The institutional structure of pollution: large-scale externalities and the common law

The article delves into the historical and contemporary relationship between legal institutions and market failures, with a focus on externalities. It challenges the conventional wisdom that large-scale environmental pollution necessitates centralized government intervention, arguing instead that common law institutions can effectively manage both small and large-scale externalities. By drawing on James Buchanan’s framework, the author illustrates how collective action and institutional reform can lead to efficient solutions, even in cases of large-number pollution. The text also explores the evolution of economic thought on externalities and the role of transaction costs, highlighting the adaptability of the common law in addressing real-world policy challenges. Through case studies of nineteenth and early twentieth-century water pollution cases, the article demonstrates the practical application of these theoretical insights, showcasing the common law’s ability to contend with complex environmental issues. This exploration not only sheds light on the institutional structure of pollution but also advocates for a more polycentric approach to environmental governance, emphasizing the importance of decentralized decision-making and overlapping layers of legal authority.