Of Coase and Carbon:
The Coase Theorem in Environmental Economics, 1960-1979
Steven G. Medema
University of Colorado Denver
∗
September 2011
Department of Economics, University of Colorado Denver. Email: steven.medema@ucdenver.edu. I am grateful
for the instructive comments provided by Daniel Bromley, Emery Castle, Thomas Crocker, Alan Randall, and
participants in the workshop at the Property and Environment Research Center (PERC) as I developed this paper,
and for the research support provided by PERC, the National Endowment for the Humanities, and the Institute for
New Economic Thinking.
∗
1
Of Coase and Carbon:
The Coase Theorem in Environmental Economics, 1960-1979
Steven G. Medema
University of Colorado Denver
Introduction
Environmental economics began to develop as a specialized area of study in the 1950s and 1960s, but
it was not until the 1970s that it really emerged as a distinct field of economic inquiry, with the
attendant proliferation of scholarly articles and books, the establishment of specialized scholarly
journals such as the Journal of Environmental Economics and Management, the development of a
textbook literature, and the like. The Coase theorem, too, is a product of the 1960s, and, like the field
of environmental economics, began to attract more significant attention in the 1970s. While
correlation does not imply causation, there is an obvious link here. It would be difficult to sustain the
argument that the interest in the Coase theorem per se helped to drive the development of
environmental economics, but the fact that the theorem piqued the interest of economists in the
possibility of private or “market” solutions to environmental problems may have played a role. On
the other hand, there can be little question that the increased interest among economists in
environmental issues, derivative of the increased public awareness of the importance of these issues
in the 1960s and 1970s, had something to do with the significant increase in the attention paid to the
Coase theorem, and externality theory generally, during this period.
The purpose of this paper, however, is not to attempt to resolve the issue of causation and its
direction. Rather, the goal is to examine the early reception of the Coase theorem in the
environmental economics literature, its impact on that literature, and place that it came to have in the
environmental economics during the formative stages of the field.1
1
We must admit up front that this is not an easy issue to tease out. Perhaps the most difficult problem posed here is
the identification of the literature in “environmental economics” as distinct from the theory of externalities
2
Coase’s Insight
As Alain Marciano (2011, pp. 2-3) has noted, the literature on externalities prior to the 1960s is very
thin, particularly if one excludes the debate over technological economies and diseconomies that
occupied the literature of the 1920s. The reason for the relative paucity of attention is perhaps best
described by Scitovsky, who pointed out in 1954 that externalities were seen by economists as interfirm issues, but issues that were “unimportant” and “exceptional” (1954, p. 145)—a theme to which
we shall return. This publication trend, and perhaps to some extent the view of the importance and
extent of externality relationships, began to change significantly in the 1960s, and part of the impetus
for this was the publication of Ronald Coase’s article, “The Problem of Social Cost,” in 1960.
Coase’s article is most well known for its elaboration of what George Stigler (1966) later
labeled “the Coase theorem.” Using a simple, rather pastoral example of a farmer whose crops are
destroyed by a neighboring rancher’s roaming cattle, Coase proposed that, viewed through the lens of
economic theory, the basic problem of externality (a term Coase despised and did not use) was the
absence of property rights over the resources in question—that there was no law specifying whether
the farmer had the right to be free from harm or that the rancher had the right to allow his cattle to
roam where they pleased. Coase demonstrated that, once such rights were assigned, the efficient
outputs of cattle and crops would obtain and that it did not matter, from an allocative perspective,
whether the relevant property rights were assigned to the rancher or the farmer. As Coase put it,
It is necessary to know whether the damaging business is liable or not for damage caused
since without the establishment of this initial delimitation of rights there can be no market
generally, and it is difficult to avoid the conclusion that any such distinction is somewhat arbitrary. The selection
criteria employed here to identify “environmental economics” literature include: (i) books and articles whose titles
and or subject matter explicitly treat or are pointed toward environmental issues; (ii) works by individuals who are
identified with environmental economics or self-identify as environmental economists; and (iii) articles appearing in
journals which take as their mission the dissemination of scholarship in environmental economics. We will not,
then, be taking on the larger debates over the validity of the Coase theorem during this period (e.g., in the externality
theory literature) except to the extent that the issues raised in that literature became part of the discussion and debate
within the field of environmental economics. We also ignore the large legal literature on Coase theorem as applied
3
transactions to transfer and recombine them. But the ultimate result (which maximises the
value of production) is independent of the legal position if the pricing system is assumed to
work without cost. (1960, p. 8)
This is the result that came to be known as the Coase theorem,2 and, as set out by Coase, turns on two
key assumptions and embodies two central results. The key assumptions are that rights are fully
specified and transaction costs are zero. The results are that the externality will be resolved
efficiently (the efficiency proposition) and that the outcome will be invariant under alternative
assignments of rights (the invariance proposition, or allocative neutrality).3
Although the Coase theorem is only one of several important insights contained in “The Problem of
Social Cost”—and, as Coase (1981, 1988) has since told us, not the most important one—it is this
aspect of Coase’s analysis that eventually was seized on by economists, legal scholars, and others as
the central message of Coase’s analysis and/or as the insight upon which new approaches to legal
and economic problems potentially could be grounded. The attention given to the theorem in the
literature only increased with time, and scholars working in the area of environmental economics
played no small part in this process.
Initial Reception: The 1960s
As Alan Randall noted in the late 1970s, Coase’s article “attracted the immediate attention of natural
resource economists, environmental economists, and the heirs of the Pigovian tradition” (1978, pp. 910), and it did not take long for economists working on environmental concerns to graft Coase’s
argument into their analysis. It is in J.W. Milliman’s 1962 article, “Can People be Trusted with
to environmental issues, as well as the discussions by non-economist commentators in the environmental science
and ecology literatures.
2
I will use the term “Coase theorem” hereafter as a short-hand moniker for Coase’s negotiation result, recognizing
that not all of the authors discussed herein apply this term to the negotiation result.
3
Of course, both the assumptions and the results were soon brought it for criticism, but the examination of these
issues is not our purpose here. See, for example, Medema and Zerbe (2000).
4
Natural Resources?” that we first witness the propensity to link analysis to the idea of negotiated
solutions to environmental problems. Milliman, then an associate professor of Public Administration
at Indiana University and the co-author of an influential work on water supply,4 illustrates the
entrenched nature of the regulatory approach when he notes that “there is very little acceptance of the
thesis that the market system and private property rights can be used to deal effectively with many of
our natural resource problems” (1962, p. 200). He thus set out to “examine some of the premises
upon which one might base a choice of public versus private decision-making for natural resource
use and development” (p. 200). The orientation that informs Milliman’s analysis is not disguised: He
consciously assumes that “it is desirable to have a democratic society based upon individual choice”
and “the goal of society is to satisfy or carry out individual preferences” (p. 208)
Like Coase, Milliman located the externality problem in the absence of property rights over
the resources in question: “In general, the solution to a technological spillover problem is to expand
the scale of decision-making to correspond with the effects of the action. Very often this can be done
by coordinating fragmented property rights as in the case of unitization of oil pools and ground water
basins. An incomplete definition of property rights is usually at the heart of the matter.” As a result,
he said, “Changes in these property rights either to make them more specific or to enlarge the scale of
action, are often called for,” and once the appropriate rights structure has been established, “Very
often the pricing system itself may take into account many types of spillover losses and gains (p. 215,
emphasis added).5 Milliman did allow, however, that “In some cases direct government intervention
is the only available solution,” as will be the case when “the scale of action is too large to be
encompassed by ordinary property rights, as in a river basin or an ocean, or in which it is simply
impossible to establish a mechanism to give private owners incentives to take into account spillover
social benefits and costs, as in the case of air pollution” (p. 215). For Milliman, then, the issue is not
4
See Hirschleifer, de Haven, and Milliman (1960).
5
the validity of Coase’s negotiation result, or even its applicability per se; it is simply a question of the
range of applicability, and he is convinced that this range is not insignificant—that is, that many
spillover problems embody the characteristics that would lend themselves to solutions via the pricing
mechanism.
The second appearance of the Coase theorem in the environmental literature came in Allen
Kneese’s now-classic book, The Economics of Regional Water Quality Management (1964), a
pathbreaking treatise pointing to the possibilities of using economic analysis for the examination of
environmental issues and the development of potential policy solutions thereto. Though “The
Problem of Social Cost” had been cited in the literature fewer than ten times prior to 1964,6 Kneese
took the argument seriously enough to devote some three pages to Coase’s negotiation result in a
chapter on “Water Pollution and Resource Allocation by Private Markets.” After laying out the
traditional view of externality-induced market failure, Kneese informs the reader that “Free markets
do not inevitably result in the neglect of downstream costs by waste disposers” (p. 43), and he
invokes Coase’s logic via an example of how the negotiation could internalize damage costs
regardless of whether property rights are assigned to waste disposers or downstream water users.
Kneese, too, accepted the theoretical validity of both the efficiency and invariance claims
made by Coase. Having gone this far, however, he then raised two concerns that would become
standard aspects of the discussion of the Coase theorem within the environmental economics
literature. The first is that of equity, where Kneese suggests that equity matters in the determination
of who is made to bear related to environmental issues and that, in the case of a firm whose pollution
damages fishing stocks, “on equity grounds it might be considered justifiable to compensate the
fisherman for his loss of fish,” as opposed to having the fisherman pay the polluter to induce a
reduction in or the elimination of pollution emissions (p. 44). The second issue raised by Kneese
5
Milliman adds that “Coase makes this point in convincing fashion in a critique of modern welfare economics
related to the problem of externalities” (p. 215 at n. 350).
