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

Abstract

This paper revisits a long-standing discussion surrounding the efficacy of the common law versus government intervention in addressing large-scale environmental externalities. Drawing on a conceptual framework developed by James M. Buchanan, we challenge the prevailing economic orthodoxy which holds that so-called “large-number” externalities inherently necessitate government policy intervention. Instead, we argue that the common law offers a viable means of addressing both small- and large-scale environmental pollution problems. Using riparian and nuisance cases from the nineteenth and early twentieth-century as a case study, we demonstrate how common law has historically managed to resolve water pollution disputes, even in cases involving many parties. The paper expands the discussion on externalities by integrating insights from environmental and institutional economics, highlighting the role played by transaction costs, collective action, and institutional reform in the preservation of environmental resources. Our findings suggest that a more polycentric system of rules, relying more heavily on decentralized legal institutions, could offer more efficient and adaptable solutions to contemporary environmental challenges.