Edited by Enrico Colombatto
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 economics 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 in the case of positive externalities that the party...
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