Ed Lotterman’s March 28 column, “Pollution control: theory vs. practice,” misrepresents Nobel laureate Ronald Coase’s argument regarding how contractual remedies based upon property rights can solve externality problems — the effect of a purchase or action by one upon others — and fails to note real-world contracts that solve externalities.
Lotterman is in error when he claims market contracts to solve externality problems “only works in some dream world of perfect information and zero bargaining costs.”
In fact, in the real world (imperfect information and positive bargaining costs), there are prominent examples of contracts solving externalities, including the problem Lotterman raises in his column: nonpoint source pollution of surface water. The New York City Watershed Agreement resulted from the state of New York prohibiting New York City’s use of eminent domain to address water pollution. This gave upper New York state citizens property rights in surface water and required NYC to negotiate a contract with representatives of those citizens.
Statesman readers interested in this success story of contracts, and a more balanced presentation of Coase’s actual argument, can read our paper in the Winter 2014 issue of the Cato Journal, “The Coasean Framework of the New York City Watershed Agreement,” located at http://www.cato.org/cato-journal/winter-2014.
Geoffrey Black and D. Allen Dalton, BSU College of Business and Economics, Boise