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The Myth of Social Cost
For over 50 years economists have argued that where private costs or benefits differ from social costs or benefits - in noise, smells, congestion, pollution of the environment - there is a 'clear case' for government intervention to correct the divergence. This argument has been used to justify almost endless intervention. However, the original analysts of social costs/benefits were led into error by failing to test their propositions against the evidence of real life. Painstaking empirical studies clearly demonstrate these errors. A divergence between private and social cost is no decisive justification for government action to correct it. The costs of intervention often outweigh the social benefits. Moreover, the alleged 'externalities' are merely uncontracted effects. Under private property rights, the use of contracts to transact what have been regarded as 'external' effects is far more common than has been commonly recognised.
- GenresEconomics
74 pages, Paperback
First published January 1, 1978
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Displaying 1 - 3 of 3 reviews
January 6, 2013
I am giving this an average rating for two reasons:
First, you have to be very well-versed on different social cost theories. I know what externalities are, and I am pretty good in economics, however, Professor Cheung goes very in-depth about different theories. He goes on to show why Pigou was wrong by using Pigou's own resources and citations. However, at the same time, it gets a bit complicated.. so much that I don't really get where he was going with it. So, is it fair for me to review or rate? Well, that leads me to my next reason..
2. The heavy use of graphs pertaining to the first half of the book. I don't mind graphs, and I can read them fine. However, these graphs were one giant page (sideways) long and he'd go on to talk about different sections of it for some length, and having to flip back, turn the book around, and all of that is just a hassle. Perhaps he should have just tried to explain it better through words.
Anyway, I don't recommend for anyone who isn't already well-versed in externality economics.
First, you have to be very well-versed on different social cost theories. I know what externalities are, and I am pretty good in economics, however, Professor Cheung goes very in-depth about different theories. He goes on to show why Pigou was wrong by using Pigou's own resources and citations. However, at the same time, it gets a bit complicated.. so much that I don't really get where he was going with it. So, is it fair for me to review or rate? Well, that leads me to my next reason..
2. The heavy use of graphs pertaining to the first half of the book. I don't mind graphs, and I can read them fine. However, these graphs were one giant page (sideways) long and he'd go on to talk about different sections of it for some length, and having to flip back, turn the book around, and all of that is just a hassle. Perhaps he should have just tried to explain it better through words.
Anyway, I don't recommend for anyone who isn't already well-versed in externality economics.
October 27, 2023
A CRITIQUE OF GOVERNMENT INTERVENTION FOR REASONS OF ‘SOCIAL COST’
The Foreword to this 1980 book (originally published in 1978) by Ronald Hamowy explains, “The …. Economist A.C. Pigou first systematically developed the theory of social cost in his ‘Economics of Welfare’ (1920)… Its far-reaching implications have given proponents of wholesale government intervention in the economy an extremely potent rationale. It is, after all, possible to claim that every act has external effects and that, if the function of the state is to correct for these externalities, then the government may legitimately intrude into any aspect of social life. In [this book] Professor Steven Cheung… takes issue with this line of argument and with standard social-cost analysis, both on theoretical and empirical grounds…. Professor Cheung’s most extensive criticism centers on the lack of any empirical evidence to support the conclusions arrived at by social-cost analysis.”