6
involves the costs of transacting in the context of environmental conflicts—an issue he finds
somewhat problematic:
it is possible for market transactions to avoid the resource misallocations that could result
from externalities, but such transactions are not always easy (inexpensive) to organize. The
damaging effects of water pollution are so widespread and diffuse, especially in highly
developed areas, that establishing a market which would permit the minimization of
production costs at optimal output would be very complex (expensive). As a rule, such
markets do not become established. (pp. 45-46)
In light of this, Kneese moved in other, more traditional, directions for the analysis of water pollution
policy.
Kneese was also at the center of the one significant debate over Coase’s analysis in the 1960s
environmental economics literature, though this came with a somewhat interesting twist. We have
seen that Kneese accepted the basic theoretical validity of Coase’s claim regarding the allocative
neutrality of alternative property rights assignments, but he also argued that Pigovian taxes and
subsidies would generate identical results—though he did not connect this to Coase’s negotiation
analysis. Others did, however, as Kneese’s assertion regarding taxes and subsidies spawned a notinsignificant literature that grew up alongside the Coase theorem debates, examining the general
question of symmetry between what were labeled “bribes” and “charges,” which included not only
negotiated settlements between parties to an externality, but also (and primarily in this literature) the
use of taxes and subsidies imposed by the state.7 That is, in addition to being taken as a hint about a
potential new framework for dealing with environmental issues, Coase’s result was seen as
potentially relevant for the standard Pigovian policy framework. The central issue that emerged
within these debates, for our purposes, was the effect of long-run behavior on the invariance result,
6
Nearly all of these references were by James Buchanan, and not all dealt with Coase’s negotiation result.
7
owing to the potential for entry into an industry. The argument was that bribes received for reducing
polluting activity raise the profitability of polluting firms. This, in turn, would trigger entry into the
industry, resulting in industry output that was greater under a system of bribes than under a system of
charges—thereby negating the invariance proposition.8
Though Kneese made only minimal revisions to his discussion of the Coase theorem in the
1968 revision of his book, a project undertaken with Bower,9 he did find this debate over long-run
asymmetries sufficiently important to mention them as one of the qualifications to the negotiation
model (Kneese and Bower 1968, p. 82). Kneese and Bower also pointed to the problems associated
with the “technically complex” nature of “the linkages between dischargers and damaged parties,”
suggesting that transaction costs increase with the number of parties to the externality not only
because there are more entities among whom agreement must be reached, but also because it
becomes increasingly difficult to determine the extent to which particular parties contribute to the
damage incurred by others (p. 84). All of this, then, led to a conclusion that was at least as
pessimistic as that expressed by Kneese in 1964: “Although it is possible for market transactions to
take externalities into account under certain circumstances, transactions of this kind are rarely
organized” (1968, p. 84).
In sum, the 1960s discussion of the Coase theorem within the environmental literature
brought out two issues that became central to the debates over the Coase theorem: (i) the realism of
the zero transaction costs assumption, both as regards the effect of the number of parties per se on the
possibility of coordinating bargains and the effect of imperfect information; and (ii) the implications
of entry and exit for the theorem’s invariance proposition.
7
See, e.g., Kamien, Schwartz, and Dolbear (1966), Bramhall and Mills (1966), Freeman (1967), Baumol (1972),
and the overviews of this debate in Kneese and Maler (1973) and Baumol and Oates (1975, 1988).
8
Freeman (1968) added the qualification that symmetry requires that the parties are using the same rate of discount.
This thread was not picked up to any extent in the subsequent literature, perhaps because the informational context
necessary to generate different rates of discount would seem to violate the assumption of zero transaction costs.
9
The 1968 book was entitled Managing Water Quality: Economics, Technology, Institutions.
8
One final question that arises when we consider the environmental economics literature of
the 1960s is the relationship between the Coase theorem and the suggestions by Crocker (1966) and
Dales (1968b) that a market can be established in pollution rights. It is rather common today for
scholars to credit Coase with the insight that gave rise to the idea that such markets could be
established. Yet, when we examine the literature from the 1970s, most of the credit for marketable
permits seems to go to Crocker and Dales.10 What, if anything, is Coase’s proper legacy here?
Crocker make no mention of Coase in his 1966 article, though he has recently suggested that “The
Problem of Social Cost” was one of several works that had an impact on his thinking at the time. In
his case, though, that impact was more in the way of confirming the validity of his own ideas about
the possibility of using markets to deal with environmental problems rather than stimulating those
ideas (Crocker 2011). Like Crocker, Dales does not cite Coase in his now-classic book, Pollution,
Property, and Profits (1968), but he does note in his acknowledgments the substantial influence that
“The Problem of Social Cost” had on his thinking and that his chapters dealing with the possibilities
of pollution rights “owe much to” to work of Coase, Gordon (1958) and Charles A. Reich (1964).11
It is quite clear that the marketable pollution permits system has more in common with
Arrow’s analysis (which, of course, came later) than with Coase’s discussion in “The Problem of
Social Cost.” Where the intersection with Coase’s work is closest, in fact, is in his article on “The
Federal Communications Commission” (1959)—the article that gave rise to “The Problem of Social
Cost.” Here, Coase suggested that policy makers consider the establishment of a market in broadcast
frequencies, one in which rights were either auctioned or given to spectrum users, with provision for
the purchase and sale of those rights between users and prospective users. The approach to pollution
10
See, for example, Chisholm et all (1974), Harlow (1974), the 1976 Fisher and Peterson JEL survey, Marin (1978),
and Maloney and Pearse (1979) all of which cite Dales and not Coase in this context.
11
The influence of Coase on Dales’s thinking is quite evident in his 1968 Canadian Journal of Economics article,
which covers some of the same territory as his book, but the impact of Coase’s work on Dales seems to have been
more in the area of how property rights influence economic activity than on the idea that one can create a market in
pollution rights. See Dales (1968a).
9
advocated by Crocker and Dales has much in common with Coase’s proposal for the allocation of the
frequency spectrum, though the similarity seems to be nothing more than coincidental.
The 1970s: Controversy and Consensus
As we moved into the 1970s, the environmental economics literature began to grow significantly,
and references to the Coase theorem mushroomed within and alongside of it. We find more than 50
references to the theorem in the environmental economics journal literature and a number of
additional references in scholarly books and textbooks in the field. The theorem was also considered
sufficiently important to be the subject of a two-issue symposium in the Natural Resources Journal
in 1973-74 and to be a topic of discussion in Fisher and Peterson’s Journal of Economic Literature
survey article in 1976—an article that may be characterized as the first “state of the art” presentation
of environmental economics to the broader community of academic economists12 and which Bromley
(1978, p. 43) identifies, along with the treatise by Baumol and Oates (1975) as the sign of the
maturation of the field of environmental economics.
The Coase theorem was invoked in two basic contexts in the environmental economics
literature of the 1970s. The first, and most common of these, involved authors making reference to
the theorem when discussing policy options for various environmental problems—ranging over
traditional industrial pollution of air and water (the examples here are numerous), the valuation of
pollution damage (Fisher and Krutilla 1975), mining on the ocean floor (Eckert 1974), and
transnational externalities (d’Arge 1975). In many instances negotiated or market solutions were
classified with taxes and subsidies, and direct controls, as the basic options for dealing with the
12
This is not to say that there were not environmental articles appearing in leading journals, but the Journal of
Economic Literature was known at that time for publishing broad survey pieces that would be of interest to large
segments of the community of economists.
10
policy issues at hand.13 A second group of articles were targeted more directly at the theorem per se,
usually to criticize it on various grounds. The Natural Resources Journal symposium in 1973-74 is
the most prominent illustration of this genre, but the work of Mishan (1971a,b), Randall (1972, 1975,
1978), and Dick (1976) is also important and attracted significant attention. Several themes emerge
from these two branches of the literature.
Validity
The references to the Coase theorem within the environmental economics literature by and large treat
it as correct, an accepted truth.14 One gets a sense for the broad-based acceptance of the theorem
from the fact that even E.J. Mishan, perhaps the theorem’s staunchest critic, accepted its theoretical
validity and tells us in his classic Journal of Economic Literature survey article in 1971 that a
“consensus” on the subject of externalities, such as pollution, emerged in the early 1960s, and this
consensus embodied the view that, “assuming transaction costs are low enough, it [is] a matter of
indifference from the point of view of allocation whether a manufacturer is compelled to compensate
the victims or whether the victims offer bribes to the manufacturer” (1971b, pp. 16-17).
It is also interesting to note at this stage exactly what environmental economists were
accepting as valid—that is, how they characterized the “Coase theorem.” A significant number of
authors followed the basic contours laid out by Coase, but of particular interest here is the fact that
not all environmental economists invoked Coase’s assumption that the costs of transacting are zero.
Some statements allow that the theorem holds with “low” or “small” transaction costs. Others, such
as Johnson (1971, p. 361 at n. 36) suggest that the efficiency and invariance results hold “as long as
13
Interestingly, negotiated solutions and tax/subsidy solutions were often grouped together under the a heading such
as “market” solutions, reflecting the sense that both utilized the pricing mechanism, as against the option of direct
controls. This makes for an interesting contrast with the view expressed by Coase and by many others, both at that
time and today, that the dividing line between market and government solutions has the tax/subsidy option on the
“government” side. Samuels (1974, pp. 15-16) argues still another position—that because government is the force
behind the creation and enforcement of property rights, both property rights an tax/regulatory solutions are
governmental solutions.
