[lehighguy]

The dog example is really a bad example for pollution purposes. I merely was trying to explain the concept of an externality (third party other then buyer and seller) being involved.

In the case of the dog, the effects of the pollution are known beforehand, and parties involved are clearly defined, and the damage being done is readily visible. In such a case the government can step aside and allow the parties involved to come to a settlement. The dog owner could decide not to take any settlement if she wanted.

In this way the situation is not much different then Kelo. Imagine if a factory wants to open in your town, but the pollution will cause your home to become uninhabitable. In such a case the government should not intervene and force a settlement (IMO).

There is still a place for the government in making sure that the company doesn't simply pollute anyway despite not reaching an agreeement witht he dog owner, and in such cases lawsuits with punitive damages come into play.

However, clearcut cases such as above are often not the case before us. Often, the effected parties are not identifiable and the damage caused is diffucult to assertain. Consider the following example:
Lets say a firm pollutes the air and all of the people in the city are slightly more likely to develope Asthma. When someone comes down with Asthma there is no way to prove that the companies pollution specifically caused it. Individual lawsuits are impossible. Even if possible, legal action would act as a huge transaction cost reducing the effectiveness of repairing the externality especially in light of the fact that the burden of proof would be so high.

In comes the government. They have an enviormental scientist calculate the odds that an individual will contract Asthma because of the polution (A), figures out the population of the city effected (B), and then is given a "cost" of having Asthma (C).

A * B * C = D

D is the fee the government will charge the company for polluting. Since individual victims can't be identified, the government must use the money to benefit the citizens potentially effected (send everyone a check, provide healthcare for Asthma patients, etc.)

The main problem of course is determining C, since this is a value subject to opinion. In the dog example the individual parties are best equiped to determine C because they are directly involved and have the most information. Such is not possible in the Asthma example. C will be subject to political pressures, special interest lobbying, corruption, and ultimately be imperfect and costly to calculate. But such is the case with all government action, which is why we try to avoid it whenever possible.

I don't know if the above jives with libertarian theory. My judgements on individual rights and property rights are based on a cost/benefit analysis of different government policy options, not some moral absolutist arguement in favor of either. I think governmental involvement comes with significant costs and substantial implementation problems. As such I try to use it as little as possible. However, in cases like above, it is more practicle to involve government.