Externalities and the State

Murray Rothbard and Ludwig von Mises argued that cases of negative externalities all turn out to be instances of failure of government to enforce individual property rights adequately. This article goes beyond Rothbard and Mises in claiming that failure to enforce property rights is far from the only way in which government gives rise to externalities. Indeed, rather than externalities requiring government intervention to remedy the problems they cause, this article argues that most actions of the government actually cause externalities. Looking at externalities in this way leads to the logical conclusion that government interventions are the main obstacle to markets’ attaining maximum social utility. The line of reasoning leading to this conclusion is as follows: (1) government failures lead to externalities; (2) externalities lead to market failures; ergo (3) government failures lead to market failures. Specific government actions whose externality-generating effects are analyzed include taxes, subsidies, price controls, government spending, monetary policy, prohibitions, and income redistribution.