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

C. K. ROWLEY
Once there are transaction costs, the effects are less clear-cut.
Dr E. J. Mishan, 1 indeed, has argued that bargaining costs rise
with the size of the group, so that the costs of achieving a solution
are much higher ifthe large group initiates the bargaining
than if the individual (in his example an offender) is forced to
do so.
This argument is unconvincing. 2 Certainly bargaining costs
may rise as the numbers affected increase, but this does not
imply that the onus of placing the incentive to take the initiative
itself necessarily affects the size of those costs. It is impossible
to generalise at all about which settlement of rights will lead
to the lower bargaining costs. There is little evidence, for
example, to suggest that people who would like to use rivers
for recreation have made active use of their riparian property
rights to prevent the discharge of effluent into rivers.
4. Failure of legal and political institutions
Finally, the transaction costs of resolving an externality problem
may be high as a consequence of inadequate institutions.
Inevitably, this issue has dominated the debate on policy.
What are the main issues on which controversy has centred?
There are two kinds of externality: the anticipated and
persistent, and the accidental and periodic. The externality
literature is dominated by the former, the anticipated and
persistent; but it is the accidental and periodic that are of
increasing relevance. The implications for policy are by no
means the same. Compulsory insurance is an obvious additional
instrument for dealing with accidental and periodic externalities.
But what can be done about anticipated and persistent
externalities?
III. INSTRUMENTS OF GOVERNMENT
INTERVENTION
The most obvious instrument of policy, once property rights arc
established and bargaining has failed, is court action. In an
ideal world, it would suffice. But, in practice, British courts are
less than helpful. The decisions of the courts reflect a pre-
1 E. J. Mishan, 'Pareto Optimality and the Law', Oxford Economic Papers,
November 1967.
* P. Burrows, 'On External Costs and the Visible Arm ofthe Law', Oxford Economic
Papers, March 1970.
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