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Source link: http://archive.mises.org/13705/the-problems-of-external-costs-and-external-economies/

The Problems of External Costs and External Economies

August 27, 2010 by

Carried through consistently, the right of property would entitle the proprietor to all the advantages that the good’s employment may generate — and all the disadvantages resulting from its employment. FULL ARTICLE by Ludwig von Mises


Ned Netterville August 27, 2010 at 1:46 pm

This chapter should be required reading for all environmentalists. Long before Rachel Carson wrote SILENT SPRING, which is credited by many with launching the modern environmental movement, Ludwig von Mises wrote HUMAN ACTION, and in it called attention to the true causes of environmental degradation.

P.M.Lawrence August 29, 2010 at 9:30 am

It is true that where a considerable part of the costs incurred are external costs from the point of view of the acting individuals or firms, the economic calculation established by them is manifestly defective and their results deceptive. But this is not the outcome of alleged deficiencies inherent in the system of private ownership of the means of production. It is on the contrary a consequence of loopholes left in this system. It could be removed by a reform of the laws concerning liability for damages inflicted and by rescinding the institutional barriers preventing the full operation of private ownership.

Not necessarily, because of a subtle implication. The reform itself would need to be enforced, which in turn creates costs. These could also be external in the same way. For what we might call the “natural” subject matter of property rights, say property in land, it’s usually a non-issue; centuries ago, the owners themselves dealt with trespassers and the costs mostly sorted themselves out, and more recently the police do it and, although that does generate external costs through the way the police are funded through taxes that fall more broadly, at least the costs are far smaller than the costs of not having a property system at all. But that’s not so with everything; the policing costs of other subject matter, say the internet (if they ever decide to put it in “responsible” hands), could easily outweigh the benefits. Certainly, there have been many cases where things did work out that way, e.g. the costs of sending gunboats to protect a country’s citizens’ overseas property were material and didn’t get billed to them.

The government has no more ability than individuals to create something out of nothing. What the government spends more, the public spends less. Public works are not accomplished by the miraculous power of a magic wand. They are paid for by funds taken away from the citizens. If the government had not interfered, the citizens would have employed them for the realization of profit-promising projects the realization of which they must omit because their means have been curtailed by the government.

And it has no less ability. While it is not usual these days, it is certainly true that, historically, some governments have indeed undertaken genuinely profitable activities (although, of course, they typically also added their own compulsion to get a further boost). And public works have often not been paid for by funds taken away from the citizens but by more direct compulsion, e.g. forced labour. In those cases, typically in colonial situations, it usually didn’t curtail “profit-promising projects” (which didn’t exist for the forced labourers, by and large) but people’s leisure and comfort – which the authorities viewed as idleness.

If the government, yielding to the demands of the interested pressure groups, builds the railroad and runs it at a deficit, it certainly benefits the owners of farm land in those poor districts of the country. As a part of the costs that the shipping of their products requires is borne by the treasury, they find it easier to compete with those tilling more fertile land to whom such aid is denied. But the boon of these privileged farmers is paid for by the taxpayers who must provide the funds required to defray the deficit… The government attains its end of benefiting some parts of the country with what they would have missed, but it produces somewhere else costs that exceed these gains of a privileged group.

That is wrong, because it is not 100% true that “the boon of these privileged farmers is paid for by the taxpayers who must provide the funds required to defray the deficit”. Some of the cost is not borne by that funding burden but by the losses of those who lose their market advantage – and, sometimes, those are in other countries, so the external cost is a non-issue for the taxpayers and residents of the country doing it. That is what happened with the Erie Canal, which diverted Great Lakes trade away from Montreal to New York. This doesn’t affect the principle of dealing with externalities, but it does show that these things can be sound policy for the perpetrators.

Bruce Koerber August 29, 2010 at 5:11 pm

Economic Externalities Can Be Eliminated By Refining Property Rights.

As part of the re-construction of a society (away from the destruction of society caused by Keynesianism/socialism/empiricism/interventionism) it will be necessary to redefine and continually refine property rights. This will require the abolition of ego-driven interpretation by improperly educated ‘economists’ and of course it will require the abolition of the ego-driven interventionists.

The foundation, then, for this reconstruction is the axiom: property rights are human rights and human rights are property rights. As this axiom is instituted into the law and order of society by defining and continually refining property rights along these lines the natural incentives that serve humanity via the market process will alleviate unsound pressures on the physical resources of the planet.

Current August 29, 2010 at 6:27 pm

P.M.Laurence’s comment above is excellent and gives a list of items for future research.

Ethan August 30, 2010 at 1:14 am

Where is the picture for this post taken? It looks a lot like the west coast of Cornwall.

guard August 30, 2010 at 2:17 am

“P would withdraw capital and labor from the realization of some other projects for which the demand of the consumers is more urgent”
A warning here that arguments about property rights will ultimately have to rest on morality: proscriptions against theft. The arguments above are based on a kind of zero sum thinking and will eventually run aground. From the standpoint of hard sciences, we do not live in a closed universe and we do have the ability to create, Mises’ sneering comments about a magic wand notwithstanding.

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