5 Defining and Enforcing Rights: Property, Liability, and SpaghettiRead more at location 939
Note: 5@@@@@@@@@@@@@@ PROBLEMA: COME SI PROGETTA UNA LEGG EFFICIENTE? PROPRIETÀ=>OTTIMA X DANNI INDEFINIBILI E CONTRATTAZIONI FACILI RESPONSABILITÀ=>OTTIMA X CONTRATTAZIONI DIFFICILI E DANNI OGGETTIVI NEL CASO DI CONTRATTAZIONI DIFFICILI E DANNI INDEFINIBILI? C È CHI DICE PIGOU (MA I DANNI SONO INDEFINIBILI!) C È CHI DICE LIBERTY FIRST. DOMANDE 1) CHI DECIDE I COMPORTAMENTI (PROP). 2) CHI PAGA (RESP) Edit
how to decide whether rights ought to be protected by property rules (“steal a car, go to jail”), liability rules (“dent my car, pay to fix it”), or fines.Read more at location 945
Railroad trains in the nineteenth century threw sparks; the sparks sometimes started fires in adjacent fields. Railroad companies could reduce the problem either by running fewer trains or by installing a spark arrester,Read more at location 947
Farmers could reduce the problem by leaving land near the railroad track bare or planting some crop unlikely to catch fire.Read more at location 949
Farmers have only two alternatives: wheat, which burns, and clover, which does not.Read more at location 951
We consider four different legal rules: 1. Property right by the railroad. The railroad is free to throw sparks if it wants to.Read more at location 956
2. Property right by the farmers. The railroad may only throw sparks if it has permission to do so from all the farmers;Read more at location 958
3. Liability right by the farmers. The railroad is free to throw sparks but must compensate the farmers for any damage that results.Read more at location 960
4. Liability right by the railroad. Any farmer may enjoin the railroad from throwing sparks but must then compensate the railroad for the cost of having to put on a spark arrester.Read more at location 961
The symmetry is clearer if we think of each rule as answering two questions: Who decides whether the railroad throws sparks? Who bears the costs implied by that decision?Read more at location 965
There are two possible answers to each question: Railroad or farmers. Combining the possible answers gives us our four rules: 1. Railroad decides, farmers bear 2. Farmers decide, railroad bears 3. Railroad decides, railroad bears 4. Farmers decide, farmers bearRead more at location 968
First suppose that the damage done by fires in wheat fields is $400, switching to clover costs $800 ($8 per farmer), and a spark arrester costs $1,000 (column a of the table). The cost of the fires is less than the cost of either way of preventing them, so the efficient outcome is A: Sparks + Wheat.Read more at location 991
Next suppose we reverse the costs of clover and fires; switching to clover now costs $400, and fires do $800 worth of damage (column b). The railroad throws sparks. The farmers consider their options and switch to clover, since the savings from eliminating fires make it worth doing.Read more at location 997
we have again gotten there with no transactions between the parties and no transaction cost,Read more at location 999
Finally, suppose the cost of a spark arrester drops to $200 (column c). The railroad is still legally free to throw sparks if it wants to. But now it is in the interest of the farmers to buy the railroad a spark arrester, since doing so will cost them less than switching to clover, which is their next best alternative.Read more at location 1000
It is in their interest, but it may not happen. The reason is the public good problem mentioned earlier. As long as enough money is contributed to pay for the spark arrester, farmers who choose not to contribute get a free ride.Read more at location 1003
There are a variety of ways in which the farmers might try to overcome such a problem. For example, they might draw up a contract by which each agrees to contribute only if all of the others do.Read more at location 1007
This solution depends on our assumption that all farmers are equally at risk from sparks.Read more at location 1010
As this example suggests, the situation provides a lot of opportunity for bargaining, bluffing, threats, and counterthreats.Read more at location 1014
Turn now to rule 2. This time it is the farmers who have the absolute property right; the railroad is permitted to throw sparks only if it has permission from every farmer. What happens? If the efficient outcome is C—No Sparks + Wheat—it happens immediately with no need for any transactions. The railroad could offer to buy the farmers’ permission, but that would cost more than a spark arrester, so it is not in the railroad’s interest to make the offer.Read more at location 1020
Suppose, however, that the efficient outcome is A or B—sparks, with or without a switch to clover. To get there the railroad must buy permission to throw sparks from the farmers. Such a transaction, at any price lower than the cost of a spark arrester and higher than the cost of either fires (A) or clover (B), is in the interest of both railroad and farmers. It is in their interest but, again, may not happen, this time because of a holdout problem.Read more at location 1024
So far we have been dealing with property rules: One side or the other gets to decide whether or not sparks are thrown.Read more at location 1036
Next we consider liability rules: One party gets to decide but owes compensation to the other for the resulting costs.Read more at location 1037
Rule 3 is a liability rule in which the railroad controls the decision of whether to throw sparks, but the farmers have a right to be compensated for any resulting damage.Read more at location 1038
The railroad can either throw sparks and pay the farmers $400 for the resulting fires or else pay $1,000 for a spark arrester; it chooses the former option.Read more at location 1040
this time when the railroad’s sparks start fires, the farmers sue for damages. We have gotten to the efficient outcome, but with an additional cost: the litigation cost of the resulting tort suits.Read more at location 1042
