Wait.. so who had the property rights?

“Who authorized the construction of an industrial park within a community? At the same time, who authorized the construction of a school located near the industrial park? These are simple questions that do not have concrete answers” expressed a concerned woman from Quinteros, a Chilean community suffering from intoxication due to toxic hydrocarbon fumes since early August 2018. According to BioBio Chile News, Quinteros is one of Chile’s largest industrial parks with 17 industries which has polluted nearby communities causing the suspension of 31 schools. Since this area is known as the “sacrifice zone,” community members have begun a series of pacifist protests against the polluters resulting from the decrease in quality of life. Due to the large concentration of factories and power plants, there is no clear census of who the real culprit is.  For this reason, this event has been named as a national crisis, where the community of Quinteros is demanding serious action from the government to clean up the toxic fumes.

According to Coasian Theory, both parties impose a cost on each other, yet a bargain with zero transaction costs and well defined property rights is an idealistic and quite unrealistic scenario. Currently, there is a cap on the amount of toxic fumes that factories are supposed to emit and if ever surpassed the firms must pay a substantial fine. The fine however, which would be the compensation from the firms to the community of Quinteros gets lost in the grand scheme of transactions. The money directly goes from the firm to the government, but then there is a lack of transparency as to where the money ends up. The contradiction then becomes: the government designated the area as an industrial park, yet now the government has defined property rights making the firms liable for the damage. In no way that means that I am arguing that the burning of coal is worth more than the lives of the people of Quinteros, instead I want to point out how the factories comply with the norms and regulations, but it’s not enough for the community members to continue with their daily lives.  

Through this chaos, there is a clear market failure resulting from the negative externality of production caused by the 17 industrial plants on the community. The industries impose a cost on the civilians, which means that if we were to visualize the situation on a price and quantity graph, the negative externality of production would depict a higher social marginal cost (SMC) curve and a lower social private cost (SPC) curve, thus creating a dead weight lost (DWL) triangle between the two parallel SMC and SPC curves. This results in a disagreement between the quantity that represents allocation efficiency and the quantity that gets produced (Q*).  The community is willing to lighten the protests and allow the continuation of production if and only if the “government closes the Codelco foundry, regulates arsenic norms, improves emission standards and increases tests fun on children.” In order for the industries to keep producing they must provide these non-monetary compensations to the community. In other words, the industries’ Private Marginal Cost (PMC) plus these previously mentioned costs become the new SMC which must be less than the Social Marginal Benefit (SMB). It is essential that the government keeps an eye out for free riders, especially since the factories tend to produce similar fumes which then makes it difficult to distinguish the source of the problem. At this point, all the industries are liable for the problem imposed on the families, where regardless of who owned the original property rights, it looks like the community of Quinteros now has the final say in how the problem will get solved.  Does that mean that the ideal bargain between the industrial plants and the community should be done directly without the government as the intermediate party?