State action is needed. But the system has performed as well as it has because
of State action. Nonetheless, there are still imperfections. What additional
State action is required?
If this is a correct summary of Pigou’s position, its inadequacy can be
demonstrated by examining the first example he gives of a divergence between
private and social products.
It might happen that costs are thrown upon people not directly con-
cerned, through, say, uncompensated damage done to surrounding
woods by sparks from railway engines. All such effects must be
included-some of them will be positive, others negative elements-in
reckoning up the social net product of the marginal increment of any
volume of resources turned into any use or place.
The example used by Pigou refers to a real situation. In Britain, a railway
does not normally have to compensate those who suffer damage by fire caused
by sparks from an engine. Taken in conjunction with what he says in Chapter
9 of Part II, I take Pigou’s policy recommendations to be, first, that there
should be State action to correct this “natural” situation and, second, that
the railways should be forced to compensate those whose woods are burnt. If
this is a correct interpretation of Pigou’s position, I would argue that the first
recommendation is based on a misapprehension of the facts and that the second
is not necessarily desirable.
Let us consider the legal position. Under the heading “Sparks from en-
gines,” we find the following in Halsbury’s Laws of England:
If railway undertakers use steam engines on their railway without ex-
press statutory authority to do so, they are liable, irrespective of any
negligence on their part, for fires caused by sparks from engines. Rail-
way undertakers are, however, generally given statutory authority to
use steam engines on their railway; accordingly, if an engine is con-
structed with the precautions which science suggests against fire and
is used without negligence, they are not responsible at Common law
for any damage which may be done by sparks …. In the construc-
tion of an engine the undertaker is bound to use all the discoveries
which science has put within its reach in order to avoid doing harm,
provided they are such as it is reasonable to require the company to
adopt, having proper regard to the likelihood of the damage and to
the cost and convenience of the remedy; but it is not negligence on the
part of an undertaker if it refuses to use an apparatus the efficiency
of which is open to bona fide doubt.
To this general rule, there is a statutory exception arising from the Railway
(Fires) Act, 1905, as amended in 1923. This concerns agricultural land or
agricultural crops.
In such a case the fact that the engine was used under statutory powers
does not affect the liability of the company in an action for the damage
…. These provisions, however, only apply where the claim for damage
… does not exceed £200 [£100 in the 1905 Act], and where written
notice of the occurrence of the fire and the intention to claim has been
sent to the company within seven days of the occurrence of the damage
and particulars of the damage in writing showing the amount of the
claim in money not exceeding £200 have been sent to the company
within twenty-one days.
Agricultural land does not include moorland or buildings and agricultural
crops do not include those led away or stacked. I have not made a close study
of the parliamentary history of this statutory exception, but to judge from
debates in the House of Commons in 1922 and 1923, this exception was probably
designed to help the smallholder.
Let us return to Pigou’s example of uncompensated damage to surrounding
woods caused by sparks from railway engines. This is presumably intended to
show how it is possible “for State action to improve on ‘natural’ tendencies.”
If we treat Pigou’s example as referring to the position before 1905, or as being
an arbitrary example (in that he might just as well have written “surrounding
buildings” instead of “surrounding woods” ), then it is clear that the reason
why compensation was not paid must have been that the railway had statutory
authority to run steam engines (which relieved it of liability for fires caused by
sparks). That this was the legal position was established in 1860, in a case,
oddly enough, which concerned the burning of surrounding woods by a railway,
and the law on this point has not been changed (apart from the one exception)
by a century of railway legislation, including nationalisation. If we treat Pigou’s
example of “uncompensated damage done to surrounding woods by sparks from
railway engines” literally, and assume that it refers to the period after 1905,
then it is clear that the reason why compensation was not paid must have been
that the damage was more than £100 (in the first edition of The Economics of
Welfare) or more than £200 (in later editions) or that the owner of the wood
failed to notify the railway in writing within seven days of the fire or did not
send particulars of the damage, in writing, within twenty-one days. In the real
world, Pigou’s example could only exist as a result of a deliberate choice of the
legislature. It is not, of course, easy to imagine the construction of a railway
in a state of nature. The nearest one can get to this is presumably a railway
which uses steam engines “without express statutory authority.” However, in
this case the railway would be obliged to compensate those whose woods it
burnt down. That is to say, compensation would be paid in the absence of
Government action. The only circumstances in which compensation would not
be paid would be those in which there had been Government action. It is
strange that Pigou, who clearly thought it desirable that compensation should
be paid, should have chosen this particular example to demonstrate how it is
possible “for State action to improve on ‘natural’ tendencies.”
Pigou seems to have had a faulty view of the facts of the situation. But
it also seems likely that he was mistaken in his economic analysis. It is not
necessarily desirable that the railway should be required to compensate those
who suffer damage by fires caused by railway engines. I need not show here that,
if the railway could make a bargain with everyone having property adjoining
the railway line and there were no costs involved in making such bargains, it
would not matter whether the railway was liable for damage caused by fires or
not. This question has been treated at length in earlier sections. The problem
is whether it would be desirable to make the railway liable in conditions in
which it is too expensive for such bargains to be made. Pigou clearly thought
it was desirable to force the railway to pay compensation and it is easy to see
the kind of argument that would have led him to this conclusion. Suppose
a railway is considering whether to run an additional train or to increase the
speed of an existing train or to install spark-preventing devices on its engines. If
the railway were not liable for fire damage, then, when making these decisions,
it would not take into account as a cost the increase in damage resulting from
the additional train or the faster train or the failure to install sparkpreventing
devices. This is the source of the divergence between private and social net
products. It results in the railway performing acts which will lower the value
of total production-and which it would not do if it were liable for the damage.
This can be shown by means of an arithmetical example.
Conclusion
Notes
See Also
References and Further Reading
About the Author/s and Reviewer/s
Author: international
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