Well, most of you would probably say that the townspeople should
have the right to clean air just as a matter of fairness.
But suppose I told you that the tannery was there
long before the citizens now are complaining,
would that make a difference?
That is indeed some food for thought.
The other thing that is interesting about this example is how
quickly any possibility of a bargain breaks down,
particularly if it is the town members who are
expected to compensate the tanner for shutting down the factory.
Here, some people may be bothered more than others by
the stench and some may not be bothered at all.
Should everyone pay the same amount to the tanner?
Should only those who are bothered pay?
And recalling our old friend the free rider
problem that plagues the provision of public goods,
how can we tell if people are telling
the truth about how much the stench actually bothers them,
particularly if their payment will depend on their answer?
And here is the punchline,
because Coase bargaining is so difficult and limited,
there are many other ways the government may intervene
to deal with externalities.
One other such remedy to do what economists refer to as internalizing externalities,
is to rely upon a legal framework of liability laws.
This framework is known in legal circles as the Wrongful Act or Tort System.
And the idea behind Torts is that the person or corporation that produces
the negative externality is legally liable for any costs or damages to other persons.
For example, suppose the Ajax degreaser company regularly dumps
leaky barrels of solvents into a nearby canyon owned by the Barbeque Ranch.
Once the Barbeque Ranch discovers the pollution,
it then can file a lawsuit against Ajax degreaser to
collect for the pollution damages as well as the costs of a possible cleanup.
However, as with the Coase theorem,
this Tort system has its limitations.
For one thing lawsuits are expensive,
time consuming and have
uncertain outcomes while major time delays in the court system are commonplace.
In addition there is great uncertainty.
Will the court or jury accept your claim that your child's leukemia
has resulted from the toxic waste emitted by the degreaser plant next door?
Can you prove that a specific firm in
the area is the source of the contamination of your well?
And, are you willing to risk all of your money to sue a deep pocketed corporation
with hundreds of millions of dollars in assets and a team of 50 lawyers?
It is precisely these kinds of constraints and observations that lead
us to yet another approach to internalizing externalities.
Direct government intervention in the form of either command and control
regulation or the use of Pigouvian taxes and subsidies to modify behavior.
And that's the subject of our next module.
So when you are ready, let' s move on.
Dr. Peter NavarroProfessor
