But the amazing thing to me is that despite that, many people still do not appreciate how profound and nuanced his points are. In particular, the central insight of “The Problem of Social Cost” is that costs are reciprocal–this is what, as Jonathan notes below, fundamentally destroys the idea of externalities as a coherent concept for most applications. This means that so-called “externalities” really boil down to a question of incompatible uses, which really boils down to a question of property rights and transaction costs in defining and transferring property rights. The notion of externalities (in my view) rests on a crude reductionist logic that something that looks like physical causation also must be causation in law. But this isn’t necessarily correct and the important insight here is that cost not only is reciprocal, but that the idea of “cost” in economics is opportunity cost.
Via Craig Newmark. I use Greg Mankiw's Principles of Microeconomics text in my Micro Principles classes and the point Todd makes is not in the chapter (10) that deals with the economics of externalities. I'm also not aware of any other Principles text that makes this point. But it is a point I have made in my class lectures.
To illustrate the point, I show this video from the television show Storm Chasers. In the video, two storm chasing teams employ mobile radars to examine conditions in the lower atmosphere in and around supercell thunderstorms. The problem is that both radars radiate and can thus interefere with each other, making this situation an excellent example of the reciprocal nature of negative externalities.
The Coase Theorem tells us that private bargaining can solve the problem of external costs if transactions costs are zero and property rights are well-defined. We see an attempt at "bargaing", if you want to call it that, to resolve the situation. Transactions costs would seem to be low in this case but, while I am no law expert, my hunch is that property rights are not well-defined by any stretch of the imagination. Who has the right to use their radar when it would interfere with another radar: the small, private firm or the government-funded, massive research operation?