Cheung states, “no matter how large the total value of uncontracted effects may be, the Pareto condition will be satisfied if at the private-maximizing margin the value of the MARGINAL uncontracted effects is zero. The pressure of uncontracted effects, taken by itself, is thus no indication of misallocation of resources. And a divergence between private and social cost, unless referred specifically to the margin at which the action is carried, is therefore NO justification for corrective government action.” (Pg. 19)
He argues, “Let us turn to a familiar situation of more general concern. It is evident that an airport introduces noise and pollution in its locality. Yet almost without exception the values of properties adjacent to an airport RISE with its inception… If the aggregate value of all the uncontracted effects generated by the airport is positive, and if increasing air traffic leads to further increase in this value, any public policy adopted to curb the air traffic implies a movement away from the Pareto condition. Thus there is no defense on efficiency grounds for citing only the HARMFUL uncontracted effects of airports and ignoring the BENEFICIAL ones. (In the United States this has been the dominant view popularized by the champion of consumers, Mr. Ralph Nader.)” (Pg. 20)
He asserts, “The Pigovian social cost argument, carried to its logical conclusion, can be deployed as an argument for government intervention in anything and everything. For uncontracted or external effects are a pervasive phenomenon of social life. Walk down any street and you will be confronted with a vast number of external effects: -the pleasing sight of a well-kept garden, -the noise of children playing; -exhaust fumes from passing cars; -the smell of cooking; … -the roar of the traffic; -canine deposits underfoot; -the jostle of the crowd; -advertisements on billboards… and so on. The simple Pigovian policy formula, carried to the logical extreme, implies that government should intervene, every second of our lives, to correct these myriads of externalities that surround us all the time.” (Pg. 56)
He concludes, “What conclusions may we draw for public policy? First, the Pigovian policy rule---that externalities necessitate ‘corrective’ government action---is dangerously oversimplistic…. Second, the Pigovian analysis contains an implicit bias toward ‘intervention solutions’ for externalities, in the form of taxes, subsidies, regulations, and prohibitions. Third, recognition of the fundamental role of ATTENUATIONS of private property rights in generating externalities leads to consideration of the alternative policy of redefining property rights… The general conclusion for public policy is the classical one:… the general rule should be to let the price system deal with externalities wherever possible: by redefining property rights and removing barriers to trade due to externalities. Government intervention… is best kept as a ‘solution of the last resort.’ … Even on these grounds, government intervention must be carefully scrutinized, because the costs and external side-effects may outweigh the benefits.” (Pg. 70-71)
This book may appeal to Libertarians and to some conservatives.
The Foreword to this 1980 book (originally published in 1978) by Ronald Hamowy explains, “The …. Economist A.C. Pigou first systematically developed the theory of social cost in his ‘Economics of Welfare’ (1920)… Its far-reaching implications have given proponents of wholesale government intervention in the economy an extremely potent rationale. It is, after all, possible to claim that every act has external effects and that, if the function of the state is to correct for these externalities, then the government may legitimately intrude into any aspect of social life. In [this book] Professor Steven Cheung… takes issue with this line of argument and with standard social-cost analysis, both on theoretical and empirical grounds…. Professor Cheung’s most extensive criticism centers on the lack of any empirical evidence to support the conclusions arrived at by social-cost analysis.”
Cheung states, “no matter how large the total value of uncontracted effects may be, the Pareto condition will be satisfied if at the private-maximizing margin the value of the MARGINAL uncontracted effects is zero. The pressure of uncontracted effects, taken by itself, is thus no indication of misallocation of resources. And a divergence between private and social cost, unless referred specifically to the margin at which the action is carried, is therefore NO justification for corrective government action.” (Pg. 19)
He argues, “Let us turn to a familiar situation of more general concern. It is evident that an airport introduces noise and pollution in its locality. Yet almost without exception the values of properties adjacent to an airport RISE with its inception… If the aggregate value of all the uncontracted effects generated by the airport is positive, and if increasing air traffic leads to further increase in this value, any public policy adopted to curb the air traffic implies a movement away from the Pareto condition. Thus there is no defense on efficiency grounds for citing only the HARMFUL uncontracted effects of airports and ignoring the BENEFICIAL ones. (In the United States this has been the dominant view popularized by the champion of consumers, Mr. Ralph Nader.)” (Pg. 20)
He asserts, “The Pigovian social cost argument, carried to its logical conclusion, can be deployed as an argument for government intervention in anything and everything. For uncontracted or external effects are a pervasive phenomenon of social life. Walk down any street and you will be confronted with a vast number of external effects: -the pleasing sight of a well-kept garden, -the noise of children playing; -exhaust fumes from passing cars; -the smell of cooking; … -the roar of the traffic; -canine deposits underfoot; -the jostle of the crowd; -advertisements on billboards… and so on. The simple Pigovian policy formula, carried to the logical extreme, implies that government should intervene, every second of our lives, to correct these myriads of externalities that surround us all the time.” (Pg. 56)
He concludes, “What conclusions may we draw for public policy? First, the Pigovian policy rule---that externalities necessitate ‘corrective’ government action---is dangerously oversimplistic…. Second, the Pigovian analysis contains an implicit bias toward ‘intervention solutions’ for externalities, in the form of taxes, subsidies, regulations, and prohibitions. Third, recognition of the fundamental role of ATTENUATIONS of private property rights in generating externalities leads to consideration of the alternative policy of redefining property rights… The general conclusion for public policy is the classical one:… the general rule should be to let the price system deal with externalities wherever possible: by redefining property rights and removing barriers to trade due to externalities. Government intervention… is best kept as a ‘solution of the last resort.’ … Even on these grounds, government intervention must be carefully scrutinized, because the costs and external side-effects may outweigh the benefits.” (Pg. 70-71)
This book may appeal to Libertarians and to some conservatives.
