Negative externality of racist campaign

Illustration: two candidates, A and B, were campaigning for an office. They needed to get votes from 16 percent of population -- the swing voters coming from the first-round election. Candidate A's strategy was to play racism and bigotry card against the B. Candidate B decided to face it one-on-one by playing pluralism card. Both are rational. You can even assume that neither of them are actually racist nor bigot by heart.

Candidate A won the election as apparently voters bought the racism and bigotry card he played. Some commentators also believed that candidate B's strategy for directly confronting the racism card is the reason he lost the election. Nonetheless in a relatively competitive election, this is the equilibrium of the number of voters for each candidate and the quantity of racist and bigot campaign. The voters have spoken. But is this a socially optimal outcome?

If you believe that racism and bigotry are not `bad', then it is optimal. And you can skip the rest of this posting.

If you believe that racism and bigotry are `bad' -- something like pollution--,  then it is not socially optimal. We have a case of negative externality: candidate A, the producer of racist campaign, while maximising his private benefit against cost in a competitive political market, massively failed to take into account the social cost of doing it. As a result, he over-produced racist campaign.

To fix the problem, the social cost of racist campaign needs to be `internalized' to the private cost-benefit calculus of the candidate. One way is by asking government to step in by imposing tax or anti-racism regulation. But here, in this case, it might not be applicable: the candidates ran for the very government position, while at the same time people in the government are part of the game

So we need to take a different approach: when market fails, use more market. We can try to link the current political market to other markets - say, the next presidential election market or even just a market for `(urban cosmopolitan) educated social club membership' -  where our candidate is also aspiring to be. The idea is to make the candidate pay the full price for playing racism card by explicitly internalize the social cost he incurred into his private cost structure in these other linked-markets.

This might work or not work, but what I fail to comprehend is some pundits' post-election suggestion to help (subsidize?) the producer of racist campaign to get away with the allegation of being racist under disguise of repairing the election damage. First, it would even more externalize the social cost from the private cost-benefit structure of the candidate. Second, it would create a moral hazard among other aspiring politicians to play the same dirty tricks. In the end, we will see more of `bad' in the air, not less.