Externalities and Systemic Failure: A Common Law and Property Rights Based Solution

Point source pollution externalities are typically viewed as the result of some kind of market failure. The methods typically prescribed for reducing point-source pollution are either based on “price-setting” or “quantity-setting” schemes (pollution tax or cap-and-trade respectively). This research presents point-source pollution as a systemic failure rather than market failure, and prescribes the use of well defined property rights and a common law system to reconcile the failure. As a real world example, the market for solid household waste is considered. There are simple but important government regulations and interventions in the market for disposal of household waste which makes it ideal for analysis. Government interventions distort the marginal cost of solid waste disposal, leading to inefficiencies and failures - or externalities in the market. When the proposed solutions are implemented, the market gains efficiency and reduces externalities. The parallel is then drawn between the market for household solid waste and other pollution markets (industrial pollutants). Significant benefits are presented along with foreseeable problems associated with implementing the solution. This research relies on concepts and works from Austro-libertarian ideology (Austrian economics) and Ronald Coase’s seminal work “The Problem of Social Cost.” The research is original in its presentation of the externality problem as a systemic failure rather than a market failure, and opens the door to further research and analysis on the subject of free-market point-source pollution reduction