Coasian Contracts in the Coeur d'Alene Mining District

Article excerpt

For the greater part of the twentieth century, mainstream economists viewed negative (technological) externalities as a prima facie justification for government intervention in the market. Absent such government action, they argued, nothing would be done to prevent or remedy the damages third parties suffered as a result of unrestrained "spillovers" or "neighborhood effects." For example, in the words of Joseph E. Stiglitz, "without government intervention there would be an underprovision of pollution control" (1988, 76). Even such staunch defenders of the market as Milton Friedman (1962, 30) and F. A. Hayek (1979, 43-45) conceded that spillovers might justify government intervention, although they embraced neither the "blackboard economics" conclusion that government intervention is desirable and effective in all cases of spillovers nor the "nirvana" standard implicit in Stiglitz's use of the neoclassical welfare-economics term underprovision.

Not until the argument of Ronald Coase's 1960 article "The Problem of Social Cost" began to penetrate professional understanding did economists start to appreciate how private contracting--usually viewed as property-right exchanges of various sorts--might be employed to prevent or remedy negative externalities without any government intervention to impose regulation, taxes, or subsidies. A literature gradually developed in which an assortment of cases--for example, private construction and maintenance of lighthouses (Coase 1974), private provision of bee-pollination services (Cheung 1973), private management of coastal developments (Rinehart and Pompe 1997), and private improvement of riverine water quality (Yandle 2004)--illustrates the voluntary internalization of externalities in history.

Even now, however, more than fifty years after the publication of Coase's landmark article, economists and economic historians continue to learn about important cases of private contracting to allay pollution problems and, in particular, about the variety of means that private contractors have employed to organize themselves for this purpose and to carry it out. In the present article, I relate the history of an important and little-known case: the voluntary measures that mine, mill, and smelter operators undertook in the Coeur d'Alene mining district beginning at the turn of the twentieth century. These parties not only purchased existing private-property rights specifically in order to internalize negative externalities but also engaged in creative organizational and technological innovation to achieve the same end. They did not do so, however, merely out of the goodness of their hearts. The interplay between legal and political proceedings, on the one hand, and the operators' "internalization" projects, on the other hand, lies at the heart of the story.

The Fabulous Coeur d'Alene

The Coeur d'Alene mining district is located in the Idaho panhandle approximately three hundred miles east of Seattle and seventy miles east of Spokane. Mining began there after the discovery of gold near the North Fork of the Coeur d'Alene River in 1883 kindled a gold rush that brought thousands of people in search of quick riches. The town of Murray sprang up, "a city a half a mile long" that "had its own lawyers, doctors, gamblers, and women of ill repute" ("Coeur D'Alene Mining District" 1998). By 1885, the rush had subsided, but gold mining continued near Murray for decades afterward. As prospectors fanned out from the original gold rush on the North Fork, they discovered mineral deposits rich in silver, lead, and zinc near the South Fork in 1884, and those deposits became the basis for the development of one of the world's greatest mining districts, known now as the Silver Valley (Ojala 1972, 6-8; Bennett, Siems, and Constantopoulos 1989, 145; Bennett 1994, 6).

According to an authoritative summary published in 1989,

[t]he Coeur d'Alene Mining District . …