External effects such as air pollution are often cited as an example of a problem that can be usefully addressed by public policy. In the real world, however, two factors cause externalities to be overemphasized as a justification for regulation:
Transactions costs
Motivated reasoning
A recent article by Geoffrey Kabat in Reason magazine helps to illustrate both of these problems. Back in 2003, Kabat and James Enstrom published a study showing that second hand smoke had no statistically significant effect on mortality. According to Kabat, the reaction to their paper is a classic example of motivated reasoning:
Since that conclusion flew in the face of the conventional wisdom that had long driven state and local bans on smoking in public places, our study understandably sparked a controversy in the public health community. But the intensity of the attack on us in the pages of a medical journal—by critics who were certain that our study had to be wrong but typically failed to provide specific evidence of fatal errors—vividly illustrates what can happen when policy preferences that have taken on the status of doctrine override rational scientific debate. . . .
Exposure to ETS is known to cause eye and throat irritation and to exacerbate preexisting respiratory conditions. In addition, it is simply disagreeable to many people (including me). But assessing the claim that ETS is potentially deadly requires dispassionate examination of the available scientific evidence.
Another example of motivated reasoning occurs when people complain that smokers lead to higher taxes due to spending on public health care, ignoring the offsetting fact that they live considerably shorter lives and thus collect smaller public pensions. There are good reasons to be annoyed by smoking, but increased fiscal costs are not among them.
Kabat points out that a new scientific study reached broadly similar conclusions regarding second hand smoke:
A recent study by American Cancer Society (ACS) researchers underscores that point by showing that, contrary to what our critics asserted, the cancer risk posed by ETS is likely negligible. The authors present that striking result without remarking on it, which may reflect their reluctance to revisit a debate that anti-smoking activists and public health officials wrongly view as long settled.
The other problem with second hand smoke legislation is that ignores the issue of transactions costs. Ronald Coase showed that public policies to address externalities are only necessary when there are large transactions costs to negotiating a private resolution of the issue. To the extent that second hand smoke is a problem, it is almost entirely in indoor settings. That means the problem can be most easily addressed by the owner of the property where the smoking occurs.
Governments can regulate second hand smoke in government buildings, and private owners can regulate second hand smoke in privately-owned buildings. There is no obvious rationale for having the government regulate behavior in a privately-owned setting. Property owners already have an incentive to regulate second hand smoke whenever the benefit to such a regulation exceeds the cost.
This is not to to deny that there exist externalities that reflect market failures. I favor carbon taxes to address global warming. But even on that issue, which the private sector cannot easily address, I see many examples of motivated reasoning. Proponents of “degrowth” seem motivated by a distaste for our modern industrial society, and use global warming as an excuse to push for a return to a simpler past. Carbon taxes are not an appealing solution for people with that sort of agenda, as they would allow society to address global warming without giving up all of our modern conveniences. For some advocates of degrowth, the efficiency of carbon taxes would be a bug, not a feature.
