Wednesday, June 13, 2007

The Limits of Pigou

A friend emails me some economic analysis from his 12 year old daughter:
Our daughter commented yesterday that "almost all cars are silver or gold, which are boring colors" and that "you should only be allowed to have a boring color if you pay extra for a special permit." We weren't sure we agreed with her evaluation of the external effects of car colors, but we were delighted that she'd learned you should use a tax to address an externality!
This cute example raises a fundamental question: When does correcting externalities start to offend principles of liberty?

Imagine your next door neighbor made some horrible aesthetic choices: He cut down all his trees, paved over his lawn, boarded up his windows, painted his house black, and adorned his new black top with statues reminiscent of Edvard Munch's The Scream. Would scaring local children be a negative externality that warranted government intervention? If not, what principle distinguishes this externality from, say, pollution? If so, how far are you willing to go imposing community tastes on others?