Questionson“TheProblemofSocialCost”Reminder:ShortPaperYouarearguingacasebeforeJudgePosner.Writeabriefargumentforonesidebasedonlawandeconomicsarguments.Anycasepastorpresentwilldo,provideditisnotcoveredineithermybookorPosner’sEconomicAnalysisofLaw,whichIwillputonreservesoyoucancheck.Reviewof“TheProblemofSocialCost”“Externalities”areJointlyCausedPriceTheoryFrameworkCostofinputs=theirvalueinthebestalternativeusePriceofoutputs=theirvaluetothosewhobuythemFarmerandRancherTheoutcomedoesnotdependonwhoisliableAndisefficientProvidedtransactioncostsarezeroWithzerotransactioncosts,itneverpaystoleavemoneyonthetable.Withnon-zerotransactionscosts,itpaystoleavemoneyonthetableiftheamountofthemoneyislessthanthecostofpickingitup.MoreCases,theSameLogicBlockingthedraftofachimneyBleachingCoconutMattingConfectionervsDoctorJollyAnglerBrewingJudge’sBasisforDecidingtheCase

MaySeemIrrelevanttotheEconomist

ButItmaybedesignedtogiveapredictableruleOrbeaproxyforrelevantconsiderationsTwoAlternativeApproachesTwoalternatives:CourtfindleastcostavoidereachtimeOrcourtorlegislaturemakesrulesDesignedtousuallymakethelowercostavoiderliableThefirstalternativecangiveresultsbetterfittedtocases,but…Reducescertainty,raiseslitigationcosts,makestransactionsharderThisisanextremeversionofthe“rulevsstandard”issueSpeedlimitoralawagainstdangerousdrivingPossiblesolutionstothetransactioncostsofthemarketCombineactivitiesinafirmHavegovernmentregulationDonothingAllhavecosts,soitisamatterofchoosingtheleastbadCoase’sAdvicetoEconomistsGatherdataonhowtransactionsareorganizedWheretransactioncostsarehigh,courtdecisionsmatter.Inthelimitofinfinitetransactioncosts,wearebackinaPigouvianworldWiththeCoaseiancritiqueaboutdoublesidedcausationstillvalidPropertyruleifitisclearwhattherightanswerisLiabilityruleifitisunclearwhattherightansweris,butdamagescanbemeasuredLeavingthequestionofwhichpartyisliableand/orwhichholdsthepropertyrightCommonLawofNuisancevsStatuteStatutemayexpandorcontractthecoverageofthelawofnuisanceExamples?PigouandRailroadsStateactionisneeded;whatadditionalstateaction?ButPigou’srailroadexampleisduetostateaction,and...Notnecessarilyundesirable.

LetthemgrowcloverWhatisOwnedisaRight,notaThingFurtherPointsTheexistenceofinefficiencyrelativetotheoutcomeproducedbyaperfectlywiseplannerdoesnotnecessarilymeanyouaredoinganythingwrongandgovernmentshouldstepinAnd“governmentsteppingin”isnotwelldefined.SincethegovernmentdefinedtherightsyoustartwithActuallyverylittleanalysisisrequiredtoshowthatanidealworldisbetterthanastateoflaissezfaire,unlessthedefinitionsofastateoflaissezfaireandanidealworldhappentobethesame.Butthewholediscussionislargelyirrelevantforquestionsofeconomicpolicysincewhateverwemayhaveinmindasouridealworld,itisclearthatwehavenotyetdiscoveredhowtogettoitfromwhereweare.Abetterapproachwouldseemtobetostartouranalysiswithasituationapproximatingthatwhichactuallyexists,toexaminetheeffectsofaproposedpolicychangeandtoattempttodecidewhetherthenewsituationwouldbe,intotal,betterorworsethantheoriginalone.Inthisway,conclusionsforpolicywouldhavesomerelevancetotheactualsituation.RiskRiskaversionisnotaboutriskMoralhazardisnotaboutmoralityLabelssaylessthantheypretendTheUtilityFunctionAdescriptionofpreferencesOveranything—apples,books,money,girlfriends,…IfU(3,4,$3000,Mary)>U(2,6,$1000,Anne)Youwouldratherhave…3apples,4books,$3000,andMaryasyourgirlfriendthan…ButwewillbelookingattheutilityofincomeWhichcanbeusedtobuy(almost)anything.UtilityofIncomeU($50,000)>U($40,000)>U($30,000)Buthowmuchgreater?Is[U($50,000)-U($40,000)]