Chapter 11 — Further Reading

Foundational works

Arthur Pigou, The Economics of Welfare, 4th edition, Macmillan, 1932 (originally 1920) Pigou invented the concept that now bears his name — the idea that a tax on an externality can bring the private cost of an activity in line with the social cost. The original treatment is dry but historically important. Book II, Chapter 2 is the relevant section.

Ronald Coase, "The Problem of Social Cost," Journal of Law and Economics, 1960 The paper that introduced the Coase theorem. Coase argued that when transaction costs are low, private bargaining can solve externality problems without government intervention. One of the most-cited papers in economics.

On market-based environmental policy

Robert Stavins, "What Can We Learn from the Grand Policy Experiment? Lessons from SO2 Allowance Trading," Journal of Economic Perspectives, 1998 A comprehensive review of the U.S. acid rain program by one of the leading environmental economists. The paper documents why the program was cheaper than expected and what lessons it offers for climate policy.

Lawrence Goulder and Andrew Schein, "Carbon Taxes versus Cap and Trade: A Critical Review," Climate Change Economics, 2013 A balanced comparison of the two main market-based approaches to carbon pricing. Useful for understanding when each approach is preferred and why economists are divided.

William Nordhaus, The Climate Casino: Risk, Uncertainty, and Economics for a Warming World, Yale University Press, 2013 Nordhaus (Nobel 2018) makes the case for carbon pricing as the most efficient response to climate change. The book is accessible and the chapters on carbon taxes and cap-and-trade are clear.

Nicholas Stern, The Economics of Climate Change: The Stern Review, Cambridge University Press, 2007 The landmark review commissioned by the UK government that argued for urgent, aggressive action on climate change based on a low discount rate. We will revisit the Stern-Nordhaus debate in Chapter 15.

On congestion pricing (case study 2)

Transport for London (TfL), Congestion Charging: Central London Monitoring, multiple annual reports TfL publishes detailed annual reports on the effects of the congestion charge. Free online at tfl.gov.uk. The most direct source of data on the London case study.

Winston Harrington, Alan Krupnick, and Anna Alberini, "Overcoming Public Aversion to Congestion Pricing," Transportation Research Part A: Policy and Practice, 2001 A pre-implementation analysis of the political challenges of congestion pricing, with insights into how London overcame them.

Charles Komanoff, "Pricing Justice: New York City's Congestion Pricing Holds Lessons for Other Cities," various publications Komanoff, the leading advocate for New York City's congestion pricing plan, has published extensively on the design and expected effects.

On the Coase theorem

Steven Medema, "The Coase Theorem at Fifty," Journal of Economic Literature, 2020 A comprehensive review of the Coase theorem's influence, its applications, and its limitations. Useful for understanding how the theorem has been used and misused in the 60 years since its publication.

Oliver Williamson, The Economic Institutions of Capitalism, Free Press, 1985 Williamson (Nobel 2009) extended Coase's insights about transaction costs into a broader theory of how firms and institutions are organized. Relevant for understanding why the Coase theorem fails for large-scale problems.

On externalities more broadly

Gregory Mankiw, "Smart Taxes: An Open Invitation to Join the Pigou Club," Eastern Economic Journal, 2009 Mankiw, the author of the leading principles textbook, makes the case for Pigouvian taxes on gasoline, carbon, and other externality-producing activities. Short and accessible.

Martin Weitzman, "Prices vs. Quantities," Review of Economic Studies, 1974 The foundational paper on when to use a price instrument (tax) vs. a quantity instrument (cap-and-trade). The answer depends on the relative slopes of the marginal cost and marginal benefit curves. Technical but influential.

Elinor Ostrom, Governing the Commons: The Evolution of Institutions for Collective Action, Cambridge University Press, 1990 Ostrom (Nobel 2009) showed that common-pool resources can be managed without either privatization or government regulation, under specific conditions. Cited in Chapter 12.

Modern policy applications

International Energy Agency (IEA), Energy Technology Perspectives and World Energy Outlook, annual reports The IEA produces the most authoritative data and analysis on global energy and emissions. Useful for putting the externality framework into real-world context.

Resources for the Future (RFF), various publications RFF is the leading think tank on environmental economics. Their papers and policy briefs on carbon pricing, pollution regulation, and energy policy are consistently excellent.

The Hamilton Project at Brookings Institution, various proposals on carbon pricing and environmental policy Multiple accessible policy proposals based on the externality framework.

A reading order recommendation

If you have time for one of the books above, read Nordhaus's The Climate Casino. It's the most direct extension of Chapter 11 into the climate policy debate, and it's written by a Nobel laureate for a general audience.

If you want the theoretical foundation, read Coase's original 1960 paper. It's shorter than you'd expect, clearly written, and one of the most important papers in economics.

If you want to see cap-and-trade in action, read Stavins's 1998 paper on the acid rain program.

Chapter 12 — Public Goods and Common Resources — is next. It introduces a related but distinct kind of market failure: goods that are non-excludable, non-rival, or both.