Although I have three blog ideas the muse seems to have left me. To keep my six loyal fans coming back, here is a letter to the editor of Barron's that I came across when deleting some old emails. I emailed it on January 11, 2000. At that time, I kept paper copies of any my letters that were published. Since I couldn't find a copy of this one, I presume I won't have the Wall Street Journal lawyers knocking on my door.
Thomas Donlan has it backwards when he states that "Externalities exist where there are no property rights." Externalities exist because ofproperty rights. Further, he limits the definition of an externality when he states it is a "displacement of a privately caused cost into a public expense." An externality is a cost imposed on or a benefit given to parties outside of a voluntary transaction.
The standard example he cites of a polluter dumping waste into a lake has two aspects. There is the public aspect of contaminating the fishing and drinking water of many people. There is also the private aspect of decreasing the value of lakefront property. Donlan states that "the power of property rights" gives the owners claims against the polluter. But how will these claims be settled?
Will the polluter be forced to cease operation? That takes away the "property rights" of the polluter. Will the polluter be forced to pay damages to the lakefront property owners? But that goes against one of the tenets of the "private markets" that Donlan extols so often, namely that all transactions are voluntary. If the lakefront property owners were not in the market to sell their property, why should they be forced to enter into transactions to "sell part of their property"?
Oh, if only people would live by the ideal models of Thomas Donlan on the one hand or of Karl Mark on the other, life would be so much simpler!
