Despite the author’s Nobel Economics Prize and its standing as the most cited law review article in history, Ronald Coase’s “The Problem of Social Cost” still seems unappreciated. Its core insight, that alleged externalities are at root the result of an inability to negotiate, fails to convince many readers who see environmental problems as the result of bad polluters harming innocent bystanders, requiring public policy to ensure that the bad guys are stopped. For this reason, the idea that one could best balance the benefits of reduced environmental harm with the costs of those reductions by creating property rights to facilitate subsequent negotiations still does not get the recognition it deserves.

Free Market Environmentalism for the Next Generation, the latest version of Terry Anderson and Donald Leal’s compendium Free Market Environmentalism, follows the path opened by Coase. The book articulates the potential for resolving environmental conflicts through private solutions based upon negotiations between the beneficiaries of environmental protection and those who would bear its costs. The net of applications is cast far and wide, including potential markets for timber, grazing, water, and fishing rights. The contributing authors make a persuasive case that environmentalists should avoid the “nirvana fallacy” and recognize that government action is slow, cumbersome, and—perhaps most important—too rigid to reverse error and adapt to changed circumstances, especially with multiple agencies having jurisdiction. Moreover, government is not without its transaction costs. Of course, one should watch out for the reverse “nirvana fallacy,” the belief that no market failure is as bad as any policy to address it.

Winning the battle / Because the Coase-based perspective on market failure in general and environmental externalities in particular still may not get the attention it deserves, and because an unduly optimistic view of government often implicitly colors beliefs regarding the effectiveness of policy, Free Market Environmentalism for the Next Generation deserves a place on the reading list in virtually any environmental economics or policy course. But an instructor of such a course, or a policy adviser relying on the book, should keep a few things in mind.

One is that the admittedly appealing renegade tone of the book is not entirely warranted. Because supporters of market approaches to policy problems often feel like outsiders, it is important to note just how much of the battle for using markets to address environmental issues has been won. There has been little if any backtracking in economic policy circles regarding the use of markets since the implementation of sulfur dioxide permit trading beginning in the 1990s. Other examples include tradable fishing quotas or land development rights. To take the leading example of the day, policy disputes over climate change are very much between those who think we should do nothing and those who think we should adopt market instruments to address it. With few exceptions (notably Pope Francis), the central dispute is not about whether to implement a market-like mechanism—such as a cap-and-trade of emissions permits or a carbon tax—or to adopt command-and-control. Rather, the choice is whether and how to regulate at all, recognizing political constraints on the availability of market mechanisms. Even “Nth best” measures, such as renewable fuel requirements or automobile fuel economy standards, increasingly are implemented in a market-oriented way.

Assignment of property rights / The larger issue is whether government policy is necessary to resolve environmental conflicts, even when those policies are implemented using market instruments. From the book’s Coase-based perspective, the preferred first step would be to create property rights so that those who benefit from environmental protection and those who bear the costs of protecting it can negotiate a jointly beneficial solution. In some places, the authors lament that when property rights are up for grabs, litigation and rent-seeking will not be far behind.

Ironically, this lamentation undercuts the authors’ case. The belief that an environmental problem could be solved through the establishment of property rights presupposes that those rights have not been previously assigned. While Coase showed that in the absence of significant transaction costs the efficient solution to environmental problems can be achieved regardless of how property rights are assigned, the assignment of rights—determining who has to pay whom for what—will typically have significant distributional effects.

Consequently, litigation, lobbying, and other forms of rent-seeking to influence the assignment of property rights will be inevitable. If those are to be avoided, then the assignment of property rights is to be avoided, leaving government—rather than market environmentalism—as the only solution. The only alternative is a viewpoint that, but for rent-seeking, there is some intrinsic or “natural” assignment of property rights that common law courts or legislators would institute as a matter of course. Whether that is so in this complicated world is doubtful, but in any event it invokes considerations of political philosophy outside the scope of this book.

Even if property rights can be assigned, the next step is to show that transaction costs are negligible. The standard view of Coase is that when those costs are negligible, externalities are eliminated as long as property rights are assigned, regardless of how they are assigned initially. However, Coase (unlike many of his readers) recognized that when transaction costs are substantial, the assignment of rights can matter. This concern forms the basis for the economic analysis of common law rules for tort liability, contract breach, and even modifications to property rights such as adverse possession and estray law.