11
bargaining can take place among the affected parties.” This is relevant both because it is not what
Coase assumed and because such claims are untrue in the case of a continuous externality and
potentially untrue if externalities are binary.15 We shall have more to say below about this aspect of
the discussion. It may be, though, that the tendency to state the theorem in terms of positive, but low,
transaction costs has something to do with the notion of relevance—the subject to which we now
turn.
Relevance
In spite of what seems to have been a wide-spread acceptance of the theorem’s validity, there was an
almost universal sense—following Kneese’s early lead and often citing him for support—that the
Coase theorem was not applicable to the major environmental problems that preoccupied
environmental economists and policy makers at this time. The primary culprit here was said to be
transaction costs, owing to the large number of parties involved significant externality problems such
as air and water pollution. The direct costs of negotiation, the free-rider (non-rivalry/nonexcludability) problems posed by the process of getting a large number of “victims” to agree to
appropriately compensate a polluter to reduce emissions, and problems associated with fragmented
resource ownership combine to generate significant, indeed insuperable, barriers to the ability of
parties to reach negotiated solutions that would generate efficient levels of the externality in
question.16 Simply put, the assumption of zero transaction costs was considered utterly unrealistic, a
sentiment nicely reflected in Randall’s characterization of the Coase theorem environment as a
“transactions costs-free fairyland” (1975, p. 741 at n. 44). So, while the theorem was regularly
invoked, it was almost immediately dismissed as a relevant option for dealing with the “major issues
14
A partial list includes Kneese (1971), d’Arge (1971), Baumol and Oates (1971, 1975), Johnson (1971), Cho
(1971), Mishan (1971a,b), Meyer (1971), Parish (1972), Crocker (1973), Chisholm et al., 1974), Harlow (1974),
Eckert (1974), d’Arge (1975), Oates and Baumol (1975), Randall and Pagoulatos (1976).
15
If an externality is binary—it either exists or it does not and is not subject to incremental adjustment—then the
efficiency and invariance results hold if the gains from exchange exceed the costs of transacting.
12
of environmental policy” (Oates and Baumol 1975, p. 97), leaving “governmental solutions” as, in
the words of Brumm and Dick (1976, p. 449), “the only viable alternative” for internalizing the costs
associated with environmental problems.17
Many authors were content to simply and briefly wave aside the theorem as irrelevant for
major pollution problems and get on with their analysis of more traditional remedies.18 Others,
however, made their irrelevance critiques at some length, and with a certain stridency—even
vehemence. Mishan, for example, chose to highlight the fictional nature of a zero-transaction-costs
world by constructing a mock interview with a Coasean Dr. Pangloss, who believes that markets,
with or without transaction costs, can solve all problems. Mishan’s views regarding relevance are
nicely summarized in his characterization of the Panglossian position:
Dr. Pangloss’s arguments is … are perfectly valid in a Panglossian universe—one in which a
variety of pollutants are concentrated only in certain areas, say urban areas; in which accurate
and relevant knowledge is available to all without cost; in which the question of justice is
irrelevant, and in which there are not future generations to consider (1971a, p. 115).
But in the real world, Randall (1974, p. 44) argued, “an economist would be hard pressed to find any
situation where the assignment of liability has an absolutely neutral effect on resource allocation”
(1974, p. 44).19 Having noted the wide-spread acceptance of the view that transaction costs are
insuperable, Fisher and Peterson (1976, p. 25) concluded that one can only get to the Coase
theorem’s result in the real world by assuming its conclusions—that “The market cannot be credited
16
One can find this sentiment expressed in virtually all of the articles cited in note 14, above. One also finds a
similar view in the Coase-inspired property rights approach. See, e.g., Furubotn and Pejovich (1971).
17
See also Fisher and Peterson (1976, esp. p. 25), Dick (1976, p. 194), and Randall (1978, p. 10). Oates and Baumol
(1975, p. 97 at n. 3) also dismiss the possibility of auctioning pollution rights for large-scale externality problems.
On this, at least, they were poor prognosticators.
18
A classic example here is Baumol (1972), who, in his seminal analysis of Pigovian taxes and subsidies
intentionally abstracts from the possibility of negotiated solutions by assuming from the outset the presence of high
transaction costs associated with large numbers of parties impacted by the externality. Even so, Baumol does call the
Coase theorem an “interesting point,” though he suggests that Coase’s examples of the potential for negotiation are
“relatively unimportant cases”—further illustration of the idea that many economists were contemplating major
pollution externalities as the relevant subject matter.
13
with any particular virtue here unless one takes the extreme Coasian view that all externalities are
internalized via private negotiations.” The implications of this are straightforward, according to
Randall: “Unless ways can be found to reduce the transactions costs associated with market
solutions, market solutions will remain the plaything of academic economists, largely ignored by
policy makers and the public,” and that the onus to show that such schemes are feasible lies
“squarely on the shoulders of academic supporters of market solutions” (1972, p. 182).20
The voices of the relevance critics were numerous, and at times loud, but there were also
arguments being put forward in support of the possibility and actuality of Coase-theorem-type
solutions. Contexts identified as relevant included inter-state externalities (Upton 1975), where it was
argued that governors of states could negotiate to internalize spillovers; fisheries (Cheung 1970;
Maloney and Pearse 1979); and water rights (Johnson 1971; Burness and Quirk 1979). Schultze and
d’Arge (1974, p. 769) suggest that it may be legitimate to rely on property rights assignments and
attendant Coasean mechanisms to resolve two-party disputes over small-scale nuisances such as
motorcycle noise, and Storey (1976, p. 77) goes so far as to assert that “transaction costs can be
assumed to be zero” in two-party cases.21 Even Samuels and Mishan, perhaps the theorem’s
staunches critics, did not write off the possibility that the Coasean solution might have some policy
relevance, with Samuels allowing that zero transaction costs may obtain in “exceptional”
circumstances and Mishan noting that “with respect to bodies of land and water, extension of private
property rights may effectively internalize what would otherwise remain externalities” (1972, p. 62).
19
See also Schultz and d’Arge (1974, p. 769).
Randall strikes a more conciliatory point elsewhere, allowing that market solutions do have “attractions” and
recommending that economists and policy makers look for mechanisms to reduce transaction costs so that we can
perhaps “gain some of the benefits that seem to be offered by the market method of reducing externality problems”
(Randall 1972b, p. 47).
21
Storey goes on to point out that transaction costs loom large in the case of pollution damage, such as the water
pollution issues that are the subject of his article. Fischel (1978, p. 72), too, emphasizes that the Coase theorem
might have some relevance to small-scale environmental problems—neighborhood effects—in the context of
zoning, though, like others mentioned here, he acknowledges that it is unlikely to apply to larger environmental
issues, such as air and water pollution, that are dispersed over a wide area or subject to source-identification
problems.
20
14
What all of this means with regard to actual attempts to apply negotiated solutions is unclear, beyond
the fact that they were thought to be possible in certain situations. Whether this means that the
authors believed that the result would be efficient in some global sense and even unaffected by to
which party rights were initially assigned, or simply potentially more efficient than tax or direct
regulatory options is not discussed.
Virtually all of the relevance discussion during the 1970s took place at the theoretical level,
with little in the way of attempts to assess the theorem’s relevance empirically. A few environmental
economists, however, believed that the prevalence of private solutions for various types of externality
problems in the real world context made them suitable candidates for consideration as environmental
policy options. Dudley Johnson (1971, p. 361) suggested that externalities “are relatively common
occurrences that do not preclude efficient market solutions” and that assigning private property rights
over water resources may facilitate market solutions just as we see with other “everyday”
externalities, such as when “your neighbor paints his house chartreuse, offending your sensibilities
and perhaps lowering your property value.” Dales (1975) makes a similar point, adding that in other
situations externalities are constrained by social custom or through more regularized market
processes (p. 497).22 Alexander (1971, p. 12, emphasis added) even goes so far as to argue that
“Private negotiations have historically been significant in pollution control and abatement and in
forcing the recognition of side effects,” though the only example that he cites involves negotiations
between the owners of aluminum reduction plants and nearby farmers and ranchers over the harm
done by the emission of hydrogen fluoride. All of this, then, represented at best casual empiricism,
and did nothing to document the relevance of Coasean negotiation processes or the relevance of the
Coase theorem itself to real-world environmental problems.
22
Dales cites Cheung’s work on beekeepers and apple orchard owners as an example of internalization through the
market.
15
The one empirical study of this type that was undertaken during this period, by Thomas
Crocker (1971), sounded notes that were at once optimistic and cautionary. Crocker examined the
history of interactions among polluters and nearby property owners in Polk County, Florida, where
fertilizer companies emitted pollutants that impacted citrus and beef cattle production over an area of
roughly 400 square miles. Crocker found that a change in property rights structures that “shift[ed] the
burden of initiating negotiations from receptors to emitters” did indeed have a significant impact
outcomes, largely due to the impact of these alternative rights structures on the transaction costs
associated with the negotiation process (p. 463). This gave credence to the view that negotiations
over environmental externalities are possible. But it also led Crocker to a further conclusion that
reflected the sentiment found in many of the discussions of the theorem’s relevance: “Though there
can be no denial that in the absence of [transaction] costs property right assignments are neutral with
respect to the economic efficiency of outcomes, the Polk County case is a concrete example of the
non-neutrality of these assignments in the presence of [transaction] costs” (p. 464). Thus, while
Crocker’s study did not illustrate the strict Coase theorem processes at work, it did provide empirical
support for the idea, then gaining currency within the property rights literature and derived from
Coase’s original insight, that market mechanisms can be fruitfully applied to certain environmental
and natural resource problems, but that the effectiveness of such exercises hinges importantly on a
“proper” assignment of rights23. Interestingly, Alexander (1971, p. 12) drew even stronger
implications from the Polk County case, asserting that because negotiations took place “in many
cases,” private solutions should be pursued before government remedies are contemplated.24
As the foregoing discussion makes clear, there was a clear consensus among environmental
economists in the 1970s that the Coase theorem could not be usefully applied to the examination of
23
See, e.g., Demsetz (1964, 1966, 1967, 1972a,b) and Cheung (1969, 1970). Crocker gives this point further
emphasis in his 1973 contribution to the Natural Resources Journal Coase theorem symposium, where he presents a
more general analysis of the potential costs associated with various institutional structures.
