Reciprocal Externalities: A Refresher

A key insight of the Coase Theorem is that externalities are reciprocal.  Yes, a polluter imposes a negative externality on his neighbor.  But if the neighbor insists on clean air, he imposes a negative externality on the polluter.  While common-sense morality may urge you to take the side of the neighbor, economic efficiency urges you to keep an open mind.  If the polluter’s cost of reducing pollution greatly exceeds the neighbor’s cost of enduring pollution, the Coase Theorem tells you to tell...