“The End of the Externality Revolution” by Andy Barnett and Bruce Yandle (Auburn University and Clemson University)
The externalities literature spans 100 years, thousands of journal articles and more than a few books, that collectively brought about a virtual revolution in views on market failure and the proper role of government. This literature includes a staggering array of instances in which authors find market failure, and a wide variety of proposed government mechanisms to be used in correcting the market’s errant ways. The authors of this paper are as guilty as others. We have also analyzed externalities and proposed government imposed solutions, but now wish to repent for the sins of our youth. Simply put, markets seldom fail because of externalities. Non-trivial externalities that arise in the use of private goods can persist only if governments prevent markets from working. In the absence of government impediments to market transactions, only public goods can yield externalities that can persist, and even this case is subject to qualification. Externality may be a term that is useful in categorizing resource allocation problems, but it adds little more.