The History of Pollution ‘Externalities’ in Economic Thought

Clive Spash

No 2021/01, SRE-Discussion Papers from WU Vienna University of Economics and Business

Abstract: Today, environmental economics is the response of the neoclassical economic school to the ecological crisis, but at one time its leading contributors regarded it as a revolutionary development that would change the conduct and content of economics as a discipline. Understanding and addressing environmental pollution was core to that potential paradigm shift. In tracing the history of conceptualising pollution as an externality and market failure this paper covers the development of ideas by Marshall, Pigou, Pareto, Coase, Stigler, Samuelson, Ciciacy-Wantrup and Kapp. Pollution externality theory is shown to have incorporated an elitist ethics and liberal market ideology. As a market failure pollution was deemed a minor correctible error of the price system. Monetary valuation of social and environmental harm became the means of justifying optimal levels of pollution. Neoliberal theories of spreading property rights further watered down potential interventionist aspects. Bio-physical realism, in the work of Kneese, Ayres and d’Arge, and social realism in Kapp’s theory of cost shifting were lost once environmental economics adopted a deductivist mathematical formalism. Kapp’s alternative theory is based on a classic institutionalists economic understanding of cost shifting and power relations. It advocates a public policy response in the form of objective social minima achieved via regulation and planning. This theory has until now been successfully supressed to prevent a potential revolutionary paradigm shift in economic price theory.

Keywords: externalities; market failure, cost shifting; price theory; pollution; Pigou; Coase; Kapp; paradigm shift; environmental economics, neoclassical economics; institutional economics, neoliberal (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-ene, nep-env, nep-his, nep-hme, nep-hpe, nep-pke and nep-reg
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Working Paper: The History of Pollution 'Externalities' in Economic Thought (2021)
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