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Katharine Seelye from the New York Times:
The Gavin Power Plant burns 25,000 tons of coal a day and is located adjacent to the former town of Cheshire, Ohio. Cheshire was plagued by pollution from the power plant and the power plant was plagued by complaints and legal actions (threatened and actual), not only from townspeople but also from regulatory authorities. The owner of the plant had invested almost a billion dollars in pollution control equipment, but pollution levels remained problematic for the town.
Rather than continue to battle the townspeople and face potential litigation from them for health damages (liability risk was apparently a real concern), plant operators chose instead to buy the town. They paid $13 million for the 90 or so homes in Cheshire. There were some holdouts initially, but eventually everyone went along. The residents eventually moved away and the town no longer exists. (Bing Maps gives an eerie perspective on the town - the streets show up on the satellite photo but the houses are gone.)
Cheshire, Ohio affords us the rare chance to apply the Coase theorem to pollution control in the real world.
In environmental economics, the Coase theorem states that if a market is efficient then it doesn’t matter who starts off with property rights as everyone - through bargaining - will get what they want.
In this case, the townspeople wanted to live in a pollution-free environment. The power plant stood in the way of that. On the other hand, the power plant wanted to operate sans complaints from the townspeople.
Three solutions existed:
- The power plant shuts down
- The townspeople move away
- The two parties continue to coexist
Bargaining involves two (or more) parties compromising on a certain issue. In this situation, the compromise reached was for the power plant to buy out the townspeople (they move away). Everyone ends up happier than when they started out without any government intervention!
+1 for the free market.
