The History of Pollution ‘Externalities’ in Economic Thought

Today, environmental economics is the response of the neoclassical economic school to the
ecological crisis, but at one time its leading contributors regarded it as a revolutionary development
that would change the conduct and content of economics as a discipline. Understanding and
addressing environmental pollution was core to that potential paradigm shift. In tracing the history
of conceptualising pollution as an externality and market failure this paper covers the development
of ideas by Marshall, Pigou, Pareto, Coase, Stigler, Samuelson, Ciciacy-Wantrup and Kapp.
Pollution externality theory is shown to have incorporated an elitist ethics and liberal market
ideology. As a market failure pollution was deemed a minor correctible error of the price system.
Monetary valuation of social and environmental harm became the means of justifying optimal levels
of pollution. Neoliberal theories of spreading property rights further watered down potential
interventionist aspects. Bio-physical realism, in the work of Kneese, Ayres and d’Arge, and social
realism in Kapp’s theory of cost shifting were lost once environmental economics adopted a
deductivist mathematical formalism. Kapp’s alternative theory is based on a classic institutionalists
economic understanding of cost shifting and power relations. It advocates a public policy response
in the form of objective social minima achieved via regulation and planning. This theory has until
now been successfully supressed to prevent a potential revolutionary paradigm shift in economic price theory.