Why Market Failures Are Not a Problem: James Buchanan on Market Imperfections, Voluntary Cooperation, and Externalities

This article describes the intellectual trajectory James Buchanan followed from the early 1950s, when he started to work on ``spillover effects,'' to the mid-1960s, when he had completed a consistent explanation of the efficiency of market mechanisms and private arrangements in the presence of externalities. We show that, in contrast with what most economists admit, Buchanan argued that, even if externalities are a cause of ``market failures,'' this cannot be used to legitimate the intervention of the state, because individuals tend to pay for the external effects their actions generate. By adopting a historical perspective, we are able to show the remarkable consistency of Buchanan's claims about externalities, even though he developed them in a period when the views of economists on the question were changing dramatically.