ABSTRACT
The answer to the question in the chapter title may seem stunningly obvious. Inasmuch as the law can prohibit or regulate the emission of pollutants in a number of ways, it can make an enormous difference – the difference between an effluent and garbage-littered community and a clean and tidy one. True, but the economist interested in allocative efficiency is asking a different question. Recall that in the preceding chapter we made frequent reference to optimal outputs. By extension, we could also have spoken of optimal levels of pollution; meaning those pollution levels corresponding to the optimal outputs of the goods giving rise to them. In the simple models we used the optimal outputs were assumed exact, being determined uniquely by the intersection of the demand curve and the social marginal cost curve. Toward the end of the preceding chapter, however, I indicated that a unique solution depended, among other things, on two assumptions: first, that the marginal valuation of the spillover damage is effectively independent of the “property rights” assignment – independent, that is, of whether the victim of the spillover damage has to pay the pollutor to reduce the damage or whether, instead, the pollutor has to pay the victim for putting up with spillover damage; and second that the transactions costs involved in reaching and maintaining an agreed solution are zero.
