Wednesday, June 13, 2007

Pigouvian Externalities, aka Grey Car Silver Car...

Greg Mankiw discusses The Limits of Pigou.
What consists of a nuisance which can be considered encroachment, and what is merely bad taste to be ignored?
or as he put it:
"When does correcting externalities start to offend principles of liberty?"
My response:
A line seems clearly to be drawn at whether the externality is ignorable or not. But how to deal with the nuisance is a more interesting question. Why employ the state and empower it when individuals can assume responsibility themselves? If your neighbor presents a nuisance, they should be confronted, personally, and tactfully. Allow the Coase proposition to work. Make a deal. Initiate a transaction whereby gains from trade might be captured, and contracts might be established so that property rights are reinforced.
By introducing coercion and employing the state we make the assumption that the state ultimately owns all the property and we forfeit our sovereignty. Bad idea.
Apply the golden rule.

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