What to do when one individual’s pursuit of her own self-interest collides with the well-being of another person? That is a difficult problem in any economic philosophy, but it is especially troublesome for libertarians who fiercely oppose government regulation of private behavior.
A couple of months ago, Sarah Palin caused gasps, even from an extremely friendly audience near Sacramento, Calif., when she opined that they must be tired of government telling people what they cannot do, such as drilling wells on their own property. Many Californians may be rock-ribbed conservatives, but in that water-hungry state, nearly everyone realizes that without any social institution to control use of a common-pool resource like groundwater, aquifers will be pumped dry and society as a whole will be worse off.
The need for mechanisms to limit such external costs does not just arise from control-freak impulses of liberals. Economic theory is unequivocal and embraced by economists across the political spectrum: Without any limits on such external costs, resources get used less efficiently.
External costs, or “negative externalities,” make society poorer, with fewer goods and services produced to meet people’s needs and wants than is optimal and possible. The problem becomes one of efficiency, not just one of fairness. That is the hard nut with which libertarians have to wrestle, and few do so with any success.
Some libertarians, who exalt individual liberty as the supreme value for a society, note that one person’s liberty to act ends when such actions harm someone else. Take that rule to an extreme, however, and all sorts of daily acts become impossible.
Even with careful husbandry, growing corn on our farm southeast of Pipestone may mean that a couple of tons of topsoil washes off each acre and into the little creek that flows from our farm through the Rock, Big Sioux, Missouri and Mississippi rivers into the Gulf of Mexico. Each ton carries with it nitrates and other pollutants. The sediment itself causes harm to others.
A truck moving human necessities like food to stores emits particulates that harm people with respiratory problems. So does having a cozy blaze in an indoor or outdoor fireplace. Driving to work, even in an economy car, releases some amount of nitrous oxides and other pollutants.
Say “absolutely no actions that harm others” and modern life grinds to a halt. And how do you enforce that rule without government?
Nobel laureate Ronald Coase, a hero for many libertarians, argued that economies can still use resources with optimal efficiency as long as they define property rights with sufficient strictness. Either pass a law establishing a right not to be polluted or a right to emit pollutants. Then let whichever party is aggrieved sue the other. No need for any Environmental Protection Agency or Department of Natural Resources or Natural Resource Conservation Service. You need a court system and that is it.
This, however, assumes, that information is perfectly available and that the transaction costs of suing are zero. But how does a Louisiana fisherman with declining catches know that soil and nitrates from Ed Lotterman’s farm are enlarging the dead zone in the Gulf?
Some argue that private self-interest will prevent polluting acts. Just as Alan Greenspan still argues that financial regulation is not needed because profit-maximizing financial firms won’t take on excessive risk, others argue that farmers have an incentive not to allow erosion since it reduces the productivity of their farmland.
Soil scientists know, however, that levels of topsoil loss well within levels that can be regenerated naturally still can cause harm in a watershed. The loss of soil the thickness of five sheets of typing paper from our 211-acre farm would put 40 dump trucks of sediment into the watershed. At that rate the farm can remain fertile forever but someone downstream will be hurt. And assuming that they can sue me to stop it is unrealistic.
Pass a law banning farming? People need to eat. Ban the use of tillage practices that have higher soil loss? This is the dreaded government regulation of private activity. Pay Ed Lotterman more than $30,000 to implement a rotation grazing system in his pasture that will keep forages longer and thus filter out more runoff from tilled fields on top of the hill? This is what is actually happening, but some will call this wasteful government boondoggle and shameless looting of the Treasury, largely for private benefit. There are no clean and easy solutions.
Such situations are not rarities. They happen every day and affect nearly everyone. Government regulation of externalities sometimes is ineffective and often wasteful. But the alternatives are worse and libertarians have no coherent alternative that works better in most real-world situations.
© 2011 Edward Lotterman
Chanarambie Consulting, Inc.