A student says his family owns some property in rural East Texas. The property on a hilltop next to it overlooks my student’s pond. His neighbor says he really enjoys sitting on his porch watching the sunset over the pond. The student’s family doesn’t benefit from the pond’s positive externality — they have no view at all.
His father, who was annoyed by the neighbor’s bragging, decided to stop trimming the bushes around the pond. Soon, the neighbor called up and offered to maintain the property — trim the bushes and keep the pond free of rubbish. A clever ploy by his father to force the neighbor to internalize the externality — although I wonder whether this induced behavior represented a stable equilibrium. (HT: SF)