We’ve been talking about how the government can intervene with public policy when there’s a market failure but we haven’t asked the question yet should the government intervene with policy? So in this article, I want to talk about two different views paternalism and libertarianism of thinking about the answer to this question.
So paternalism is sometimes kind of pejoratively referred to as having a nanny state but what it is basically saying in certain situations? That the government might know best, it might know better than citizens, what’s good for the citizens. So just to give you an example, the government require that you wear a seat belt when you drive a car, where I live I’m required to wear a seat belt if I’m driving a car and if I’m not wearing a seat belt then I can get a fine. I can get a ticket and have to pay money to the government as punishment for not obeying the rule that I’m supposed to be wearing a seat belt. Now not wearing a seat belt dramatically increases the chances that I would die if there’s an accident. So this is in a sense this is a good thing for me that the government is requiring that I wear the seat belt. So there are good intentions and obviously, this makes sense and this should be a rule and there should be a fine.
But there are a few issues with that. One of the issues is what if when the government enacts its policy that policy doesn’t actually work and so you might be thinking, how could this be a problem with requiring people to wear seatbelts? How could that possibly be an issue? but there’s a couple of things that you want to think through with the policy whenever the government enacts a policy it might change the way people behave for example if people wear seatbelts research suggests that they actually drive faster. So people drive faster when they’re wearing a seatbelt why because they’re less afraid of the risk of what would happen to them if there is an accident.
There’s actually a whole literature on this it’s called risk compensation. So because they now have a seatbelt they feel a little safer and so they feel comfortable driving faster. You see the same thing with anti-lock brakes so if you have anti-lock brakes that helps you stop your car faster, so if you have abs brakes people will actually tailgate more they’ll be more likely to tailgate and drive closer to the bumper of the person in front of them. This isn’t to say of course that just because people drive faster when they’re wearing a seatbelt that we shouldn’t require seatbelts or anything like that I’m not taking a position here, I just want you to understand that sometimes when you implement a government policy you might have some unintended consequences.
Also, we need to think if the government is going to be intervening in the economy or doing things then the government can open itself up to be influenced by special interest groups. People with a lot of money or with it can come in and basically, you know by politicians get influenced to get the access they can do all kinds of things and then change the policy that ends up getting enacted.
So then it’s not so much the government is doing something because it knows best for the people but it’s actually enacting something because these special interest groups have paid bribes or campaign contributions or so forth. So once you open the door of a policy you also open the door to special interest potentially but another thing to think about is it’s just kind of philosophically is that government policy, when the government comes in and says you need to wear a seat belt otherwise you will be forced to pay a fine to the government, you could think about that is the government is subverting or kind of undermining people’s individual freedoms.
On some level, we should be able to be free and do what we want with our lives provided we’re not doing harm to other people by the same token you could absolutely see the intentions of requiring people to wear seatbelts and so forth. But this idea of individual freedoms leads to another way of thinking instead of the paternalistic view of thinking. That the government in some cases knows better than we know how to live our lives you can also think of libertarianism.
Where basically with libertarianism the government should stay out of people’s lives is the logic and it should respect their freedom. The idea is that we’re free moral agents and our freedom is paramount and even if the government knows best but at the end of the day we are free and should be able to choose how to live our own lives free of government interference.
That’s just kind of a brief sketch of what libertarianism is but if you think about that there’s an issue with that. The issue is what if your exercise of freedom affects somebody else? Now we might not think about this so much with the seatbelt example. So with the seatbelt example, let’s say there’s some guy named Tommy and Tommy doesn’t feel like wearing a seatbelt and so then Tommy gets into an accident and Tommy dies because he wasn’t wearing a seatbelt. Well you could say that’s Tommy’s problem, right? Tommy made that decision, Tommy had the freedom to do that. We get into things like, Is Tommy allowed to drink a soft drink? Some cities propose to ban that you can’t have an extra-large soft drink or something like that. So all those things you might say hey that just affects Tommy but what if Tommy’s decision and his exercise of freedom actually affects somebody else?
So let’s pretend that Tommy lives in a house and there’s a river behind Tommy’s house and when Tommy does his oil changes on his car Tommy says “I’ve got this oil now I’m just going to pour the used motor oil into the river, I don’t use the river, it’s just convenient for me, it’s too far for me to drive into town” and so Tommy just pour the motor oil directly into the river. Let’s just say that there’s another house near the river and there’s just like a whole neighborhood of people who live around Tommy. Let’s say that some of their children play in that river and then their children get sick because they’re playing in a river that has motor oil.
Now Tommy owns all this property and let’s just say he also has the waterfront and so forth. So Tommy is exercising his freedom but what about the freedom of this child to be able to play in the river and not get sick? Actually, what we call this is an externality this is actually a negative externality. I’ll have another article on negative externalities and they could be positive too. In this case, Tommy’s exercising his freedom but he’s imposing costs on somebody else and he’s not reimbursing that person for that cost.
Now, this isn’t to say that libertarianism is garbage and we got to throw out the whole idea and let the government get involved. There are different ways of dealing with this, one way is a government policy of something called a Pigouvian tax. I’ll be talking about this in another article but you basically tax the activity that’s generally generating the externality but there’s another way this is without government policy the idea of Coase bargaining.
If neighborhood families and Tommy’s family assume that each has clearly defined property rights and there are low transaction costs those assumptions that basically they could work out an agreement. Maybe neighborhood families say “Hey look we really don’t like you dumping the oil in the river there’s a problem” and Tommy says “Look I’m sorry about that I’ll pay you $25 if when you go into town you could take the oil and just dispose of it for me” so there are ways to respect people’s freedom and still be able to reach a socially efficient outcome but it’s just bear in mind that there’s no clear-cut decision when we’re thinking about the government intervention with public policy.
Just need to bear in mind that there are several different ways to look on the one hand we want to respect people’s individual freedoms but on the other hand, sometimes there can be problems when we ignore things like externalities or the existence of public goods and free-rider problems some things that we’ll talk in our future articles.