16
large-scale externality problems that loomed so large in the social conscience during this time.
Mishan probably summed up the general sentiment best when he said that “the possibilities of
protecting the citizen against such common environmental bights as filth, fumes, stench, noise, visual
distractions, etc. by a market in property rights are too remote to be taken seriously” (1972, p. 62).
But there was one commentator—Australian economist Ralph Parish—who argued that the Coase
theorem did indeed offer a recipe for dealing with these problems. Parish accepted that basic premise
that the Coase theorem shows that “when significant external diseconomies or economies exist, a
strong incentive exists for them to be internalized by negotiation between the affected parties” (1972,
p. 35). Like other commentators of the period, Parish acknowledged that transaction costs tend to get
in the way of such negotiations, meaning that the assignment of liability does matter in such cases.
However, he continues, this does not mean that the Coase theorem offers no guidance as to how to
deal with the externality. Indeed, it offers a prescriptive solution: “Ideally—at least from the point of
view of the welfare economist—a pollution-control programme should attempt to bring about a
situation similar to that which would be the outcome of negotiations between the affected parties, if
the costs of negotiation were zero” (p. 35). What we have here, then, is what appears to be the first
argument for the Coase theorem as the basis for a “mimic the market” approach in the environmental
arena—the approach that was to become foundational in the economic analysis of law. The solution
to the problem was not to be found “in” the market, but in using the guidance provided by the market
mechanism. Although this notion of mimicking the market gained currency very quickly within the
law and economics movement, one finds no further reference to it in the environmental economics
literature of the 1970s, a fact which may be accounted for by a difference in perspective between
those working in the these two fields.25
24
Alexander’s report was published in March 1971, six months before Crocker’s article was published, and there is
no reference to Crocker’s work in this report. There is also no reference to Alexander in Crocker’s article.
17
Framework
The problems posed by large-numbers-induced transaction costs were not the only reason for
environmental economists’ qualms about grafting the Coase theorem onto the analysis of
environmental issues; it also raised the question of the appropriate framework to be used for the
analysis of environmental problems. Though it was clear that environmental issues represented
instances of externality, the issue of compatibility arose precisely because environmental economics
was attempting to borrow from the received theory of externalities.26
The analysis of externalities through the 1960s had focused almost exclusively on the general
class of activities in which the actions of one party impose costs on or generate benefits to another
party or parties, where these costs and benefits are not reflected in the agents’ decision calculus.
Simple examples—such as Pigou’s railway sparks case, Meade’s discussion of beekeepers and
orchard owners, and the case of the polluting factory soiling clothing at the neighboring laundry—
were referenced or developed to illustrate these interactions, and simple models were built to analyze
them—all indicative of the fact that the theory was not created to deal with large numbers
environmental problems and the particular challenges that they posed, but with the more general (or
generic) issue of spillover effects.
This focus on two-party situations was brought in for criticism by Ayres and Kneese (1969)
and more expansively and forcefully by Kneese (1971), d’Arge (1971), and Mishan (1971b).27 The
problems identified here were two. First, Ayres and Kneese argued that the important articles in the
externality literature deal with externalities as “exceptional cases” and as “a comparatively minor
aberration from Pareto optimality in competitive markets” (p. 282 at n.2); that is, externalities were
not seen as a significant problem, either scope or magnitude. This, of course, is the perspective
25
Some additional insight into this point may be found in the penultimate section of the present paper.
See, for example, Pigou (1932), Meade (1952), Coase (1960), Davis and Whinston (1962), Buchanan and
Stubblebine (1962), and Turvey (1963).
27
See also Fisher and Peterson (1976).
26
18
reflected in Scitovsky (1954). Pollution problems, in contrast, were viewed by Ayres and Kneese
both as much more significant and much more pervasive. A second issue, also forcefully argued by
d’Arge (1971), is that while the externalities literature focused on two-party interactions,
environmental problems often involve the interaction of many parties—certainly many receptors and
perhaps also many emitters—and over large, common pool resources, where the assignment of
accurate relative values to alternative uses of a resource are difficult. The two-party context, he says,
obscures power relationships that often attend situations of externality and assumes a fullinformation context that is not present in reality. Because of this, transaction costs will often be large
and externalities not the anomaly that the two-party analysis suggests. Kneese summed up the
combined effect of these criticisms when he noted that, for the environmental economist at least, “the
essence of the externality problem is that the conditions of this simple two-party case” contemplated
by the traditional approach to externalities “are not met in reality” (1971, p. 154). It would appear
that the framework problem was an artifact of economists moving away from their “home turf” but
attempting to grapple with these new problems using familiar tools. In essence, said d’Arge, “It
seems … that in concentrating on two-party or localized effects, economists have not taken heed of
the warnings of ecologists and have ignored one of the major dictums of economic thought: ‘that
everything depends on everything else’” (1971, p. 27).
The limitations of the two-party framework led several scholars to advocate for a general
equilibrium approach that includes recognition of the interaction between economic behavior and the
environment28 and to which the treatise by Baumol and Oates (1975) represents a classic, affirmative
response. The publication of this book, with its general equilibrium analysis of Pigovian instruments,
altered the nature of the discussion and, as Daniel Bromley put it, made it “safe to conclude that
neoclassical economics now has a body of literature concerned with environmental policy in the
19
large, rather than solutions for small numbers cases in which voluntary solutions seem so
compelling” (1978, p. 44).
Even so, not all authors condemned the traditional approach. Many environmental
economists continued to conceptualize problems with simple two-party models (both partial and
general equilibrium), and one—Roy Ruffin (1972, p. 111)—explicitly defended the two-party, partial
equilibrium approach. Ruffin’s view was that though the more simple framework abstracts from
certain important phenomena, including “the transaction costs (both search and bargaining costs) of
voluntary agreements between polluters and the polluted,” there remains “much to be said for a
model that has a simple geometric solution—its simplicity and directness illuminates a social
problem much greater than the palpable one being studied (Robinson Crusoe)” (1972, p. 111).
How, then, does the Coase theorem fit into this framework debate? One could argue that the
theorem had nothing to do with any of this. It could simply be that, as Mishan (1971b, p. 1) put it,
this mis-match between theory and problem “not altogether inexplicable,” since “Economists
respond to real world problems with a time lag, initially making use of familiar, if less relevant, bits
of apparatus.” But there is more at work here than a simple time lag. At the most basic level, the
qualms about two-party models arose within the context of, and seem to have been stimulated by,
discussions of the Coase theorem. That is, the theorem brought to the fore the question of the
adequacy of the two-party framework. How? The answer may lie in the theorem’s detachment from
the real world, highlighted by many of its critics. Ruffin’s defense of the two-party framework,
applied to the consideration of, say, Pigovian taxes, has more than a bit of cogency. Though there are
limitations to such models, one can still gain significant insights into the effects of Pigovian
instruments from them. Indeed, it may be that, had the Coase theorem not entered the picture, the
need for a more complex framework would not have appeared to be so urgent. But the theorem
28
See, e.g., d’Arge (1971), Randall (1972b), and Samuels (1974). One might reasonably argue as to whether general
equilibrium framework was any less abstract than the extant two-party models, especially in light of its assumptions
20
seems to have contributed significantly to the unease that some environmental economists felt over
the two-party models, and this unease seems quite justified. Given that many environmental
economists gave the Coase theorem’s mechanisms some credence in a two-party context and that the
theorem explained that externalities would be internalized under such conditions if property rights
were assigned over the relevant resources, remaining wedded to two-party models could be
considered problematic: scholars would be dealing with externalities and externality policy in a
framework where government intervention was not necessary, whereas the large numbers nature of
many environmental problems was felt to require some form of governmental action. The theory,
then, needed be reexamined in order to develop a framework that would allow economists to come to
grips with the specific characteristics of environmental problems and develop a rationale for why
they could not be satisfactorily resolved through the market.
Correctness
To this point, the issues raised with regard to the Coase theorem have all gone to the question of its
relevance. But the discussion of the theorem by environmental economists during this period was by
no means confined to this alone. There was also a multi-pronged debate over the theorem’s
correctness—that is, over whether an assignment of property rights over externality-relevant
resources would in fact generate an efficient and invariant outcome in a world of zero transaction
costs As Randall has noted, “Right from the start, it seems, there were some theoretical and applied
economists who had vague feelings that something was wrong” with the Coase theorem, and much of
this concern went to the theorem’s claims about allocative invariance. (1974, p. 41, emphasis
added).29 The result, of course, was a lengthy debate over the theorem’s correctness, much of it
taking place in the externality theory literature. That this debate dominated the Coase theorem
about transaction costs.
29
It was not just environmental economists who saw the invariance claim as the most shocking implication of the
Coase theorem; George Stigler expressed similar sentiments on multiple occasions—though as a believer rather than
as a critic.
