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How do you deal with negative externalities?

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Tobbog posted on Mon, Dec 13 2010 2:25 PM

Hey everyone,

I'm pondering about the problem of negative externalities and how to internalize them without government control, but I can't find a satisfying solution, so maybe you can help me.


Imagine that a company plans to open a production plant near a small town. The plant would detoriate the air quality of all of the town's inhabitants. If the company doesn't have to compensate the inhabitants for the damage it causes to the them it would produce more than the social optimum. That's why the town's mayor proposes that the company has to pay $50 a month to every inhabitant for the damage it produces. But what if some ot the inhabitants demand a lot more than the proposed $50 or don't want "their" air to be polluted at all? Whose property rights weigh more, that of the company or that of the people who are affected by its actions? And how could a free market solve such problems?

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Sieben replied on Mon, Dec 13 2010 2:42 PM

The plant would detoriate the air quality of all of the town's inhabitants.
This is a violation of property rights. I cannot poison your air any more than I can poison your orange juice, or put a beartrap in your bed.

Whose property rights weigh more, that of the company or that of the people who are affected by its actions?
The people's, because they were there first. If the factory had opened up in the middle of nowhere, and THEN people had moved in, the factory would have the right to continue polluting.

And how could a free market solve such problems?
Here. Consider that while the foundation of libertarian philosophy is individual rights, there IS utility of scale when individuals are pooled under one entity. This is where statists think the state is superior. But the state isn't the only way to pool individual sovereignty... apartment complexes and neighborhood associations are examples of voluntary societies defined geographically (like states). There are also many other intermediaries that "represent" their constituents. Obvious examples include clubs and fraternal societies. In short, people themselves do not have to make decisions. Specialists can do it for them. Less obvious examples are wal-mart, who selects and screens many products for quality and price for consumers. Again, specialists figure out what people want and stock it for them.

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OK, the libertarian ideal about property rights being the best (and freest) check on pollution sounds good, but I am struggling with it.  

The central planning model (e.g., USEPA) created many problems, unintended consequences, unemployment, uncertainty, and on and on.  It needs to go.  But replace it with what?

The property rights model suffers from the problem of transaction costs and uncertainty.  The aggregate contamination may be large, but if the trespass to each person's property is small, it does not pay to pursue the trespass.  The transaction cost of pursuing air quality trespasses is likely to be cost-prohibitive and success risky.  Furthermore, the contamination may come from multiple polluters, while each polluter should only be liable for its portion.  Worse, the polluter may be uncollectible after-the-fact.

It is unsatisfactory to say (as I believe) that the pollution problems are exaggerated.  Too many believe they are not and the USEPA (and the state EPA's) have made a dent in a terrible problem, and would need a satisfactory alternative before scrapping them.


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The only reason we need speculate is because a British judge was bought way back when the industrial revolution began. Before then, pollution was considered trespass, so the libertarian position is far from without precedent; besides, do you really think that plaintiffs wouldn't be allowed to pool their cases? Air pollution is as "class action" as it gets.

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@ Tobbog, listen to this

My Blog:

Production is 'anarchistic' - Ludwig von Mises

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William replied on Thu, Jan 20 2011 11:13 PM

Assuming civilization, there is always a market in effect no matter how hampered.  What can be spoken of is that over time the freer the market the better chance one has to deal with a severe "externality".  What you probably ought not do is something like arbitrarily abandon a government in the face of what would be considered an externality (asteroid, plague, whatevs) as it would cause a traumatic homeostatic shock on top of an already extant homeostatic shock.  It must be realized that, for better or worse, whatever government is in existence is in existence because people allow it to be.  They are doing all of their calculations and speculations within that environment.

In regards to a factory producing air pollution, that is a legal question.  The best advice would be to have as decentralized law as possible, tie people to the consequences of their actions, and hope for the best.  There is no real answer in a theoretical vacuum.

"I am not an ego along with other egos, but the sole ego: I am unique. Hence my wants too are unique, and my deeds; in short, everything about me is unique" Max Stirner
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Does anyone have a citation or reference for this?

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