(NOTE TO READERS: An expanded, footnote-filled version of this article is online at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1632935 )
Externalities are costs (or benefits) imposed on third parties by another individual's voluntary action. Government regulations exist at least partially to protect us from externalities created by others.
But government regulation may create its own externalities, leading to costs that may even outweigh the benefits (or "positive externalities") created by regulation.
One example of externality-creating regulation is government-imposed minimum parking requirements. For example, Jacksonville, Florida requires apartment complexes to provide 1.75 parking spaces per one-bedroom apartment - despite the fact that 16% of Jacksonville's renter households don't even own one car. The purpose of such regulation is to prevent externalities- for example, to prevent drivers from creating congestion and pollution while they cruise the streets searching for parking spaces.
But in fact, this sort of regulation creates a variety of negative externalities. First, minimum parking requirements, by artificially increasing the supply of parking, reduce the cost of parking and thus force landowners not only to build parking lots, but to give parking to motorists for free (or, in downtown areas, at lower rates than would be the case in the absence of regulation). But landowners still have to pay to build parking lots and garages; so landowners will pass the costs of parking lot construction on to their tenants and customers in the form of higher rents and prices. So as a practical matter, society as a whole is forced to subsidize driving; parking regulation makes driving cheaper by making parking free, and makes nondrivers pay more for goods and services to support this subsidy.
Second, minimum parking requirements reduce the total amount of housing and commerce, because land that is used for parking cannot be used for housing or commerce. And by reducing the housing supply, minimum parking requirements reducce density- and residents of lower-density areas tend to be highly dependent on automobiles for most daily tasks, because they are less likely to live within walking distance of public transit and other amenities. So in this respect as well, minimum parking requirements increase driving and its negative side effects.
Third, minimum parking requirements indirectly discourage walking, by encouraging landowners to surround their buildings with parking. Where shops and offices are surrounded by a sea of parking, they are unpleasant places for pedestrians, because pedestrians must waste time walking through parking lots and risk their lives dodging automobiles. When walking is unpleasant, people drive more and walk less.
Thus, minimum parking requirements make driving more attractive and walking less so. It logically follows that municipal parking regulation may actually increase, rather than decreasing, congestion and pollution. And by increasing the number of parking lots, minimum parking requirements may increase pollution from stormwater runoff. Rainstorms cause stormwater to fall on parking lots, collect metal, oil and other pollutants lying on the ground, and then to run off into nearby waters, thus making those waters dirtier and more dangerous.
Of course, it could be argued that the costs of minimum parking requirements are slight, because in the absence of such requirements most landowners would build almost as much parking as they do now in order to get financing. But this argument cuts both ways: if landowners would build parking lots in the absence of regulation, then the abolition of regulation is unlikely to create negative externalities significant enough to justify regulation.