I'm three days behind, but I couldn't help make a few (unconnected) comments on the excellent thread about Sidgwick and Coase.

First, there is an even more obvious reason why Sidgwick would never have thought about a trading scheme for pollution.  Nobody at the time could have imagined the tasks of monitoring and enforcement!  To have trade, you have to have the traded commodity be delivered.  In the case of building height, it would have been pretty easy to look up and verify whether a building exceeded the height restrictions it had traded away.  But how is one to know whether a factory is exceeding its pollution restrictions?  Much easier just to regulate its smokestack height etc.  In fact, if you talk to folks in the US EPA's enforcement division, they will tell you that it took years of discussion and work before agency people and the environmentalists were convinced that cap-and-trade would work.  

Someday somebody should write a good history of the interplay between the ideas of economists and the political economy of cap-and-trade.  In fact, to bring the issue back to Coase, it is precisely the issue of who obtained the property rights that brought the other important stakeholders on board the US cap-and-trade experiment:  by giving away the permits to industry with the right to sell them, it created huge rents for them that didn't previously exist.  Even if industry bears the marginal costs of control, those rents can more than compensate them.  Ever wonder why the US electricity sector is currently lobbying FOR cap-and-trade on carbon?  Estimates by my former RFF colleagues suggest that, under one bill, they'd get a $400b windfall on their balance sheet.  That's not the only reason, but it's a good one.  In fact, until state regulators recently put an end to it, US utilities were racing to build more coal plants so that when the permits were finally doled out, they'd be grandfathered a larger share.

Regarding Kevin Quinn's posting.  You may not be able to see private lighthouses out the window, but if you can see as far as Chicago you *will* see trading in carbon without a cap.  (If you can see a car dealership, you may find a market for hybrids without a cap too.)  Free rider problems are not 100% decisive: people voluntarily contribute to causes all the time.  See the Chicago climate exchange at http://www.chicagoclimatex.com/.  Or, to purchase some carbon offsets from one popular retailer, go to www.terrapass.com.  Of course, there are a lot of questions about the auditing of these trades (see point one above).

I agree with him however that there is a problem with Coase's critique of Pigou.  The problem is in getting the numbers right.  You have to know the right tax is, in your example, $400 not $900.  It's even harder if the marginal damage schedules aren't constant:  you need to have a non-constant tax schedule or else foresee the equilibrium and use the equilibrium marginal damage (vs. the status quo marginal damage).  So (contra Coase) there's nothing wrong with the logic that a tax equal to marginal damages will internalize an externality.  But Coase's examples do show how easy it is to go wrong in setting that tax.

Spencer Banzhaf