aches would be more effective.
Water pollution is viewed as an externality. The typical approach to economic externalities is based upon two assumptions. First, the assumption is that externalities are harmful, and second, it is assumed that they are unidirectional. Based upon these assumptions, solutions to the problems thus created have tended to be one of the following three types: (1) require the entity creating the externality to pay damage to those injured by its existence; (2) tax the entity creating the externality by an amount equivalent to the damage caused; or (3) prohibit those activities in areas where harmful externalities would be created.
In 1960, economist Ronald Coase looked at economic externalities with a different perspective. Integral to his approach to externalities was that they were perceived to be bidirectional as opposed to unidirectional. As an example, assume that a paper pulp mill is discharging noxious chemicals into a groundwater supply. The conventional approach to externalities would posit that the mill created a harmful externality, by causing it to be either unpleasant, unhealthy, or both for individuals to continue to use the water supply. Coase would agree that such an externality existed. The concept would be extended, however, to hold that to either prevent the mill from operating or to penalize the mill for operating would impose a reverse externality on both the mill operators and those individuals and groups in society who wanted more paper pulp.
Whereas the conventional approach to dealing with economic externalities all but demands governmental participation in reaching solutions, Coase's approach indicates that such participation is not only not required, it coul
...