21
literature in the 1960s and (especially) 1970s is indisputable and is recognized in Norgaard and
Hall’s assessment that, “During the 15 years since Coase’s article, the profession has done little more
than precisely define the assumptions necessary to verify or disprove his conclusions within his
limited framework or slight alterations thereof,” rather than, as they were, pursuing the implications
and potential applications of the theorem for the design of environmental policy (1974, p. 260). Here,
as with the relevance discussion, environmental economists were quick to jump into the fray, both as
creators and as borrowers of Coase theorem critiques.30
Those factors cited regularly by environmental economists as invalidating the theorem
included income effects31 and entry/exit effects,32 in the development of which critiques
environmental economists played a significant role from the 1960s, as well as problems associated
with non-separabilities33 and non-convexities34 that were developed in the larger literature on
externalities.35 It was also “demonstrated that the Coase theorem does not hold for pollution control
across communities (Berglas 1977) or across countries (d’Arge 1975) if factors of production are
mobile, and that the presence of threats (Page 1973; Dick 1976, pp. 186-87) and uncertainty
(Greenwood and Ingene 1978) also invalidate the theorem.36 These challenges to the theorem’s
correctness focused largely on the issue of allocative neutrality—that is, on the question of whether
the outcome of negotiations over externalities will be invariant across alternative assignments of
30
See, e.g., the various contributions by Mishan and by Randall, as well as Samuels (1974), Brumm and Dick
(1976), and Dick (1976).
31
Income effects quickly became a standard criticism or qualification, which is not surprisign in light of the fact that
environmental spillovers impact population groups. See, e.g., Mishan, Randall, Fisher and Peterson (1976), and
Bromley (1978).
32
See, e.g., Frech (1973).
33
See, e.g., Marchand and Russell (1973).
34
See, e.g., Starrett (1972) and Laffont (1976). But see also Endres (1977) within the environmental literature and
Medema and Zerbe (2000) who refute the non-convexities critique.
35
These various challenges are nicely summarized in Dick’s article, “The Voluntary Approach to Externality
Problems: A Survey of the Critics,” published in the second volume of the Journal of Environmental Economics and
Management in 1976.
36
The word “demonstrated” appears in quotation marks here because many, if not all, of the supposed disproofs can
be challenged on grounds that they violate one or more of the theorem’s underlying assumptions. This, however, is
not the place to get into these issues. But see Medema and Zerbe (2000).
22
property rights.37 Randall, for one, argued that the income effects critique and the relevance-related
impact of transaction costs combined to “demolish” any claim of allocative neutrality (1972a, p. 177)
and that “For almost all externality situations which can be expected to occur in practice, it is no
longer possible to claim, as has been done in the past, that selection of a status quo liability rule
affects only the distribution of income” (1972b, p. 44). The force of this demolition, Randall
concluded, “removes one of the prime advantages that had been claimed for the market solution to
externality problems” (1972a, p. 172).
The one other significant challenge to the theorem’s validity that we find in the
environmental economics literature during this period goes to the deeper, philosophical issue of
whether externalities can even exist in the first place in a world of zero transaction costs.38 D’Arge
(1973, p. 558) posited that an externality constitutes a “perturbation” in “an otherwise perfect
economic system.” The problem, however, is that a perturbation is something that is not known about
in advance, whereas a zero transaction costs world is one characterized by perfect knowledge.39 In
short, such perturbations should not exist in a world of zero transaction costs; any and all potential
externalities should be internalized before they manifest themselves. This, for Schultze and d’Arge
(1974, p 763), raises “a major logical problem,” in that this theory of externalities cannot explain
why externalities exist in the first place. Dick (1976, p. 77) is more direct in his assessment, arguing
that “it is economic nonsense to talk about externalities in a zero transaction costs world.”40
However, the potentially problematic nature of this challenge did not seem to impact the larger
discussion of the theorem, as one finds no evidence of it in the 1970s literature beyond the articles
cited here.
37
In fact, some writing in the environmental economics literature associate the Coase theorem with the invariance
result alone (e.g., Dick 1976, p 187; Kneese and Maler 1973, p. 705).
38
See also Crocker (1973, p. 562), Schultze and d’Arge (1974), Samuels (1974), and Dick (1976, p. 193).
39
See, for example, Stigler (1972, p. 12) and Demsetz (1968, p. 33).
23
Adaptation
The various challenges leveled against the theorem’s correctness had no discernible impact on the
attention paid to the Coase theorem (unless to increase it), but they did have an impact on the terms
of the discussion. This is most apparent in the statements of the theorem, which, in the hands of
some, evolved to meet the challenges posed by these critiques. While some authors continued to state
what we might call a base, “Coase 1960” version of the theorem, others added additional
assumptions or qualifications regarding the absence of income and wealth effects, the separability of
production and cost functions, etc.—and in doing so taking the theorem beyond even the Panglossian
statement by Mishan, quoted above.41 These layers of qualification being laid onto the theorem gave
it, in Randall’s opinion, “a distinct ‘if pigs could fly’ character” (1978, p. 10)42 and likely served to
further reinforce the general sense among environmental economists of the theorem’s irrelevance.
Perhaps because so much of the controversy over the theorem—going back to the bribes and
charges debate, but including income and other effects—went to the question of allocative neutrality,
we also witness the emergence during this period of two Coase theorems—one, the “strong” version,
claiming both efficiency and invariance, and another, the “weak” version, claiming efficiency
alone.43 The latter had fairly widespread support as a valid proposition, but as we moved through the
1970s the validity of the strong version came increasingly into question. In short, in spite of the
supposed disproofs, the theorem proved resilient, surviving both in modified and unmodified form.
Equity and Fairness
The implications of the Coase theorem for considerations of equity or fairness, first raised by Allen
Kneese in 1964 and largely stimulated by the idea of “victims” bribing polluters to reduce emissions,
40
What these authors apparently fail to recognize, of course, is that this was Coase’s point in the first place and his
major criticism of the Pigovian approach, which, too, assumed the existence of externalities and the necessity of
Pigovian remedies in a world of zero transaction costs, when, in fact, such were unnecessary (Coase 1960, 1988).
41
The most common qualification is for income and wealth effects. See, e.g., Norgaard and Hall (1974), Samuels
(1974), and Randall (1978). This qualification also become somewhat common in the externality theory literature.
42
Samuels (1974, p. 8) argues that the income and wealth effects qualification reduces the theorem to a tautology.
24
continued to receive play within the environmental economics literature in the 1970s.44 The strongest
voice here was E.J. Mishan (1971a,b), and his views can be taken as representative of the equity
critiques. Mishan argued that while the claims of competing resource users in situations of externality
“are indeed Pareto symmetric,” they “may not be ethically symmetric”—that there is something
ethically wrong with an assignment of rights under which the victim pays. But this was not the only
fairness-related concern raised in the literature. There was also concern that pollution costs fall
disproportionately on the poor, and so should be mitigated by more wealthy polluters who are better
able to bear these costs.45 Problems associated with the long-term nature of certain forms of
environmental degradation, too, were raised in this context, with the argument being that the interests
of future generations are not likely to be sufficiently taken into account in Coasean negotiations
carried out by members of the present generation and that governmental solutions were more likely
to be framed with these inter-generational issues in mind (Mishan 1971b, pp. 24-26).
The roots of these concerns over equity have been ascribed by Randall (1974) to what he has
labeled Coase’s effective “amoralization of the externality issue,” and it is difficult to disagree with
his assessment that equity concerns raised by the Coase theorem played a significant role in the
hostility expressed toward it:
In essence, Coase seemed to be saying that in cases where two parties have conflicting
interests there are no moral precepts to guide the resolution of the conflict. Viscous criminals
being bribed to desist and of little children being regarded as “hitting” automobiles in
pedestrian crossings, with Coasians failing to be morally offended, were invoked …46 Mishan
43
See, e.g., Randall (1972b, pp. 6-7).
See, e.g, Mishan (1971a,b), Randall (1972a, 1975), Samuels (1974), Liebfhafsky (1973) and Weld (1973).
45
Common (1988), in contrast, argues that this conventional story of wealth polluters and poor victims may well not
be true in some instances.
46
Randall here makes reference to a paper by John Weld entitled, “The Social Cost of the Coase Theorem,”
presented at the Symposium on Environmental Economics and the Law, held at the University of Califoria,
Riverside in February 1972. Weld’s paper is referenced in several articles from the 1970s but never appeared in
print.
44
25
scored early points with the issue of income distribution. Surely decent people could see a
moral problem in poor citizens bribing an affluent producer of effluents, while Coasians
looked on benignly. (1974, p. 53)47
John Weld went even further, defending the traditional approach to causation and liability by arguing
that polluter liability and similar restrictions exist for a reason—they reflect social norms, an
“evolved consensus which is embodied in the common law, that you should “use your land as not to
injure another” (1973, pp. 598, 599). Bromley (1978, p. 57) takes a still stronger position, going so
far as to suggest that it may be best to rule out the market in certain situations, that a rule of
inalienability “would seem most appropriate” for externality situations that are “detrimental to
human health or to long-run ecological integrity.”
While assessments such as those made by Randall and Weld focused on Coase and the
Coaseans as the primary source of the inattention to equity issues, Mishan laid the blame more
broadly—at the feet of economists and the economic method generally. In his view, economists’
fixation on the Coase theorem is but one example of what he saw as their excessive preoccupation
with efficiency at the expense of equity:
It is not, of course, hard to understand the somewhat exaggerated weight attached by
economists to the allocated aspects of an economic problem as distinct, say from those
concerned with equity. For the former aspects lend themselves nicely to formal theorizing
and, with patience and a little finesse, impressive measures of social losses and gains can be
foisted on credulous civil servants and a gullible public.
