The Government's Role: When should it step in? | Chapter 6

We can probably agree that the government shouldn’t make every decision for us, but when should the government act? What kinds of laws and regulations is it responsible for putting in place?

The first laws most of us think of are the ones that prohibit harmful behavior. You can’t hurt people or steal things. Buildings and bridges have to meet certain safety regulations. Everybody has to follow traffic laws (even that guy who rides the unicycle around town). 

We also want the government to cover public goods. Roads. Fire departments. National defense. You get the idea.

The defining characteristics of these laws and policies? They affect additional people above and beyond those directly involved. Even if you don’t drive, you still benefit from traffic laws as a public safety measure and from roads as a public good. 

Without government action, people might not have incentives to consider the negative effects their actions inflict on others. Economists call these negative costs externalities.

Individuals don’t have incentives to provide public goods, either, since everybody benefits, whether they pay for them directly or not. You’d probably like having a new neighborhood park, but it would be pretty tough to take on the financial responsibility of buying the land, building the park, and maintaining it on your own, especially if anyone can come and use the park whenever they want without chipping in. 

Without the right incentives, we end up with too many negative externalities and not enough public goods. Make sense? Perfect. Because it’s about to get more complicated. 

Pollution is an externality that comes up when nobody owns the resource in question—pristine water, clean air. No matter how much we as individuals value those things, we don’t have the right incentives to take care of or conserve the resource. 

You might think the government actually owns the resources and has the right incentives to conserve them, but that’s not exactly the case. Looking throughout history, countries where the government controlled most of the resources typically had more widespread pollution. Under its Communist regime, the Soviet Union had extremely polluted rivers and smoggy skies.

Even today, countries with more centralized governments like China have more contaminated air and water than the United States does. 

We all want cleaner air and water, but the solution isn’t as simple as banning pollution. Eliminating all pollution means no cars, no electronics, no air travel. Even manufacturing green energy sources like solar power or wind turbines still causes pollution.