Nathan Rowley, Chapter 3, Question 3

Charles Wheelan presents the idea of externalities in chapter 3. As he mentions on page 55, "There is no market solution in this case; the market is the problem." Externalities are a problem intrinsic to the way markets function; if you have a market, you will have to deal with externalities. The real problem is that no individual has direct control over the actions of another; if they did, externalities would not happen. Fortunately, we have an institution that can handle the problem of externalities: the government. Although probably not originally contrived to control externalities, governments are large enough and powerful enough to regulate them. In a democracy, the government hopefully reflects the will of the majority, and so can speak with authority about what kinds of externalities will and will not be tolerated. And the government can enforce its decisions. Indeed, as Wheelan mentions, law enforcement and policing are almost exclusively carried out by governments. In a nutshell, government is the solution when the market is the problem.