An Externality Exercise
There is a practical problem with this widely accepted argument for government interventions in the marketplace. One person's actions are quite likely to affect others in both directions--to impose both positive and negative externalities. Someone constructing an argument for a subsidy is likely to add up all the positive externalities and somehow miss the negative ones. Someone constructing an argument for banning something is likely to do it the other way around.
I first encountered this problem in my first piece of published economics. People worried about overpopulation argued that each additional child, by making the world more crowded, imposed costs on everyone else, and that it would therefore be a good thing if we all had fewer children.
Part of their argument was simply bad economics. A child does not come into the world with a deed to his per capita share of the world's resources clutched in his fist. To the extent that resources are privately owned, he gets them only if he, or his parents, offers something of at least equal value in exchange.
But not all relevant resources are privately owned. My child might pollute the air your child breathes. He might commit crimes against your child. He might use the political system to redistribute in his favor, at your child's cost. All of these are legimate negative externalities.
My child might also invent the cure for your child's disease, write a book that gives your child pleasure, help pay off the national debt, bear part of the burden of taxation for national defense, in any of a variety of ways make your child better off than if mine was not born. When I tried to add up negative and positive externalities, my conclusion was that I could not estimate them accurately enough to sign the result--to figure out whether, on average, the existence of my child made yours better or worse off, whether we should be taxing childbirth or subsidizing it.
The same problem arises in many other issues. Consider the case of schooling. Those who wish to justify our present system of public schools argue that educating children benefits everyone, and so should be paid for by the state.
I offer the following challenge to readers. List all the positive and negative externalities from educating children. For a second challenge, pick some other public policy commonly defended on externality grounds, and try to list the externalities with the wrong sign--the ones that are an argument for subsidizing what we now tax, or taxing what we now subsidize.
For my views on the issue of schooling, see this piece.