3 J.L. & Econ. 1 (1960)
The Problem of Social Cost

handle is hein.journals/jlecono3 and id is 1 raw text is: The Journal of
LAW                             &,o.
VOLUME III                                            OCTOBER 1960
University of Virginia
THIS paper is concerned with those actions of business firms which have
harmful effects on others. The standard example is that of a factory the smoke
from which has harmful effects on those occupying neighbouring properties.
The economic analysis of such a situation has usually proceeded in terms of a
divergence between the private and social product of the factory, in which
economists have largely followed the treatment of Pigou in The Economics of
Welfare. The conclusions to which this kind of analysis.seems to have led
most economists is that it would be desirable to make the owner of the factory
liable for the damage caused to those injured by the smoke, or alternatively,
to place a tax on the factory owner varying with the amount of smoke pro-
duced and equivalent in money terms to the damage it would cause, or finally,
to exclude the factory from residential districts (and presumably from other
This article, although concerned with a technical problem of economic analysis, arose
out of the study of the Political Economy of Broadcasting which I am now conducting.
The argument of the present article was implicit in a previous article dealing with the
problem of allocating radio and television frequencies (The Federal Communications
Commission, 2 J. Law & Econ. [1959]) but comments which I have received seemed to
suggest that it would be desirable to deal with the question in a more explicit way and
without reference to the original problem for the solution of which the analysis was de-

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