One of the justifications for government intervention in the market is the presence of ‘external effects’ or ‘externalities’ which occur when individual actions adversely affect outsiders who are not able to demand compensation.

The textbook example is a factory that dumps its waste in a nearby river, thus harming residents that live downstream. Indeed, external effects do exist, and the liberal solution – assigning property rights – is not always easy to work out.

There are, however, many areas where individual actions need not affect outsiders at all. But embedding them in a government-created incentive system does make them cause external effects which would not otherwise be there. In these areas, government action justifies for more government action.

One such area is healthcare. In a healthcare system in which government only played a very subsidiary role (i.e. subsidising the health insurance premiums of the poorest), my decision to lead an unhealthy life would have no effect whatsoever on you.

My behaviour would probably cause higher treatment costs, but these would be borne by nobody else but me. I would pay for them either in the form of a risk add-on to the health insurance premium or in the form of higher policy excess payments.

In contrast, in tax-financed health systems like the NHS, or in social insurance systems where health insurers are not allowed to charge add-ons for risky behaviour, individual health suddenly acquires some of the properties of a ‘public good’.

You could rightfully claim that as long as you pay the bill, it is not simply my business whether I choose to smoke, eat fatty food, or practice injury-prone sports. And indeed, government actions against smoking, obesity and so on are not only justified in terms of the usual paternalistic arguments, but also in terms of their cost for the NHS.

This explains why the government is ‘decorating’ streets with Change4Life placards, ‘helping’ people to make the ‘right’ choices; why a TV programme is being broadcast as part of the same initiative; and why the state imposes high taxes on tobacco and alcohol, restrictions on their advertising, measures like the smoking ban and why it now seeks to ban the display of cigarettes in shops.

Governments first create a set of harmful incentives and then attempt to correct their consequences by policing people’s behaviour. The old liberal insight that personal freedom cannot be meaningfully separated from personal responsibility is demonstrated once more.


Head of Health and Welfare

Dr Kristian Niemietz joined the IEA in 2008 as Poverty Research Fellow, becoming its Senior Research Fellow in 2013 and Head of Health and Welfare in 2015. Kristian is also a Fellow of the Age Endeavour Fellowship. He studied Economics at the Humboldt Universität zu Berlin and the Universidad de Salamanca, graduating in 2007 as Diplom-Volkswirt (≈MSc in Economics). During his studies, he interned at the Central Bank of Bolivia (2004), the National Statistics Office of Paraguay (2005), and at the IEA (2006). In 2013, he completed a PhD in Political Economy at King’s College London. Kristian previously worked as a Research Fellow at the Berlin-based Institute for Free Enterprise (IUF), and at King's College London, where he taught Economics throughout his postgraduate studies. He is a regular contributor to various journals in the UK, Germany and Switzerland.