My initial reaction to Mattheus was to agree with him.
The more I think about it, though, I have a hard time talking about the government in these terms – not because there aren’t problems associated with government (I would be the last person to deny that), but because it confuses the definition of “externality” and that’s a very important concept that I’d prefer not to confuse.
An externality exists in a situation where some of the costs and benefits of a decision do not inform the decision making process because no rights adhere to those costs and benefits. The efficiency of that decision making process has no real bearing on whether something is an externality or not. We can imagine inefficient allocation mechanisms for goods with no particular externality (for example, monopolies or markets with considerable information asymmetries), and we can imagine efficient markets for a good that is potentially rife with externalities (such as gasoline).
So what is the situation with government? Well in liberal democracies government internalizes all costs and benefits. Everyone has standing in a liberal democracy and all preferences can legitimately inform the decision making process. If I am not a party to your transaction with the gas station, my disutility from your carbon usage can’t inform that transaction. But if I’m voting anything I am pissed off about or happy about is fair game. The problem with government, it seems to me, is that it’s not nearly as efficient in maximizing those benefits and minimizing those costs as the market is. This is why, of course, we like the market to make allocation decisions in the vast majority of cases. The government has loads of problems with it, but decisions that are systematically uninformed by subjective valuations of costs and benefits is not one of thoase problems.
So why do Mattheus and Don think it’s an externality? The more I think about it I’m not really sure. It seems like cargo cult economics to me. Externalities are all about people bearing costs that don’t seem like they should be bearing; externalities are a good way to get the attention of economists; ergo: let’s call the government a big negative externality!
I’m not so sure about this. Government internalizes all kinds of costs and benefits. That’s the whole point of classical liberal government, and that’s why it’s cited as a potential solution to externalities that pose particularly big problems. Is it inefficient and sometimes even abusive? Sure. But unless we’re talking about a case of substantial disenfranchisement, I’m not sure these problems have their source in externalities.