Government Sponsored Externalities

Col Isaac Johnson: Do we allow America to be ruled by thugs?
Bobby Lee Swagger: Sure, some years we do.
--Shooter

While wrapping my head around externalities recently, a related thought struck me that seemed appropriate for a later post. This video reminded me to follow up. It also testifies that my follow-up thought is not very original.

Externalities are often linked exclusively with free market behavior, which supposedly justifies intervention by government to reduce mitigate spillover costs. By extension, one would be led to believe that in socialistic systems, externalities would not exist--or at least be greatly reduced.

This seems highly unlikely. The reason is that government can be seen as an externality-creating machine. Nearly everything government does is a forceful intervention on the behavior of people. This intervention nearly always benefits some entity at the expense of others. A socialist economic system where bureaucrats allocate resources by discretionary will do similar--i.e., satisfy the needs of some at the expense of others.

As the person in the video notes, the profit-seeking motive of market systems is likely to address externalities more effectively than the vote-seeking motive of politicians. This is because the profit-seeking motive is driven to allocate scarce economic resources to best satisfy the needs of consumers. The vote-seeking motive, on the other hand, is driven to allocate scarce economic resources to best satisfy the needs of special interest groups.

Under which situation is standard of living likely to be higher?