> From 1997 Reason Interview...
> LOOKING FOR RESULTS
> Nobel laureate Ronald Coase on rights, resources, and regulation
> Interviewed by Thomas W. Hazlett
> Again, in 1960, Coase rearranged the study of economics with his essay "The
> Problem of Social Cost." It analyzed what happens when economic actions
> affect third parties--say, for instance, when a railroad dumps pollution on
> a farmer's crops. Before Coase, economic analysis maintained that
> decentralized decision making--the market--in such cases would predictably
> fail to achieve an optimal solution, because self-interested actors (say,
> the railroad owners) would fail to take into account the harm imposed on others.
What Coase's railroad example neglects to count, of course, is that social cost to the farmer of paying the railroad not to pollute may be higher or lower than the social cost to the farmer of disposing of large rocks or excess dynamite, which is somewhat different from the costs to the railroad of dealing with large rocks or dynamited tracks.
In the US Western Plains, there's also the likelihood that the farmer depends on the railroad for making the farm economical, so it may still be cheaper to have the 10% of the farm nearest the railroad not be economically productive due to pollution while the other 90% is able to get a much lower price for shipping goods to market, so perhaps the Coasian costs still apply for that situation, especially if the farmer got the land from the railroad in the first place, which was not uncommon when the US did big land giveaways to railroads.
