Pollution Externalities: Social Cost and Strict Liability

This paper critically considers the neoclassical social-cost approach to problems of pollution. This traditional approach, when subjected to close scrutiny, is found to be seriously wanting in applicability and consistency. A less ambitious alternative based on notions of strict liability is offered. The social-cost approach is an offshoot of the “new welfare economics~’developed during the last four decades. In its modern manifestation it entails the use of notions of economic efficiency to determine basic rights, including the right to pollute. This efficiency approach is surveyed in the next section. In the final section I will offer the strict liability alternative as a preferred approach. The methodological basis of the criticism of social cost comes from a revived and growing tradition in economics known as subjectivism. I contend that most economists would agree that the subjectivist approach is the correct one, but they are unwilling to live with its implications. For that reason the implications are seldom drawn. This inconsistent behavior may be responsible for much illconceived policy. It is my purpose in this paper to foster an awareness of these problems in the hope of promoting more careful policy responses.