Microeconomics: Theory and Applications with Calculus, 4e

17.5 Allocating Property Rights to Reduce Externalities

Instead of controlling externalities directly through emissions fees and emissions standards, the government may take an indirect approach by assigning a property right: an exclusive privilege to use an asset. If no one holds a property right for a good or a bad, the good or bad is unlikely to have a price. If you had a property right that assured you of the right to be free from air pollution, you could go to court to stop a nearby factory from polluting the air. Or you could sell your right, permitting the factory to pollute. If you did not have this property right, no one would be willing to pay you a positive price for it. Because of this lack of a price, a polluter’s private marginal ...