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For over fifty years economists have argued that where private costs or benefits differ from social costs or benefits - in noise, smells, congestion, pollution of the environment - there is a 'clear case' for government intervention to correct the divergence. This argument has been used to justify almost endless intervention.Pigou and Viner argued for government systems of taxes and subsidies to correct the divergence. Coase saw that there was a fundamentally different method of compensation: direct trading between the 'producer' and 'consumer' of social costs/benefits. The original analysts of social costs/benefits were led into error by failing to test their propositions from the evidence of real life. Painstaking empirical studies clearly demonstrate these errors. A divergence between private and social costs is no decisive justification for government action to correct it. The costs of intervention often outweigh the social benefits. The alleged 'externalities' are merely uncontracted effects. Under private property rights, the use of contracts to transact what have been regarded as 'external' effects is far more common than has been commonly recognised. The 'Chivirla' (Chicago, Virginia, Los Angeles) school of economists has developed a more fundamental analysis of external effects in over-fishing, land over-utilisation, etc., than that of Pigou, in terms of the economics of property rights and public choice. The really serious environmental problems all arise when there are common, and not private, property rights. Society might have been better off if economists had never discovered social cost.
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