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Market Solutions to Externality Problems: Theory and Practice
Author(s) -
Randall Alan
Publication year - 1972
Publication title -
american journal of agricultural economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.949
H-Index - 111
eISSN - 1467-8276
pISSN - 0002-9092
DOI - 10.2307/1238699
Subject(s) - externality , allocative efficiency , coase theorem , diseconomies of scale , economics , liability , doctrine , strict liability , microeconomics , law and economics , neutrality , transaction cost , law , finance , economies of scale , political science
The concept of market solution to externality problems has received the favorable attention of many economic theorists. Yet, policy practitioners and the general public seem less enthusiastic. Theoretical studies and available empirical work have effectively demolished Coase's doctrine of the allocative neutrality of liability rules. In reality, a full liability law will result in a greater degree of abatement of external diseconomies than will zero or intermediate liability laws. It is suggested that market solutions can be seriously considered in a world with pervasive externalities only if something approaching a full liability rule is established. Even then, excessive transactions costs may limit the success of market solutions.