Anderson, Terry L.; McCormick, Bobby --- "The Contractual Nature of the Environment" [2004] ELECD 110; in Colombatto, Enrico (ed), "The Elgar Companion to the Economics of Property Rights" (Edward Elgar Publishing, 2004)

Book Title: The Elgar Companion to the Economics of Property Rights

Editor(s): Colombatto, Enrico

Publisher: Edward Elgar Publishing

ISBN (hard cover): 9781840649949

Section: Chapter 13

Section Title: The Contractual Nature of the Environment

Author(s): Anderson, Terry L.; McCormick, Bobby

Number of pages: 17

Extract:

13 The contractual nature of the environment
Terry L. Anderson and Bobby McCormick


Introduction
While it took the most-cited article in the history of economic science, Coase
(1960), to open our blind eyes to the problem of social cost, economic
analysis of the environment has not progressed much beyond Pigou's (1912,
1920) notion that pollution problems result from a divergence between social
and private costs. Viewed through the Pigouvian lens, environmental eco-
nomics has focused on the static notion of efficiency, with policy prescriptions
centered around regulations that dictate efficient outputs or taxes that correct
prices for uncompensated costs.
At the heart of this approach is the alarmingly simple but deceptively
complex term, `externality'. In the theoretical world of externality, parties to
market transactions fail to take into account the effects of their actions on
third parties who bear costs (negative externalities) for which they are not
compensated or reap benefits (positive externalities) for which they do not
pay.1 Accordingly, market transactions lead to inefficient outcomes with too
much of a bad or too little of a good produced.2 Again the policy prescription
is to regulate quantity or tax transactions, or both.3
The externality focus in environmental economics implicitly assumes a
structure of property rights without ever explicitly recognizing this truism. In
the case of negative externalities, the implicit assumption is that the party or
parties who bear costs for which they are not compensated have a right to be
free from those costs, and ...