December 31, 2013
Interesting Quotes:
"[A]mong the 'circumstances' which Pigou chose not to specify is the nature of property rights governing the use of the roads; but property rights are indispensable constraints for any decision involving more than one individual. Moreover, Knight was essentially correct in pointing out that if private ownership is established,
"'the owner ofthe narrow road can charge for its use a toll representing its 'superiority' over the free road, [and] in accordance with the theory of rent, . . . the toll will exactly equal the ideal
tax . . .'
In charging the market with failure to attain the maximum social benefit while disallowing private property rights (upon which all private transactions must be based), Pigou was indeed barking up the wrong tree. To my knowledge Pigou never replied to Knight's paper, although the example of the two roads was deleted from later editions of The Economics of Welfare: the debate was over when it had barely begun. This, together with the difficult nature of Knight's paper, may explain the slow progress of social-cost analysis in spite of numerous writings on the subject. It was not until the publication of Coase's paper 36 years later that the issue at stake was again brought into academic debate."
-Steven N.S. Cheung, The Myth of Social Cost
--------------------------------------------------
"[A]ny government action can be speciously justified on efficiency grounds by the simple expedient of assuming that transaction costs in the market are high and that costs of governmental control are low. The use of such arbitrary (often implicit) assumptions, a routine practice in the traditional analysis of social cost, is appropriate neither for economic explanation nor for policy formulation."
-Steven Cheung, the Myth of Social Cost
----------------------------------------------------
"The serious problems of the environment and conservation exist where there is common, and not private, ownership. In Africa, for example, lions have been treated in the past as common property—'fair game' for anyone—with the result that their numbers have fallen drastically during the 20th century. But in the UK lions are reared and held under private ownership (in game parks and zoos), and the British lion population has boomed. Indeed, British game parks are now exporting their surplus lions—to Africa! This is 'taking coals to Newcastle' with a new twist."
-John Burton, Externalities, Property Rights, and Public Policy : Private Property Rights or the Spoliation of Nature, epilogue of the Myth of Social Cost
------------------------------------------------------
"Cultivated farmland was far more extensive during the Roman era than before or after, and huge areas that have become desert were then green and plenteous. Tripolitania and Cyrenaica (the eastern Roman province) may not have been the granaries of the Roman empire, but the desert was then held far more extensively in check than under the following eras of Vandal, Berber and Arab rule.
"Historical research suggests that there was no wide variation in climatic conditions to account for the rolling back of the desert in the Roman era and the long-term trend to desertification thereafter. The answer seems to lie in the errors of human beings, not in the accidents of nature. Systems of common land ownership now account for the bulk of Libyan acreage, and have done so for over fifteen hundred years, since the Vandals expelled the Romans from Libya, circa AD 455. But under Roman rule the land was extensively farmed under a system of private property rights. During the early empire it was farmed primarily by Berber peasants and other smallholders such as retired soldiers who had been granted private property rights in plots of land. Later there also emerged latifundia (large privately-owned estates) worked by Berber serf labour. With land held privately, there was incentive to conserve vegetation, rather than to treat it as a 'free good'). The benefits and costs of planting and grazing impinged upon the owner and not others: the externalities were 'internalised'"
"Following the decline of Roman rule, the system of private property rights in land reverted to that of tribal ownership . . . The long-term consequences of that change in the system of property rights are written in the encroaching sands of the Libyan desert today.
