From a general standpoint, three approaches are postulated for reducing spatial externalities: (1) Pigouvian tax on emittees, (2) damage suits, (3) zoning. Why not a fourth, which is to internalize the externality by creating a market for it? With internalization one may not get a reduction per se in emissions; that is, firms (cities) merely have to pay for the resource. An article by H. Mohring and J. Boyd in Economica (Nov. 1971) shows that in comparison to the Pigouvian tax, the internal~zation approach (or asset utilization, as they call it, after Frank Knight's example of :highways) can yield superior results. A generalization of spatial externalities must consider all approaches, or at least be consistent with all. Turning to the model, I think the damage function leaves out a very important step that yields many significant problems later on. As equation (1) is written, there is an implicit assumption that choosing pollution reduction inputs has no impact on the relative price of inputs used to produce final goods (or the relative price of the final goods themselves). Pollution control cannot be viewed realistically in a vacuum. Clearly, my choice of more x and less y will have a strong impact on resource allocation, through real factor input and output decisions (via the price system). Similarly, to argue that society wishes to minimizes the social costs of abatement plus recycled damage is fine (see equation(2)), but we cannot view abatement costs without considering the indirect effects on real inputs and final products. As presently specified, the trivial solution of zero production is the optimal choice ! To show the effect of the omission in equations (1) and (2),* consider a firm that produces a primary product (Y~), whose production results in a residual product (YR). YR is either recovered as a useful by-product (Yb) or emitted as a waste (Y~). Assume YR is some fixed proportion (k) of Y~, where 0 < k < 1. Now