Coase's Field and Railroad

The idea

A railroad's sparks set a farmer's field alight, and who should stop it is the case that reorganized how economists think about externalities. First, harm is reciprocal: the sparks harm the crop only because the crop stands beside the track, so either party could prevent the loss, the railroad with a spark arrester or fewer trains, the farmer by planting further back. Second, price the options: the arrester costs eight hundred a year, moving the crop three hundred, and the fire damage a thousand. The efficient fix is the cheapest: moving the crop. Third, the theorem. If the farmer holds the right to be free of sparks, the railroad must pay for the damage or prevent it, and will pay the farmer up to a thousand to move the crop, cheaper than the arrester; the crop moves. If the railroad holds the right to run trains, the farmer must bear the damage or prevent it, and will move the crop for three hundred rather than lose a thousand; the crop moves. Whichever way the right runs, the same fix is bought; only who pays changes. Fourth, the conditions, which make it a theorem and not a policy. The right must be clear, so each side knows what it can insist on. Bargaining must be cheap, so a deal can be found and enforced. With one railroad and one farmer that may hold. With a thousand emitters and a million breathers it does not: nobody can tell whose smoke harmed whom or gather a million people to bargain, and any deal invites free riders. That is why taxes, permits and rules exist, and what they are for: each tries to make polluters face the cost a defined right would have imposed.