No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Thirteen: Market “Failure” and the Role of the Government 309 decision-maker fully bear the costs of his or her actions. The primary method of dealing with externalities is carefully defining property rights , and then allowing the public sector to protect those rights. Let’s go back to Stinky Steel for a rather simplistic view of the problem. Consider the very basic question of “who owns the water in the river?” If Stinky Steel does not own the river, the management has no right to damage anyone else’s property by emitting toxins in the river. The legal owner of the river water should be able to use the court system for legal redress against Stinky Steel’s polluting encroachment. This may well be in the form of collective ownership—the government could own the property rights. If Stinky Steel does own the river, then it has the right to emit toxins in the river. The people who are hurt downstream because they can no longer fish or swim in the river had no legal right to do so in the first place, so their costs should not be included in the cost/benefit calculus. In most cases, markets work well precisely because property rights can be easily defined and enforced. In other cases, it is more difficult. For instance, how can we define the ownership of the air? What level of polluting is allowed? What if the pollution is natural, like methane from cows ? Do we allow you to have a campfire to cook marshmallows? Should Jesus have been allowed to emit greenhouse gases from hi s fire to cook fish? If that’s ok, what if Jesus burned a bunch of old tires to cook the fish? Then what about a junkyard with a mountain of burning tires ? Life is full of externalities, and most of them are dealt with as part of our everyday “ being at peace with all men. ” We work with others to limit the negative implications of our actions and maximize the benefit toward others. But we can’t mitigate all negative actions. Part of the problem is the presence of transaction costs with the large number of people that we would have to reach agreement with, as well as the cost of monitoring compliance. As technology improves, monitoring compliance costs can go down, such as those involved with monitoring automobile pollution. Many readers are probably outraged by the statement made earlier, suggesting that if Stinky Steel owns the property rights to the river, there is no basis for the people downstream to complain if toxins are released into the river. While that may be legally true, you might say that there is a moral problem with dumping toxins in the river. I couldn’t agree more! Yet, most of us don’t hesitate to get in the car and drive to the movies, emitting dangerous chemicals (in small amounts) in the process. Nevertheless, even if there are no legal restrictions on pollution (or any other negative externality), there can still be tremendous social pressure against bad behavior. In fact, social mores and values are much more important in guiding social behavior than the legal system. Just consider cigarette smoking. Yes, there are considerable legal restrictions against smoking; yet the legal restrictions pale against peer pressure that says “you stink” or when members of the opposite sex refuse to kiss you because you “taste like cigarettes. ”