An Evaluation of A. V. Kneeseʼs Water Quality Management System:

Compared with K. W. Kapp and R. H. Coase

Abstract

In this paper, I place A. V. Kneeseʼs water quali-ty management system into a lineage of “exter-nal diseconomy.” Although Kneese is recog-nized as one of the most influential environmen-tal economists by some scholars, his work has fallen out of favor. However, his arguments are still effective when we examine the problem of modern environmental pollution. Environmental pollution is classified as an external diseconomy, a concept that is generally acknowledged to have originated in A. C. Pig-ouʼs book, The Economics of Welfare. To reme-dy the problem of external diseconomy, tradi-tional approaches in the Pigouvian and Coasean tradition have suggested “Pigouvian taxes” or the “Coase Theorem.” Kneese critically ad-dressed both theories and the prevailing policy tools pertaining to water quality management by considering water pollution in 1960s United States. Kneeseʼs work on water quality management has been characterized in the following manner: “Kneese is the first economist after Pigou to treat externalities analytically and, at the same time, express a serious concern for pollution.” As stated above, Kneeseʼs work is based on the concept of external diseconomy. However, there is a clear difference between how Pigou and Kneese conceptualize the effects of external dis-economy. The nature of this difference lies in the criticism of external diseconomy by W. K. Kapp and R. H. Coase. Kapp criticized external diseconomy by arguing the concept of “social cost” from the standpoint of “institutional eco-nomics,” and Coase criticized it by arguing the concept of “transaction cost” from the standpoint of “new-institutional economics.” Kneeseʼs ex-ternality argument, which was influenced by the criticism of Kapp and Coase, takes both “institu-tional” and “new-institutional” standpoints. JEL classification numbers: B 15, Q 50.