-John Burton, Externalities, Property Rights, and Public Policy : Private Property Rights or the Spoliation of Nature, epilogue of the Myth of Social Cost
---------------------------------------------------------------
"[A]mong the 'circumstances' which Pigou chose not to specify is the nature of property rights governing the use of the roads; but property rights are indispensable constraints for any decision involving more than one individual. Moreover, Knight was essentially correct in pointing out that if private ownership is established,
"'the owner ofthe narrow road can charge for its use a toll representing its 'superiority' over the free road, [and] in accordance with the theory of rent, . . . the toll will exactly equal the ideal
tax . . .'
In charging the market with failure to attain the maximum social benefit while disallowing private property rights (upon which all private transactions must be based), Pigou was indeed barking up the wrong tree. To my knowledge Pigou never replied to Knight's paper, although the example of the two roads was deleted from later editions of The Economics of Welfare: the debate was over when it had barely begun. This, together with the difficult nature of Knight's paper, may explain the slow progress of social-cost analysis in spite of numerous writings on the subject. It was not until the publication of Coase's paper 36 years later that the issue at stake was again brought into academic debate."
-Steven N.S. Cheung, The Myth of Social Cost
--------------------------------------------------
"[A]ny government action can be speciously justified on efficiency grounds by the simple expedient of assuming that transaction costs in the market are high and that costs of governmental control are low. The use of such arbitrary (often implicit) assumptions, a routine practice in the traditional analysis of social cost, is appropriate neither for economic explanation nor for policy formulation."
-Steven Cheung, the Myth of Social Cost
----------------------------------------------------
"The serious problems of the environment and conservation exist where there is common, and not private, ownership. In Africa, for example, lions have been treated in the past as common property—'fair game' for anyone—with the result that their numbers have fallen drastically during the 20th century. But in the UK lions are reared and held under private ownership (in game parks and zoos), and the British lion population has boomed. Indeed, British game parks are now exporting their surplus lions—to Africa! This is 'taking coals to Newcastle' with a new twist."
-John Burton, Externalities, Property Rights, and Public Policy : Private Property Rights or the Spoliation of Nature, epilogue of the Myth of Social Cost
------------------------------------------------------
"Cultivated farmland was far more extensive during the Roman era than before or after, and huge areas that have become desert were then green and plenteous. Tripolitania and Cyrenaica (the eastern Roman province) may not have been the granaries of the Roman empire, but the desert was then held far more extensively in check than under the following eras of Vandal, Berber and Arab rule.
"Historical research suggests that there was no wide variation in climatic conditions to account for the rolling back of the desert in the Roman era and the long-term trend to desertification thereafter. The answer seems to lie in the errors of human beings, not in the accidents of nature. Systems of common land ownership now account for the bulk of Libyan acreage, and have done so for over fifteen hundred years, since the Vandals expelled the Romans from Libya, circa AD 455. But under Roman rule the land was extensively farmed under a system of private property rights. During the early empire it was farmed primarily by Berber peasants and other smallholders such as retired soldiers who had been granted private property rights in plots of land. Later there also emerged latifundia (large privately-owned estates) worked by Berber serf labour. With land held privately, there was incentive to conserve vegetation, rather than to treat it as a 'free good'). The benefits and costs of planting and grazing impinged upon the owner and not others: the externalities were 'internalised'"
"Following the decline of Roman rule, the system of private property rights in land reverted to that of tribal ownership . . . The long-term consequences of that change in the system of property rights are written in the encroaching sands of the Libyan desert today.
-John Burton, Externalities, Property Rights, and Public Policy : Private Property Rights or the Spoliation of Nature, epilogue of the Myth of Social Cost
---------------------------------------------------------------
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