Efficient Markets 
Saturday, November 29, 2008, 03:34 PM
I participated in a comment thread over at Megan McArdle's blog, one of my new favorite places on the web.

What they are describing is generally called a "negative externality." A negative externality is where you do not bear the full cost of your economic activity: it is borne by another individual, group of individuals, or society as a whole. Environmental issues lend themselves to easy illustrations of this, but noise pollution from a bar could also be classified as a negative externality.

The key point here for libertarians is that markets do not function efficiently in the face of negative externalities. If I'm producing widgets for $5 and selling for $10, but Joe and Bob incur $15 of damage to their property every time I produce a widget, then society is operating at a net loss. If you don't have an efficient market, then you don't have all of the much-touted benefits of capitalism.

In general, there are two ways to deal with negative externalities:

1) You can regulate them. This involves either prohibiting certain activities (NO loud music after 2 a.m., etc) or setting caps (max carbon emissions per year, etc.).

2) You can price them in. In the widget example, this would mean that the gov't imposes a tax on me of $15 to compensate Joe and Bob.

Libertarians and conservatives tend to reflexively act against anything that calls for more government involvement. The problem here is that many confuse a useful tactic (less government regulation) with the strategic goal (an efficient market). If you achieve the former at the expense of the latter, it really doesn't count as a win.

Administrator (Peter Hsu) 
Monday, December 1, 2008, 04:12 PM
I donít mind at all Ė itís great to have commenters on my blog! Your problem of noise pollution is not unique to India (Egypt, among other places, has similar severe problems) so thereís certainly a large appetite for a solution. In noise pollution Ė as with air pollution Ė high transaction costs combined with the difficulty of collection make it very difficult impose some sort of free market solution. Further complicating the issue is that honking your horn is not an economic activity per se. People donít honk their horn because theyíre hoping to realize a profit on the transaction, but rather for a host of other reasons. Therefore reducing noise pollution in this case isnít to preserve an efficient market, but rather to reduce a societal ill.

In this light, itís just like graphiti or any other nuisance: we impose a financial penalty or we put the person in jail. Both solutions are designed less to provide compensation to the victim, but rather to discourage the activity in the first place. My starting place for preventing excessive horn-honking would be simple fines. I know you say this will not work, but I am not sure why. In many cities in the United States parking tickets are issued for parking illegally, and the cities come to see this as an important revenue stream and reward public servants in charge of such issues accordingly. Perhaps corruption or cultural issues may make this difficult initially, but it should be possible to impose a fine that isnít so high as to discourage issuing tickets but not so low that people simply ignore it.

The closest thing to a free market approach you could implement would be congestion pricing, which would reduce both the level of noise and the number of cars on the road.

Sunday, November 30, 2008, 10:06 AM
I responded to your comment there, but I'll post it again here to engage with you directly, I hope you don't mind. Here is what I wrote:

Reading Peter's comment on negative externalities --particularly noise pollution-- seems to make so much sense. Noise pollution is a terrible scourge in urban India.

Tell me libertarians, what market-based solutions would you use to eliminate or at least drastically reduce noise pollution from motor traffic in India's crowded cities? Financial incentives? Is noise pollution somehow different, in this debate, from other forms of pollution, which often leave a tangible residue?

Banning car & truck horns will not happen anytime soon (which is what I would do if I were dictator here), and zoning restrictions (ie city laws) prohibiting honking in certain areas are completely ignored. what to do? Has anything been published on economic solutions to noise pollution?

Lately the noise level in India has affected me in a deep and negative way, and I am convinced people are really suffering here from the racket--but it's very low priority for the government, so there is zero enforcement of the very few regulations against it. And in any case everybody simply ignores the laws; what might work in the States would not work here. I would like to start a campaign to raise awareness of this problem, but, as a soft libertarian, I'd rather find some way rather than government intervention.

So your #1, regulation, is not a viable option. And I don't see how #2 would work either. I like the idea mentioned here:
of having the horn blare inside the car as well--but how could that be mandated any more than other "rules."?

While I am learning that noise pollution is definitely associated with increased stress, etc, it is very difficult to measure the "pollution" of it, compared to, say, an oil spill, or stack emissions from the factory. And those forms of pollution are often more traceable. Here, it's impossible to trace or place blame on the hundreds of drivers in a large junction.

I apologize for perhaps being to detailed or taking over the thread, but I have been thinking about this for months, and it has become an important issue to me. thanks for your input.

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