Yet, the priority given to allocative aspects in real economics problems cannot, I
think, be justified; certainly not by recourse to welfare economics. The more “affluent” a
47
It bears noting that Coase (1960, p 43) argued that it is “desirable” that policy decisions over issues such as these
“be carried out in broader terms” than just efficiency, including “aesthetics and morals.” Given this, Randall’s
charge against Coase himself is likely too strong, though it may have validity against others—e.g., within the
26
society becomes, the less important is allocative merit narrowly conceived. And in a society
in the throes of accelerating technological change (one in which, of necessity, pertinent
knowledge of the human, social, and ecological consequences of what we are doing is
generally slight and partly erroneous) complacency on the part of any economist, guided in
his professional discussions by considerations alone of allocative merit or economic growth
potential, is both to be envied and deplored. (1971b, p. 26)
Samuels (1974, p. 12) offers a similar challenge, questioning why the efficiency criterion should be
given privileged status over any other, including “the goals of egalitarian radicals.” Yet, in spite of
these equity-grounded critiques of the Coase theorem, economists, environmental or otherwise,
continued to frame their discussions of externalities largely in terms of efficiency—whether for
ideological reasons or out of professional habit.48 Even so, the fact that the Pigovian subsidy remedy,
like the assignment of property rights to “victims,” was and continues to be so roundly panned in the
literature—also on fairness grounds—suggests that equity issues have loomed fairly large in the
calculus of environmental economists.
But not all of those who raised the issue of equity came down on the side of Mishan et al.
Chisholm, Walsh, and Brennan (1974), for example, strike a rather different tone, contesting the
standard dichotomy between wicked polluters and virtuous victims. In their view, “The truth of the
matter is that all consumers contribute to pollution by the very act of consumption; firms pollute, not
because they derive fiendish delight from doing so, but because the individual consumers of their
products pay them to do so” (p. 4). The argument, of course, is that if consumers, too, are a cause of
the pollution, it becomes reasonable to consider the option of making them bear some amount of the
cost. A second point that was raised in favor of the Coase theorem on this score was one that seems
property rights tradition—who built upon Coase’s work. Of all of the commentators on the equity issue, only Weld
(1973, p. 596) appears to have noticed (albeit rather dismissively) this aspect of Coase’s discussion.
48
On this see Bromley (1990).
27
almost so obvious that it is surprising to see that it has not received more play in the literature.49 As
Australian economist Ralph Parish pointed out in 1972, because, in a zero transaction costs world,
the assignment of liability does not matter from an efficiency perspective, “the question of liability
for pollution damage could be decided entirely on the grounds of equity” (1972, p. 34). That is, the
theorem tells us that, if the judges and legislators are so inclined, rights can be assigned to “victims”
on equity grounds without fear of adverse efficiency consequences. In short, the Coase theorem itself
is as strong a weapon in the hands of those concerned with equity as in the hands of those concerned
with efficiency. It seems as if the fear that the theorem’s efficiency and invariance arguments could
be used to justify granting polluters the right to pollute in unrestricted fashion may have blinded
many environmental economists to this fact.
The Textbooks
The one additional data source that we have on the reception of the Coase theorem within
environmental economics is the textbook literature of the period. An examination of this literature is
interesting because textbooks may be said to reflect professional consensus on a subject, and because
they reveal to us what a student educated in a particular field is expected to know at a particular point
in time. As such, the treatment of the Coase theorem within this literature deserves at least a passing
mention.
Of the eight environmental economics textbooks published during the 1970s that were
surveyed for this study, six treat the Coase theorem: Crocker and Rogers (1971), Edel (1973),
Thompson (1973), Seneca and Taussig (1974), Pearce (1975), and Kneese 1977). In addition, the
environmental economics reader edited by Dorfman and Dorfman (1972) reprinted an edited version
49
But see Medema (1999).
28
of “The Problem of Social Cost.”50 As with the scholarly literature, several clear themes emerge from
the textbook treatments.
First, Crocker and Rogers, Seneca and Taussig, and Pearce all devote extensive attention to
the Coase theorem, though none of them name it as such. It is noteworthy, though, that more space is
given over to critiques of the theorem than to the presentation of the bargaining process at work and
of its results. Pearce, for example, devotes three pages to a presentation of the theorem and seven
pages to his critique of it! There is also little indication given by the textbook authors of any
applicability to real environmental problems, large or small, and the common theme is the
impediment posed by transaction costs. This more or less parallels the perspective that one finds in
the scholarly literature, though the textbook literature lacks the allowance we find in some quarters of
the scholarly literature for the possibility of negotiated solutions in small numbers cases.
A further noteworthy feature of the textbook literature is that issues of equity find their way
into the discussion. Crocker and Rogers raise the equity issue in a general way in the midst of their
Coase theorem discussion, allowing that the efficiency oriented argumentation in their book must be
“bugging the hell out of” many of the student readers, and that a “living, breathing, and feeling
human being” cares about who is made to pay or is paid (1971, p. 71). Edel (1973, p. 99) goes a step
further in telling the students that the “victim pays” notion “violates many people’s ideas of fairness
in a way that compensation payments [from polluters to victims] do not.” While acknowledging that
equity is important, Crocker and Rogers justify their emphasis on efficiency with the argument that
efficiency concerns “are often neglected” in environmental quality discussions and that, as
economists, these are the issues that they are at least “partially competent to discuss” (1971, p. 71), a
50
The textbooks that do not treat the Coase theorem are by Ramsay (1972) and Hines (1973). Hines does, however,
make passing (and rather dismissive) mention of Dales’s proposal for auctioning pollution permits. There was also a
second reader published during this period, by Redfern and Shulstad (1974). It does not include “The Problem of
Social Cost,” but the authors do mention it in their introduction. While it is now standard for environmental
economics and intermediate microeconomics textbooks to include a discussion of the Coase theorem, it may or may
29
viewpoint that is relevant to Mishan’s critique of the economist’s method of dealing with
environmental issues, discussed above. Pearce, though, confronts the students’ potential fairness
qualms head on, arguing that there is no a priori reason to think in terms of “those who ‘innocently’
suffer” (1976, p. 84) and that the decision as to the morality of one party or the other bearing costs
ultimately comes down to a social value judgment.
In short, then, the Coase theorem very quickly made its way into the textbook discussions in
environmental economics, which may be taken as indicative of the impact of the theorem on the
field. As one might expect, the same themes that we identified within the scholarly literature are
found within the textbook treatments. What is less obvious is why the textbooks, which tend to focus
on ideas that are considered “settled truths” within a field and that potentially have some measure of
analytical or practical applicability, would have devoted attention to an idea that remained highly
controversial and had for the most part been dismissed in the scholarly literature—and was dismissed
in the textbook literature—as essentially irrelevant. Some clues may be found by considering the
general question of why environmental economists were so interested in the Coase theorem—a
question to which we now turn.
Why were Environmental Economists so Interested in the Coase Theorem?
It should be clear by this point that while the Coase theorem features prominently in the
environmental economics literature of the 1970s, it does so in a curious way. Although many
environmental economists were inclined to accept the theorem as a valid theoretical proposition, and
some even suggest that, in certain contexts, voluntary solutions to environmental problems may be
possible—and even, as Bromley (1978, p. 44) put it, “compelling”—there is virtually no evidence of
anyone suggesting that it has a role to play in dealing with the large-scale environmental problems
not be surprising that the proportion of environmental economics textbooks treating the theorem in the 1970s was
both higher than that in the intermediate microeconomics textbook literature and began in force much earlier.
30
that were the focus of the literature during this period. What we find, instead, are a host of references
to the theorem, often with a paragraph or two of accompanying commentary, indicating that the
theorem is irrelevant for the analysis of major environmental issues because the large number of
parties involved negates the assumption of zero transaction costs and because the presence of
consumer “victims” generates income effects that negate the invariance proposition. The in-depth
treatments of the Coase theorem that we do find in the literature from this period are almost wholly
critical of the theorem and the policy conclusions that some drew from it.
This raises the question as to why many environmental economists felt compelled to bring up
the Coase theorem in the first place. Why was it deemed worthy of the significance conferred by a
two-issue symposium in the Natural Resources Journal, a “Survey of the Critics” in the second
volume of the Journal of Environmental Economics and Management, Mishan’s scathing Pangloss
article in a special issue of the Swedish Journal of Economics dedicated to “Environmental
Economics,” and treatments in the textbook literature? After all, the theorem was widely panned as
irrelevant, and there does not appear to be any larger “pro-Coase-theorem” current in the
environmental economics literature that authors should have felt compelled to discuss and critique.
One part of the answer undoubtedly lies in the fact that the economic analysis of
environmental problems consciously drew from and was constructed upon the theory of externalities.
The environmental economics literature did not evolve out of externality theory; rather, it evolved out
of a concern on the part of some economists to grapple with environmental issues, in response to the
larger social concerns of this period. It was stimulated by a perceived real-world problem rather than
developing via a strictly internalist move—a “natural” progression of the literature—within the larger
field of economics. Given the resonance of the pollution issue with the theory of externalities, it is
understandable that economists would turn to this theory as a source of theoretical frameworks and
models with which to analyze environmental issues. And given that the Coase theorem quickly
31
became a part of the landscape of externality theory,51 it is perhaps no surprise that environmental
economists felt compelled to mention and even grapple with the theorem as they developed
paradigms for inquiry.
But the impact of the state of externality analysis here goes beyond mere theoretical
borrowing by scholars in this emerging field. The Coase theorem was very much “in the air” during
the 1970s, discussed in department hallways and seminar rooms, in addition to the scholarly
literature.52 And among those talking about externality issues, there was a not insubstantial cadre
suggesting that the theorem showed that tax and regulatory remedies, such as the Clean Air Act, were
not necessary for an efficient resolution of environmental problems—that Coasean mechanisms
would effectively internalize the relevant costs. Thus, while the environmental economics literature
would suggest that the critics were reacting against an invisible straw man, attention to the larger
background against which this emerging literature played out reveals a different picture and gives
credence to the claims made by scholars such as Mishan and Randall that the theorem had a degree
of support among economists generally as a framework through which one could do environmental
policy analysis.
