Externalities

One version of libertarianism holds that governments should intervene only when private actions harm someone else’s person or property; that is, only when private actions generate externalities. For example, externality libertarianism opposes policies that sanction drug or alcohol use, arguing that any harms accrue mainly to those who consume these goods.

The externality perspective on government policy is a useful rule of thumb. Most government policies that make sense are ones that address substantial externalities like crime or pollution. Nevertheless, the externality perspective is incomplete.

The first problem is that almost any action generates at least some externality. Driving under the influence of drugs or alcohol, for example, causes accidents. More broadly, some might claim they suffer a negative externality from contact with persons of particular races, religions, or political views; or from disparities in wealth; or from seeing messy clothes.

Thus, externalities might appear to justify apartheid, wealth redistribution, or taxes on T-shirts, yet no one would accept such logic. One can attempt to avoid this problem by considering only “substantial” externalities, but this quickly becomes hopelessly subjective. The mere existence of externalities, therefore, is not a convincing basis for government intervention.

A second problem is that even when externalities are substantial, government attempts to reduce them generate their own side effects. In some cases these unintended consequences are worse than the externalities; drug prohibition is a standard example.