THE MYTH OF SOCIAL COST.pdf - Institute of Economic Affairs

PROLOGUE
economic activity. 1 Clean air, for example, is slowly polluted
as industry expands; river water is increasingly fouled by the
domestic sewage of an expanding community. In such circumstances,
the 'property' rights to pollute or not to pollute
may never have been determined, and owner and user (polluter)
of the river or other properties may be unwilling to
strike a bargain because neither will concede the right to the
other. Without this initial delimitation of property rights, there
will be no market transactions—exchange or 'trade'—to transfer
and recombine them. A clear-cut decision on property
rights may thus itself be all that is required to resolve the
difficulty.
2. Uncertain effect of externality
Where the externality itself is complex and even ambiguous,
so that the individuals do not know whether an activity is
detrimental or beneficial to themselves, it is impossible to strike
a bargain. 2 Scientists may disagree about the long-term impact
upon fish-life and plankton of discharges of waste matter to the
river. The inability of the individuals to strike a bargain is
perhaps itself sufficient evidence that the externality is not
relevant for policy. Further research may clarify the effects.
Information costs invariably arise over externalities.
3. Bargaining costs
Transaction costs may frequently increase with the number of
individuals, both as a result of increased difficulties in locating
all involved and of accurately revealing their preferences.
Holiday-makers, for example, are both numerous and widely
dispersed geographically, and they are conscious only periodically
of the adverse welfare effects from fouled beaches. This
complication may explain why it has taken so long for holidaymakers
and others to reduce the 'degradation' or fouling of
coastal waters by oil and sewage pollution, as in the Torrey
Canyon, Amoco Cadiz and Eleni V disasters.
On the assumption of zero transaction costs, Professor
Coase argued that the efficient solution would be attained by
bargaining irrespective of the initial delimitation of rights.
1 C. K. Rowley, 'Pollution and Public Policy', in A. J. Culyer (ed.), Economic
Policies and Social Coals, Martin Robertson, London, 1974.
8 P. Burrows, C. Rowley, D. Owen, 'The Economics of Accidental Oil Pollution
by Tankers in Coastal Waters', Journal of Public Economics, 3, 1974.
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