A second conjecture here goes to the propensity of economists to be attracted to the study of
interesting theoretical problems and puzzles, irrespective of their relevance. This is a typical
historical explanation for many of the turns that we have seen in economics during the post-WWII
period, as economists increasingly adopted more highly mathematical approaches and developed
increasingly abstract models that many believed were loosed from “real-world” moorings. Does this
conjecture hold up for environmental economics? There is a case to be made in each direction.
51
Even though the number of reference to Coase’s negotiation result in the 1960s is relatively small, this fact is
accounted for by the smallness of the externality literature rather than the degree of interest in the Coase theorem
within it.
52
I would like to thank Alan Randall for alerting me to this point and Emery Castle and Robert McCormick for
confirming it.
32
One might reasonably argue that environmental economists were more practically oriented
than the profession at large, as is sometimes the case for those whose research is focused on social
policy issues. Evidence for this can be found in the assertion by Thomas Crocker, one of the pioneers
of environmental economics, that “In contrast to the well-ordered, narrow path conferred by the
universal paradigm of its parent discipline, the frequent demands starting in the 1930s for public
policy applications in resource economics have given life to an eclectic interplay between real
problems and abstract theory,” as well as “a lesser willingness than its parent discipline to protect
theory from data” (1999, pp. 35, 36).53 Randall seems to lend support to this view with his
assessment that, starting with Allen Kneese, environmental economists for the most part “resisted the
lure of a simplistic, just leave it to the market’ answer” (1974, pp. 40-41).
There is also, however, a case to be made for the opposing view. Mishan’s critique,
referenced above, of the economist’s fascination with efficiency and lack of attention to issues of
equity, grounded, he says, in economists love of “formal theorizing” suggests that abstract theory at
times carried the day. Environmental economists were not immune to this, and the attention given to
the Coase theorem may be a reflection of it.54 A further piece of evidence here comes from the use
general equilibrium theory for the analysis of environmental issues, particularly the effects of
Pigovian instruments. This theoretical framework is no more tightly wedded to reality than the
Coasean one, with both operating in a world of costlessly adjusting markets, and the general
equilibrium models assuming costless state action (e.g., zero information and bureaucracy costs).55
Though the negotiation result was originally formulated as a strictly intuitive proposition by Coase,
and then converted into an intuitive “theorem” at the hands of Stigler, by the 1970s we were
53
See also Bromley (2008, esp. pp. 22-23).
One finds a similar sentiment expressed by Crocker (1973, p. 561), as well as in Liebhafsky’s (1973, p. 632)
statement that the Coasean position deals with the law “‘as if it contained only the axioms and corollaries of a book
of mathematics” and that this view was attractive to many economists (quoting Oliver Wendell Holmes in Nebbia v.
New York, 291 U.S. 502).
54
33
beginning to see a range of mathematical treatments of it, though much of this work was outside of
environmental economics per se (both in terms of literature and context of analysis). The scores of
articles authored by economists of all stripes attempting to prove or disprove the theorem, many of
them done seemingly as “one-offs” by individuals who had no subsequent engagement with the
relevant literature, speak powerfully to the attractive theoretical puzzle posed by the theorem.
Randall (1978, p. 7) offers a somewhat different take on this same theme, attributing “much
of the early success” of the Coase-inspired property rights approach to “the combination of
neoclassical orthodoxy with [the property rights scholars’] fascinating and somewhat heretical habit
of visualizing potential trades in situations where trading is illicit or, at least, not customary.” This of
course, calls to mind the attraction of many economists to and the controversies within economics
over economics imperialism and, more recently, the “freakonomics” genre.56 In sum, then, the
challenge that the theorem posed to traditional ways of thinking about externality problems, and, by
extension, environmental issues, and the interesting theoretical puzzle that it embodied, may be said
to be one of the sources of attraction, even if that attraction took the form of criticism.
Finally, one cannot overlook the role that normative, and even ideological (broadly
conceived), factors may have played in these discussions. As Randall pointed out in 1974, “many of
those who have worked so hard to pierce the Coasian balloon have invested that effort mainly
because they found the policy implications of the Coase Theorem rather offensive” (1974, p. 35).57
We can identify two normative or ideological themes within these arguments.
The first goes to issues of equity and fairness, which we have discussed at some length
above, and reflects the view that holding “victims” liable is simply wrong. These arguments
represent something of a rejection of the reciprocal view of externalities laid out by Coase in “The
55
One could argue that those who rejected the Coase theorem on realism grounds and then proceeded to advocate
for a general equilibrium approach were more than a bit inconsistent in their demands regarding realism.
56
This also raises the question of whether environmental economics constitutes an instance of economics
imperialism, but this is not the place to pursue this issue.
34
Problem of Social Cost.”58 One prominent illustration of this, and of the problematic nature of such
assertions, can be found in Mishan’s argument for the priority of rights of non-smokers on the ground
that “the freedom to breath fresh air does not, of itself, reduce the welfare of others.” In like manner,
he says, “the freedom desired by members of the public to live in clean and quiet surroundings,” as
against having noisy vehicles or polluting factories operating nearby “does not, of itself, reduce the
welfare of others” (1971b, p. 25). But these statements are patently false; freedom for the nonsmoker reduces the welfare of the smoker and the freedom of the residents to enjoy amenity reduces
the welfare of owners of the automobiles and of the plant, as well as the plant’s employees and the
customers, both of which groups are impacted by the higher costs of production associated with
costly pollution abatement activities.
The second aspect of the normative/ideological cast of these discussions of the Coase
theorem is what one might call the “pro-abatement” tone that is evidenced in so much of the
environmental economics literature—a view that pollution levels must be reduced and that, in the
Coase theorem context, leaving things to the market will almost certainly result in significant
environmental degradation owing to the failure of the Coase theorem to work its magic in the real
world (e.g., Samuels 1974, p. 22). Randall even goes so far as to ask whether one can adopt the
Coasean position “without appearing blatantly anti-environment” (1974, p. 54).
The discussion here ties directly back to the notion of relevance. As Randall pointed out,
those who see the Coase theorem as relevant for dealing with environmental issues make one of two
arguments. The first, grounded in the notion of allocative neutrality, is that there is no reason to move
away from a system where polluters are not liable, since a change in the assignment of liability
would have no allocative impact in any event (Randall 1974, p. 38). Randall refers to the doctrine of
57
Randall cites Samuels (1974) and Mishan’s various works as examples.
Interestingly, others, including some not favorably disposed to the Coase theorem as a mechanism for dealing
with externality problems, suggest that alerting economists to the reciprocal nature of externalities is one of the
58
35
allocative neutrality as “the clincher” to the Coasean approach and argues that “its demise,” owing to
the various critiques of the theorem, “is disastrous to the laissez-faire people.” As both Samuels
(1974) and Randall (1975) point out, it makes the policy significance of the Coase theorem the exact
opposite of what those disposed to market solutions assert—property rights assignments, in reality,
affect distribution and allocation, as well as “the whole range of macroeconomic variables” (1975, p.
739).59
A second concern relates to the implications that some were drawing for the evaluation of
environmental and other policies in a world of positive transaction costs.60 The argument here was
that transaction costs are simply another form of cost, like production costs, and that exchange which
exhausts all gains from trade, net of transaction costs, is Pareto optimal. The conclusion drawn from
this was that externalities are efficiently internalized through the market if transaction costs are the
only factor precluding further exchange, meaning that government intervention to internalize the
externality is unnecessary and even efficiency-diminishing. Randall summarizes this position as
follows: “when a market for an external economy does not exist it should not exist, since the benefits
from such a market clearly cannot exceed the costs of its operation. The absence of an observable
market is itself a market solution.” The implication, then, is that “any externalities which are
observed to exist unmodified should not be modified”—a notion that Samuels rejects on the grounds
that it assumes “the propriety of allocations made through market adjustments” and which Randall
labels a “fallacy” because it ignores the possibility that other corrective actions (e.g., Pigovian
instruments) may be less costly than the market solution (1972a, pp. 176-77).61
It goes almost without saying that both of these “Coasean” positions would be anathema to
those who believed that pollution should be reduced from its existing levels. As Mishan put it the
major contributions of Coase’s article. This is a theme that Samuels, for one, emphasized repeatedly. See, e.g.,
Samuels (1974).
59
See also Randall (1974, p. 53). Dick (1976, p. 194) argues this same point.
60
See the references to Demsetz and Cheung cited in note 23, above.
36
case in his Journal of Economic Literature essay, “Rationalizing the status quo in this way brings the
economist perilously close to defending it” (1971, p. 17), and the status quo was viewed by many as
wholly objectionable. The clear sentiment that emerges from the writings of the theorem’s strongest
critics is that the market should not be the sole arbiter of rights over resources such as air and water.
Although the Coase theorem was (and is) a descriptive, positive statement with no direct normative
implications, those strongly opposed to it tended to object to what they perceived as its normative
thrust. Samuels (1974) pointed to what he saw as “the laissez faire, non-interventionist tenor of the
usual Coasian discussions” (p. 13) and labeled the Coase theorem as “part of the apologetics and
theology of the market” (p. 27). As such, he said, “the Coasian analysis is but an attempt to lend the
credo of science to normative justification of the market and its fantasies of markets everywhere, and
to have everything seen in that light” (1974, p. 11). Randall described the Coasean position in similar
terms: “If there is one normative statement which sums up their position, it is this: The opportunity
for trades, of all types, should be maximized,” and private trading is “the solution to any and all
perceived economic and/or institutional problems” (1978, p. 7). The role of government here, then, is
reduced to “allocative impotence” (1974, p. 37).62 We even find this point of view reflected in the
textbook literature, with Pearce associating the Coasean position with “Advocates of a free market”
and “those who are concerned to minimize government activity” (1976, p. 84) and Edel (1973, p. 98)
sounding similar concerns.
