Welcome to Econ Talk, part of the Library of Economics and Liberty. I'm your host Russ Roberts

of George Mason University and Stanford University's Hoover Institution. Our website is econtalk.org

where you can subscribe, find other episodes, comment on this podcast, and find links to

other information related to today's conversation. Our email address is mail at econtalk.org. We'd

love to hear from you. My guest today is Mike Munger of Duke University long time contributor

to the Library of Economics and Liberty and frequent guest here at econtalk. Mike, welcome back.

Good to talk to you, Russ. Our topic for today is the idea of subsidies and the economic

justification and sometimes the political reality of the subsidy world. What is the idea behind

subsidies in the ideal? We're going to classic justification for it was by an economist named

AC Begu who said that one of the main things that the state, meaning the nation, the government

should do is get prices right and as economists I generally, as an economist, I generally think

that's right. I think we can do to remove distortions and pricing is probably going to improve

the allocation of resources. What he meant, though, was with something he called externalities or

people later called externalities, that the effect of something that I do, something I consume,

something that I produce is not fully captured in price and government has to make up the difference.

So if I am thinking of doing something that would also benefit others, I won't do enough of it

because I won't fully capture the benefits and so a subsidy makes up the difference.

So the flip side of this, you and I have spoken about before, would be a negative externality,

which would be an example like pollution where I impose costs on others beside myself,

but today we're going to talk about positive externality. So what would be some examples of that?

Well, I tried to kind of personalize this and think of some examples in my own life that I

have encountered, some things that I like that I think we should have more of. I'm a big St. Louis

...