When Princeton's Roland Benabou visited GMU a couple weeks ago, he made an argument I've occasionally heard before: Non-economists would disagree with economists less, and respect our views more, if we put more emphasis on the concept of externalities. When economists talk about markets, the argument goes, we usually seem tone deaf to non-economists' concerns. If we put more emphasis on the concept of externalities, non-economists could see that it is easy to translate their concerns into our language - and that we have every reason to take their concerns seriously...The Benabou position is more in line with my own thinking. I believe economists are tone-deaf to the general public, and we should take their concerns more seriously - instead of just talking about the merits of the free market in general or shouting COASE THEOREM whenver someone brings up the concept of extrernalities. Too many intelligent people write off economics as being libertarian (or conservative) ideology masquerading as a science.
If we explain the concept of externalities properly, non-economists will continue to give us the cold shoulder. Here's why.
1. The concept of externalities relies entirely on economists' standard notion of willingness to pay. If people are willing to pay to preserve a rare species of monkey, there may be an externality. If no one cares, there's no externality. The upshot is that the concept continues to slight non-economists' concerns about fairness, intrinsic value, equality, etc.
2. If an externality exists, the economically efficient solution is normally a tax or subsidy. That's it. But non-economists are usually looking for an excuse for government to ban or nationalize. At minimum, non-economists want to use hands-on regulation - not just add a tax and say "OK, problem solved."...
Caplan states that "non-economists are usually looking for an excuse for government to ban or nationalize". But often this might be the most efficient case.
Take a stylized example from my own life. I am trying to grow organic tomatoes in my backyard, and I live at the bottom of a hill. Some of my neighbours, at the top of the hill, use pesticides and herbicides to keep a picture perfect lawn. Whenever it rains, pesticides are washed away from their lawn and end up in my backyard and on my tomatoes, because I live at the bottom of the hill.
Environmental groups are calling for a ban on the use of pesticides for residential use on lawns. I would naturally prefer some kind of tax/subsidy arrangement, but given collection and enforcement costs (and the natural Pigovian problem of what to set the rate at), is it reasonable to suggest that, in this case, a Pigovian solution makes more sense than a legislative one?
I think the disconnect between economists and non-economists isn't that non-economists are anti-market. Rather it's that academic economists have this habit of assuming away a lot of the facts, such as transaction costs, enforcement costs, collection costs, less than full information, etc. that make real life problems less black-and-white so much more difficult. First, we must assume that we have a can opener, indeed.