12. Externality Problems and Property Rights Solutions
Sean Mulholland is associate professor of economics at Stonehill College in Easton, Massachusetts. He specializes in economic growth and environmental economics.
In economic activity, there are sometimes externalities, or spillover effects, to other people not involved in the original exchange. Positive externalities result in beneficial outcomes for others, but negative externalities impose costs on others. Prof. Sean Mullholland at Stonehill College addresses a classic example of a negative externality, pollution, and describes three possible solutions for the problem: taxation, government regulation, and property rights. The first two options are difficult to monitor and may create perverse incentives. A better solution to overcome the externality is through property rights, as described by Ronald Coase. As long as property rights are well defined, divisible, and defendable, parties can negotiate to reduce the impact of the pollution.
- Externalities [Article]: Bryan Caplan explains the fundamentals os positive and negative externalities and examines various applications of the theory.
- Market Failure [Video]: Milton Friedman explains some of the shortcomings of conventional market failure analysis and provides an example of a private solution to a public goods problem.
- The Problem of Social Cost [Article]: Ronald H. Coase examines the concept of externality and its relation to property rights.
- The Ultimate Externality [Article]: Donald J. Boudreaux finds that government is often a much larger source of negative externality on net than the market.
Use these questions to enhance your understanding of the topic. We recommend watching the featured video first; the suggested resources will also help.
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Comments
I personally get very irritated when I hear about a farmer having any responsibility over the pollution. For Example:
Take chicken farming along the Chesapeake Bay. Chicken farms are creating "Dead Zones" where no fish life (or any life) can exist. They know this by taking aerial photos of farms and photograph waste entering the streams that lead to the bay.
Many people say: "If there's proof, fine them till they stop or they find a way to fix it!"
Here's a "bright" idea: the farmers are merely creating the good, period. If it bothers the consumers (or the government) why not they create a program or institution designed to HELP the farmers make it cleaner AND clean the mess up FOR THEM since the farmers purpose is to create the good!
The price mechanism seems to especially have an edge here: If government is assigning fines to pollution, how would legislators know how much to charge as punishment for pollution, and why would they have a greater incentive to care than the people actually being directly affected by the pollution?