie. So based on what you know, the rational choice would be to jump and make 1000 dollars.
But here’s the thing: just because a decision is rational, doesn’t mean it’s informed. What you didn’t know is that the “physicist” was actually a serial killer. He knew you trusted me, so he paid me 1000 dollars to tell you to trust him. By jumping, you broke both your legs, meaning you made a poor economic choice.
But the choice was rational, because the decision was based on given knowledge and probabilistic reasoning. So who’s the real culprit in this? Information asymmetry, i.e. the lack of complete information between buyer and seller.
In our economy, people jump out the proverbial window all the time.
-People take jobs, whose descriptions don’t explain the actual job (including the risk and stress involved).
-People attend college expecting employment and high salaries after graduating, even though the school doesn’t disclose the prospects of recent graduates with their GPAs and majors.
-People buy un-labeled products that predispose them to cancer.
When it’s cost-effective, the government should enforce laws requiring full disclosure; so people can live in a society where they could make more informed decisions.
Say I find a feral dog. I pet it, feed it and lure it into my car. I intend to take it to an animal shelter, where a loving family can adopt him. But I find out that the nearest shelter is 20 blocks away, and I rather not waste gas. So I go with a cheaper option: I go five blocks back and drop him off at your house. Don’t worry, I don’t ask for your permission; so the dog doesn’t have to see us argue.
An externality is a cost or benefit on a non-consenting party. If you hate feral dogs, this would be a negative externality. If you like them (which I hope you do), this would be a positive one. Instead of worrying about the potential negative externality, I decided to save money. Can you blame me?
When a business has an incentive to produce negative externalities on society, it is the government’s job (when cost-effective) to de-incentivize. For example, if a business wants to dispose industrial waste into a fisherman’s lake to save money, the government can fine them so that disposing waste there would cost more money than it saves. Or if a business has to pollute, the government can fine them if they pollute beyond a level that would be harmful to public health.
Curbing negative externalities is curbing the social costs of individual selfishness.
Say there’s a country where there is no police, no court system and no prisons. You, being naive about the ramifications, decide to open a shop there, to sell an assortment of candies, pastries and canned goods. You buy your entire inventory, and you’re excited to start your first day of work. But when you open the store in the morning, you realize that everything has been either destroyed or stolen. You’re shocked. You find fingerprints and check the hidden surveillance footage, and figure out who the bandit was (it was me). But you don’t know where he lives, and there is no government that will make an effort to prosecute him.
What should you do? Uh… nothing. I don’t wanna get killed. But if anything, maybe you should reflect, and recognize that buying inventory in a world that doesn’t protect property rights was a stupid thing to do.
Without property rights, there is little reason to make or spend money. If our sacrifices to create wealth results in that wealth being easily taken away, then why sacrifice in the first place? And why sacrifice in the future?
On an advanced note: intellectual property rights motivate us to invent. People are more likely to invent novel products that make the world a better place if they know some lazy quack can’t take credit for their ideas.
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