Does Government Spending Harm The Environment?

A market failure occurs when there is a gap between the private and social costs of an activity. That is, the social costs are higher than the private costs. The activity itself is something economists call an externality. For example, consider a factory where the production process throws off disgusting waste. If the factory dumps this junk into a handy river instead of disposing it in a less convenient, less harmful place, the resulting pollution is an externality.

Of course, the problem is that by using the river as a dump, production costs are lower than if the factory disposed of its waste in a socially responsible way, so the factory owner has little incentive not to pollute. This leaves the people and businesses along the river, who suffer the bad effects, to bear the cost–hence the term “social cost.”

The failure of the market to cover the costs of an externality is taken as an invitation for the government to step in and make private parties deal with the social costs. In this example, the government could promulgate regulations to stop river pollution by making it unlawful for the factory to dump waste in the river, which, in turn, would raise the private cost of production but lower the social costs borne by society.

At any rate, during the 1970s, the “correction” of market failures accelerated the pace of social regulation. In 1970, both the Occupational Safety and Health Act and the Read more