For the greater part of the 20th century, mainstream economists viewed negative externalities as a prima facie justification for government intervention in the market (see Bator 1958). Absent such government action, they argued, nothing would be done to prevent or remedy the damages suffered by third parties as a result of unrestrained "spillovers" or "neighborhood effects." For example, in the words of Joseph Stiglitz (1988: 76), "without government intervention there would be an underprovision of pollution control." 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 orthodox term "underprovision."
Not until the argument of Ronald Coase's 1960 article "The Problem of Social Cost" began to penetrate the profession's understanding did economists start to appreciate how private contracting--usually viewed as property-right creations or exchanges of various sorts--might be employed to prevent or remedy negative externalities without any government intervention to impose regulation, taxes, or subsidies. Gradually, a literature has developed in which an assortment of cases--private construction and maintenance of lighthouses (Coase 1974), private provision of bee-pollination services (Cheung 1973), private policing (Benson 1994), private provision of highways (Klein 1990, Benson 1994, Klein and Yin 1996), private management of coastal development (Rinehart and Pompe 1997), private improvement of riverine water-quality (Yandle 2004), private indemnification of losses from cattle disease spread by drovers (Anderson and Hill 2004: 147)--illustrates the voluntary internalization of externalities (both positive and negative) in history.
Even now, however, more than 40 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 20th century. These parties not only purchased existing private property rights specifically in order to internalize negative externalies, but they 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 300 miles east of Seattle and 70 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 of the river in 1884, and those deposits became the basis for the development of one of the world's greatest mining districts, known nowadays as the Silver Valley (Ojala 1972: 6-8; Bennett, Siems, and Constantopoulos 1989: 145; Bennett 1994: 6). …