In a classic episode of Seinfeld, George Costanza realized that his instincts were fundamentally wrong, and vowed to "do the opposite":
George: Elaine, bald men, with no jobs, and no money, who live with their parents, don't approach strange women.
Jerry: Well here's your chance to try the opposite. Instead of tuna salad and being intimidated by women, chicken salad and going right up to them.
George: Yeah, I should do the opposite, I should.
Jerry: If every instinct you have is wrong, then the opposite would have to be right.
George: Yes, I will do the opposite. I used to sit here and do nothing, and regret it for the rest of the day, so now I will do the opposite, and I will do something!
The same lesson often applies to government intervention. Yes, market failures do exist. But when you look at "corrective" policy, it often turns out to be the opposite of what economic theory recommends.
Marginal Revolution guest blogger Robin Hanson has a new thought-provoking example of how regulation aggravates market failure instead of soothing it:
Land in populated areas is valuable mostly because other people live nearby; people with whom one can have social, job, and shopping relationships. While our neighbors often hurt us, their net (and marginal) effect is on average positive, and huge.
This externality, however, mainly comes from the people on nearby land, and not from their gardens. So when we consider how much land to use for our homes or offices, we do not consider the gains to others from our using less land, and so allowing more people to be nearby. We also neglect the benefits we provide others when choosing to live at the edge of the populated area, versus living in an unpopulated area.
These neglects suggest a big market failure, wherein housing and office density, and the size of the populated areas, are too small...
Local governments are in a position to reduce this externality, but they seem to mostly make matters worse. Minimum lot sizes, maximum building heights, maximum densities, and barriers to development at the populated edge are far more common than their opposites.
Robin's prescription, in short, is: maximum lot sizes, minimum building heights, minimum densities, and subsidies to development at the populated edge. It's not Free to Build, but it's more efficient than what we've got.