Why the Markets Need a Strong Government Hand

More to the point, there is also substantial waste in the private sector, much of it caused by individual purchase decisions that impose costs on others.

Suppose, for example, that everyone owned a car weighing less than 2,500 pounds and someone then bought one that weighed 5,000 pounds. That person would face less risk of injury and death than before, while all others would face more. Their best response may be to buy 5,000-pound cars themselves, in which case everyone’s risk would be higher than when all were driving smaller cars.

Similarly, at crowded gatherings in enclosed spaces (remember them, before the pandemic?), when all speak more loudly to hear better, they don’t hear as well as they would have if all had spoken more softly.

In these cases, individually rational behavior is collectively irrational. Buying 5,000-pound cars when 2,500-pound cars would be better for almost everyone is waste, pure and simple.

Taxing vehicles by weight would be a relatively unintrusive remedy. But opponents of government might object, saying such measures are social engineering. Yes, but so are speed limits and traffic lights. Policies that try to bring individual and collective interests into closer alignment exist in all countries, for good reason. And as long as we have to tax something, why not tax activities that cause harm to others? Every dollar raised from such levies can be a dollar less from the many taxes currently imposed on beneficial activities.

Former President George W. Bush once said, “We don’t believe in planners and deciders making decisions on behalf of Americans.” Yet that’s exactly what all societies entrust government bureaucrats to do, again for good reason: Even if people are just as rational and markets just as competitive as Mr. Friedman believed, individually rational actions often yield demonstrably bad outcomes. That simple, incontestable fact has always been the central rationale for government involvement in economic life.

The government requires catalytic converters on cars, for instance, because each individual’s decision to install one would be costly and yield no measurable impact on air quality. Yet when everyone installs a catalytic converter, the benefit of the improvement in air quality far outweighs the corresponding cost.

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