The challenge for the contributors to this book is to show that transaction costs do not impede solving environmental problems through negotiations rather than government intervention when transaction costs seem large—most notably, when the number of polluters and number of those willing to pay to reduce pollution are large. One possibility could be to argue that even with large numbers of affected parties, common law will arrive at efficient assignment of pollution liability without needing more intrusive environmental legislation and regulation. The chapters in the book by and large do not take that approach, which is understandable because when large numbers are affected, either tort lawsuits are a public good or the incentives to sue are internalized through class action litigation. But these legal actions are troublesome, especially when litigation has been characterized as a form of rent-seeking.

The authors commendably do not ignore the “large numbers” problem. However, their solutions can take on a kind of “assume a can opener” character, referring to the joke about an economist on a desert island confronting a can of beans. Here, the can opener is some group like the Nature Conservancy that can, and often does, purchase property to preserve habitats and open spaces. In defense of the authors, these are not hypothetical can openers as in the joke; sometimes they are real. But whether environmental groups are a reliable representation of aggregate willingness to pay for environmental benefits, or are an exception that proves the rule regarding the importance of transaction costs, is not resolved here.

As numerous examples in the book illustrate, non-governmental collective action is admittedly more plausible in relatively small settings such as fishing villages or ranching towns. Frequently citing the Nobel Prize–winning work of Elinor Ostrom, the authors provide a number of settings in which local social norms serve the function of government in terms of managing local public goods. As with Coase, Ostrom’s insights merit a wider audience, yet another reason this book would be useful in classroom settings. My guess is that social norms of the type Ostrom identifies not only address public goods, but are what keeps the only barber in a small town from charging a monopoly price for haircuts. Whether libertarians should feel more comforted by the power of social norms relative to the power of collective government might be worth some thought. Complaints from conservative academics about the oppressive leftist culture in universities, going back to William F. Buckley 65 years ago, suggest that social norms strong enough to influence outcomes may not be an unmitigated blessing.

Conclusion / These observations will not deter readers who are already disposed to solutions to environmental problems based on relatively costless negotiations among stakeholders with clearly defined property rights. The question remains how to get this sermon to be heard beyond the choir.

One impediment the authors could have done something about is their book’s title. Posing the issue as between “free market environmentalism” and “political environmentalism”—with the appendage “coerced” proving impossible to resist for the latter—will put off some readers as biased rhetoric reflecting an ideological commitment disconnected from outcomes. One could imagine the reaction from property rights proponents if the options were “exploitative capitalist environmentalism” and “democratic environmentalism.”

A less rhetorical observation is that the “free” in “free” markets not only rhetorically implies a value judgment, it also rests on a value judgment that the underlying distribution of property rights is normatively acceptable. “Your money or your life” is a voluntary transaction if the holder of the gun has a prior property right over the life of the person staring into the barrel.

A harder challenge beyond the scope of the book is defending the view that the objective of environmental policy should be what the market produces or, at least, would have produced were property rights feasible to define and transaction costs negligible. Economic efficiency—that the environment deserves no more protection than that for which environmentalists are willing to pay to compensate polluters—is irrelevant for those who find environmental protection morally compelling in and of itself.

Emphasizing Coase’s perspective and economic efficiency also presents challenges to libertarians. The appeal of free market environmentalism is not the outcome as such, but the process: the view that (relative to the initial assignment of property rights) the outcome is voluntary and mutual. But if economic or political circumstances preclude ideal transactions, economic efficiency and libertarian norms can come into conflict.

Climate policy is a powerful example because of its prominence and because there is no time machine that would allow current generations to negotiate with and compensate future generations to arrive at mutually agreeable sacrifices to limit climate change. Basing the libertarian argument against climate policy not on this involuntary redistribution but on alleged failures of science gives the almost certainly inaccurate impression that if the science were different, libertarians would then find climate policy acceptable.

By clarifying the nature of environmental policy choices, Free Market Environmentalism for the Next Generation may help move this debate away from disputes about science and toward deliberation regarding political values.