Implicit in that conclusion is an important assumption: that the court can accurately measure damages.Read more at location 1044
Suppose that is not the case. The fires actually do $400 worth of damage, but the court, impressed by pictures of smoldering fields, overestimates the damages and awards $1,200 in compensation to the farmers.Read more at location 1044
The solution to this problem requires another transaction. The railroad goes to the farmers and offers to buy their liability right, to pay each of them $8 in exchange for his agreement not to sue. Just as with rule 2, the parties may be able to bargain to an efficient outcome, but to do so they must overcome a holdout problem.Read more at location 1047
Suppose we now reverse the assumption: Clover costs $400, and fires do $800 worth of damage. B is now the efficient outcome. How do we get it?Read more at location 1052
If the court simply measures the damage from fires, the obvious tactic for the farmers is to grow wheat, suffer fires, and send the bill to the railroad.Read more at location 1054
We can solve this problem by having the railroad pay the farmers to switch to clover. Here again there is a potential holdout problem, but it is reduced by the fact that the railroad can pay some farmers to switch to clover, eliminating fires in their fields and the resulting liability, and pay damages to the ones who refuse to switch.Read more at location 1057
A sufficiently well-informed court, applying the same principle to precautions against a continuing problem, could refuse to award the farmers the full $800 cost of their burning wheat on the grounds that half the cost is their fault; they should have switched to clover. If the farmers do switch to clover, the sufficiently smart court will recognize that they are suffering a real cost from the sparks even though there are no visible fires and award them $400 in damages.Read more at location 1061
If courts were fully informed about everything, if they knew, in detail, what every party ought to do, we would not need a liability system. The court could simply announce what everyone ought to do and hang anyone who didn’t do it.Read more at location 1069
At the other extreme, if courts knew nothing at all and produced their verdicts by rolling dice, legal liability, law in general, would make little sense as a solution to the coordination problem.Read more at location 1072
if the court is not smart enough to get us there directly, the Coasian solution cuts in: The parties bargain to the efficient rule, provided the transaction costs associated with such bargaining are not too high.Read more at location 1080
A real-world example is the externality that I impose every time I exhale, increasing the amount of carbon dioxide in the world and thus contributing my little bit to global warming. The cost may be real, but we are quite confident that continuing to breathe and putting up with the consequences is the least costly solution to the problem, so we give each individual a right to breathe, free of tort liability for costs that his breathing may produce.Read more at location 1101
An example is my absolute property right not to be deliberately shot at by my neighbors. While losing the opportunity to practice their marksmanship and take out their frustrations may cost them something, we are pretty sure that it costs them less than being shot costs me.Read more at location 1105
If we know that courts can measure damages accurately and cheaply, taking into account all possible precautions, then rules 3 and 4 look very attractive;Read more at location 1111
Similarly, if we believe that it is easy for the farmers to solve their public good problem, perhaps because there are not very many of them and they are all friends and neighbors, rule 1 looks attractive.Read more at location 1115
It is especially attractive, relative to the alternatives, if we believe courts are costly to use and incompetent at estimating damages.Read more at location 1117
Before restating the argument in this form, however, it is worth considering one more possible rule—controlling sparks by Pigouvian taxes.Read more at location 1125
5. Fine for sparks. Railroad pays a fine equal to the damage done by its sparks.Read more at location 1128
There are some problems, however. Suppose the regulatory agency assessing the fine, like the only moderately smart court of an earlier example, can measure and charge only for direct damages.Read more at location 1133
Coase plus Pigou is too much of a good thing. Suppose the spark arrester costs $1,000, switching to clover costs $800, fires cost $600 (column d). The efficient solution is to keep throwing sparks. Under this solution, each year the railroad pays a $600 fine, and the farmers suffer $600 worth of damage. If the railroad installs a spark arrester, both fine and damage disappear, for a combined gain of $1,200 at a cost of $1,000. The farmers offer to pay the railroad $500 toward the cost of a spark arrester, the railroad agrees, and we have gotten to the inefficient outcome C.Read more at location 1144
A liability right to something means that if it is taken, the taker owes you compensation. A property right means that if it is taken, the taker is punished in a fashion intended to make it in his interest not to have taken it. Very roughly, we may think of the liability rule as “damages equal to damage done” and the property rule as “damages high enough always to deter.”Read more at location 1154
Imagine a world with only liability rules. If someone wants your car, he doesn’t have to come to you and offer you a price. He simply takes the car and lets you sue him for its value. What is wrong with that approach? Why would it not lead to an efficient outcome? In a world where courts could accurately measure value and enforce liability judgments at negligible cost, it would.Read more at location 1159
I would have no incentive to spend time and money guarding my car against thieves, since if it were stolen I would be fully compensated—andRead more at location 1164