We see in the strong critiques of the theorem leveled by Randall, Samuels, and Mishan the
suggestion—essentially confirmed by Mishan in the above quotation (see also 1971a)—that they put
a great deal of stock in the idea that economists were very attracted to the Coase theorem owing to
their predisposition toward decentralized market solutions, and in the potential for the continuation,
and even increase, in that attachment (1972, p. 176; 1974, pp. 37-38). One gets the sense from
61
See also Randall (1974, pp 45-46; 1975, p. 735) and Samuels (1974, pp. 4-5).
37
reading these works that there was a perceived need to “demolish” the theorem (to use Randall’s
term) in order to put an end to fantasies about market solutions and, perhaps more importantly, any
prospective attempts to make status-quo-favorable efficiency judgments that would deflect attention
from the goal of achieving a reduction in environmental pollution, which Mishan (1971b, p. 26)
labeled “the most urgent economic problem of our fragile civilization.”
In short, there can be no question that the Coasean approach was perceived—by
environmental economists and others—as a real threat to the long-accepted status of the Pigovian
tradition, an approach that guaranteed reductions in pollution emissions from market-generated
levels and did so in a way that imposed costs on emitters rather than “victims.” Mishan makes this
explicit, characterizing what he labels a “consensus” on the Coase theorem (1971, pp. 16-17) as the
launching point for “an iconoclastic movement to edge the master [Pigou] from his niche in the hall
of fame” (1974, p. 1288 at n.1),63 the blame for which he laid squarely at the feet of Coase and, to a
lesser extent, Buchanan and Stubblebine (1962). In adopting such a stance, however, economists put
themselves at odds with “politicians, administrators, and the general public,” as this latter group, in
Randall’s view, “seems to have more faith in systems of standards” to achieve the desired level of
pollution reduction (1972, p. 176).64
62
Randall suggests that Coase and Demsetz seem to be of the mind that “the role of central planning [read:
government intervention] should be minimized” (1974, p. 35). Samuels (1974) makes a similar argument.
63
See also Samuels (1974, pp. 27-28). That said, not everyone saw things in this way. Horner (1975) notes, in the
period since Coase raised the possibility of negotiated solutions, “most of the literature has defended policies based
on Pigovian taxes and subsidies to correct the inefficiencies caused by externalities” (1975, p. 34).⁠ Fisher and
Peterson (1976, p. 25), in like manner, tell us that environmental economists “usually recommend Pigovian taxes to
internalize the externalities associated with pollution.” Horner goes on, though, to play into the hands of those
disposed to Coasean solutions (with transaction costs, a la Demsetz, Cheung, and the Coase of pages 15 onward in
“The Problem of Social Cost”) in saying that Pigovian policies “eliminate the need to consider the transactions costs
preventing negotiations and the ambiguity of property rights associated with natural resources such as air and water”
(1975, p. 34), thus tacitly admitting that the exclusive focus on Pigovian remedies forecloses the investigation of
whether market solutions might entail lower costs than the Pigovian ones.
64
See also Randall (1974, pp. 40-41). Mills and Peterson (1975) lament that economists and economic analysis
generally were not allowed to play an influential role in the environmental policy-making process during the first
half of the 1970s.
38
It bears emphasizing, though, that the normative or ideological argument cuts both ways.
Indeed, as Harlow (1974, p. 540) has pointed out, ideology appears on both sides of the pollution
argument, in both the market failure and the pro-market approaches. What is curious about the
environmental economics literature is that it evidences little of the pro-market viewpoint, except to
the extent that one considers Pigovian taxes and subsidies market instruments, which some during
this period did. But whether one is looking at the environmental economics literature or externality
theory generally, it seems reasonable to conclude, as Randall did, that “At almost every stage in the
debate which sprang up around ‘The Problem of Social Cost,’ it is unclear whether theory fathered
policy viewpoints or vice-versa” (1974, p. 36).65 What was apparent to Randall was that the
normative thrust attached to the theorem and its technical attraction combined to account for “the
fascination which the Coasian debate has held for a sizable number of academic economists.” This
debate, he said, “has all the stuff of which great scholarly debates are made—opportunity for highpowered theorizing possibly leading to, or justifying, radical suggestions for policy orientation”
(1974, p. 36).
Conclusion
When discussing his 1937 article on “The Nature of the Firm” at an NBER conference in 1972,
Ronald Coase opined that his article was “much cited but little used” (1972, p. 63). Much the same
can be said of the status of the Coase theorem in the first two decades of the environmental
economics literature, where the standard approach was to mention the theorem as one of several
possible solutions to environmental pollution problems, only to quickly wave it aside on the grounds
of irrelevance.
65
Dan Bromley and Alan Randall have both suggested to me in correspondence related to this paper that what one
might call the “pro-environment” view present much of the environmental economics literature during this period
may be the result of self-selection: that the individuals most likely to be attracted to this emerging field were those
who had an interest in doing something about the environmental conditions of the day.
39
There can be no question that Coase’s article had a significant influence on the environmental
literature, even given the dismissive view of the theorem that one finds in this literature during the
1960s and 1970s. Randall, for all of his criticism of the Coase theorem, calls Coase’s article “truly
seminal” and credits it for stimulating a vast literature on externalities (1974, p. 53)—a literature that,
of course, fed quickly into the emerging field of environmental economics—and Mishan expressed
similar sentiments about impact, if not seminality (1971b, pp.16-17). The theorem’s curious
treatment by environmental economists seems to be the result of an interaction between the attention
given to the theorem within the larger theory of externalities and the nature of the problems—cases
of large-scale environmental pollution—on which environmental economists were focused. Those
who were working on pollution issues continued to do so almost exclusively within a Pigovian
framework, though the view was perhaps tempered slightly by the acknowledgment that Crocker
(1966), Dales (1968), and later Montgomery (1972) had shown that markets or market-like processes
could, in theory at least, be considered as possible mechanisms for dealing with externality problems.
But one should not make too much even of this, as there was little sentiment during this period that
markets constituted viable solutions to environmental problems.
The objections to the theorem that received prominent play in the literature are neatly tied to
the issues facing environmental economists. The focus on the impact of income effects, which
becomes an issue for externalities to which consumers are a party, was logical response to the
environmental issues, such as air pollution, that were at the center of the policy debates during this
period. And, of course, the large numbers character of these issues somewhat inadvertently put
environmental economists on the front lines of economists emphasizing the importance of
transaction costs within the exchange process—though little was done in the way of attempting to
assess the details of their effects or mechanisms that might be employed to reduce them. On the other
hand, environmental economists were not nearly so quick to express concern about the efficiency
effects of the costs associated with government action. There was more than a bit of attention given
40
to the difficulties of computing the optimal Pigovian tax—the classic exposition being Baumol
(1972)—but far less devoted to the costs associated with the bureaucracy that would oversee the
tax/regulatory processes that were seen as the only viable policy alternatives in the 1970s.
Of course, this last point featured prominently in Coase’s 1960 discussion of policy responses
to social cost issues. Although the point of this paper is to look at the treatment of the Coase theorem
result in the environmental literature, this brings us to the issue of the treatment of Coase’s larger
message in “The Problem of Social Cost.” It is interesting that environmental economists by and
large confined their discussion of Coase during the 1960s and 1970s to his statements about the
reciprocal nature of externalities and the Coase theorem. In doing so, they misapprehended both the
rationale for Coase’s analysis of the world of zero transaction costs and his discussion of the
appropriate responses to life in the real world of positive transaction costs. In the former instance, the
efficient internalization of externalities in a world of zero transaction costs revealed that Pigovian
remedies are unnecessary in the world contemplated by Pigovian externality theory. But once the
economist moves to the real world of positive transaction costs, and with that acknowledges that
there are costs associated with government coordination as well, the policy realm becomes one of
making choices between imperfect alternatives. The central message of “The Problem of Social
Cost” is not the Coase theorem, but its converse—that the resolution of questions of externality
policy should ultimately come down to a case-by-case analysis of the benefits and costs of
alternative courses of action, including the possibility of allowing the externality to persist if the
costs of government action exceed the cost associated with the external effect. That so much of the
environmental literature of the 1970s focused on the Coase theorem (and, one might argue, the
necessity of using Pigovian instruments) suggests that environmental economists, like economists
generally, confined their attention to a relatively small part of Coase’s article, and there is virtually
41
no mention of Coase’s emphasis on the need for a comparative institutional approach to problems of
social cost.66
The literature here seems to give effect to Coase’s concern about the use of the term,
“externality”—a term that, for Coase, implies the existence of an activity that must be restrained in
some way. One possible explanation for this is the role of preconceptions—a point noted by several
commentators over the course of the 1970s. While the debate over externalities generally in the
1960s and 1970s featured numerous voices both favorably and unfavorably disposed to market
solutions to externalities, the environmental literature features the latter point of view almost
exclusively. This may be because those attracted to this emerging field had an interest in dealing
with environmental issues in ways that would unmistakably reduce the level of pollution in society.
The equity concerns raised by many commentators, and the strong rhetoric that sometimes attended
these discussions, particularly when the issue of reciprocity was raised, provide some support for this
interpretation.
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