sulfur dioxide). These permits were of the “shrinkable” type; that is, the amount of pollution allowed by a given

permit declined with time.

Better-Defined Property Rights

A clarified and strengthened idea of property rights can also strike a balance between economic activity and
pollution. Ronald Coase (1910–2013), who won the 1991 Nobel Prize in economics, offered a vivid illustration

of an externality: a railroad track running beside a farmer’s field where the railroad locomotive sometimes

emits sparks and sets the field ablaze. Coase asked whose responsibility it was to address this spillover. Should

the farmer be required to build a tall fence alongside the field to block the sparks, or should the railroad be

required to place a gadget on the locomotive’s smokestack to reduce the number of sparks?

Coase pointed out that one cannot resolve this issue until one clearly defines property rights—that is, the legal
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