The cost to thieves of stealing cars would be negligible, since owners would take no precautions.Read more at location 1165
In the real world courts cannot measure the value of my car to me very accurately, not nearly as accurately as I can. Furthermore, the cost of finding out who stole the car, proving that he did it, and establishing an estimate of its value, is substantial. Protecting my right to my car with a liability rule would be an expensive approach and one that could frequently lead to inefficient transfers.Read more at location 1167
The better approach is a property rule: You can take my car only with my permission.Read more at location 1171
If my car is worth more to you than to me, you will be willing to make me an offer that I will be willing to accept. You don’t have to steal it; you buy it instead. Value is demonstrated not by a court’s best guess but by what offers you are willing to make and I am willing to accept.Read more at location 1173
The transaction cost of selling you the car is a great deal less than the transaction cost of your stealing the car and my then suing you and collecting.Read more at location 1175
If property rules work so well, why do we ever use liability rules? The answer is that there are some cases in which the transaction cost of selling is higher than of suing. Every time I pull out of my driveway I impose a tiny risk of injury on every driver and pedestrian for miles around. The transaction cost of getting permission from all of them before I turn on the ignition is prohibitively high. So instead of enforcing their right not to be run into or over by a property rule, we enforce it by a liability rule: If I injure someone under circumstances in which the court finds me at fault, I must compensate him.Read more at location 1176
Property rules are attractive when the cost of allocating rights by market transactions is low. Liability rules are attractive when the cost of allocating rights by litigation is low.Read more at location 1181
In a world where both costs were zero, either approach would lead to an efficient outcome. In a world where both sets of costs are high, we may have to look for other alternatives.Read more at location 1184
Consider the distinction between trespass by people and trespass by cattle. If I deliberately trespass on your land, I am liable without regard for how much damage I did or how reasonable my action was. If my cattle stray onto your land, I am liable only for the damage they actually do.Read more at location 1185
The obvious explanation is that if crossing your land is worth more to me than it costs you, I can buy permission—permanently, in the form of an easement, if that is what I require. But if I want to keep cattle on my land, I cannot readily buy the permission of every landowner onto whose property they might stray.Read more at location 1189
If my haystack spontaneously ignites and the fire spreads to your nearby buildings, you sue me for damages. If the smell from your tannery makes my apartment building unfit for human habitation, I go to court and ask to have the tannery enjoined as a nuisance.Read more at location 1192
Part of the explanation for the difference may relate to the ability of the court to determine who is the least-cost avoider. With a continuing nuisance the cost to either party of eliminating or tolerating the nuisance is to some degree observable. So the court has a reasonable chance of figuring out who is the least-cost avoider and assigning the property right accordingly, thus getting directly to the efficient outcome either on a case-by-case basis or by general rules such as the doctrine of coming to the nuisance. But accidents are uncertain, making their expected cost uncertain, making it hard, perhaps impossible, for the court to know who is the least-cost avoider.Read more at location 1196
A second reason for the difference may be that reallocating rights by a private transaction is often more practical in the case of the continuing nuisance. If my tannery is polluting your factory, both of us know it. So if the wrong person is assigned the right by a court deciding whether or not to grant an injunction, the other person can buy it from him, at least as long as only one or two people are affected. This doesn’t work as well for accidents.Read more at location 1203
One way of treating pollution and similar externalities is as torts; if your neighbor’s noisy candy factory makes it impossible to use your consulting room, you sue him for damages. Under modern environmental law they are more commonly treated as violations of federal regulations and punished with fines.Read more at location 1209
Low transaction costs not only make a liability rule work better, they also make a fine work worse, for a reason already discussed. If transaction costs are low and the fine does not go to the farmers, the railroad has a double incentive to put on the spark arrester; not only can it eliminate its fine, it can also get the farmers to help pay the cost. So it may be in the railroad’s interest to install a spark arrester even if doing so costs more than the damage done by the sparks.Read more at location 1217
In order for someone to be punished, his violation must be reported and prosecuted. A liability rule gives the victim an incentive to do so, since he is the one collecting the damage payment. A fine does not.Read more at location 1222
One way of thinking of tort liability is as a Pigouvian tax, designed to force tortfeasors to internalize their externality. Another is as a way of compensating victims, a sort of court-ordered insurance policy. A third is as a bounty system, in which private law enforcers, also known as tort victims,Read more at location 1224
One possible response to the problems I have been discussing in this chapter is that I have not considered enough legal rules. One might, for example, argue that the solution to both the public good and holdout problems faced by the farmers is a legal rule that allows a majority of farmers to set the termsRead more at location 1228
