The Elgar Companion to the Economics of Property Rights
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The Elgar Companion to the Economics of Property Rights

Edited by Enrico Colombatto

Economics is a matter of choice and growth, of interaction and exchange among individuals. Because property rights define the rules of these interactions and the objects of exchange, it is vital to fully understand the institutions and implications of the various property-rights regimes. With over 20 original and specially commissioned chapters, this book takes the reader from the historical and moral foundations of the discipline to the frontiers of scholarly research in the field.
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Chapter 13: The Contractual Nature of the Environment

Terry L. Anderson and Bobby McCormick


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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