The Legal Analyst: A Toolkit for Thinking about the Law

By Ward Farnsworth | Go to book overview

8 The Coase Theorem

We have spent several chapters talking about various kinds of waste that are worries to the law. The most basic and most important example is behavior by people that creates some benefits for themselves but more costs for others, like failing to take simple precautions to avoid accidents. The problem is that sometimes the things you do create costs for others that you don’t feel, and so may not take into account in deciding how to act. We have seen that sometimes legal rules can be viewed as ways to correct that: they make people act the way they would if they cared equally about all the costs and benefits of what they did. Now let’s consider another take on the problem, which is that there might not be a problem if the parties can easily make contracts with each other. If you’re creating more costs to me than benefits for yourself, I can pay you to stop—and that will be the end of the waste even without help from the law.

The idea sounds simple but is easy to overlook. It was first introduced by Ronald Coase, who later won the Nobel Prize in economics partly on the strength of the point.79 Coase liked to illustrate his argument with examples from old common law cases, and they are convenient for us as well. Imagine a bakery next door to a doctor’s office. The bakery creates lots of noise—banging away with pots and pans and so forth. The doctor finds that this disturbs his medical practice, so he brings a lawsuit claiming the bakery is a nuisance. There are various ways to think about the problem, but one—and the one most congenial to the style of analysis we’ve been developing—is to ask how we can get the most total value out of the space the doctor and the baker share. If there is great value in doing one of the activities there but not so much value in the other, then on this view the more valuable one should have its way. That is what a single owner would do who ran a doctor’s office and an adjacent bakery: leave the more valuable one where it is and move the other. It’s like the choice between the ox and the goat that we encountered in the discussion of the single owner in chapter 4.

At this point, though, it might seem that there’s a problem: how can a court figure out which of these activities—the doctor’s or the baker’s—is more valuable? Coase’s idea was that the court doesn’t have to figure it

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The Legal Analyst: A Toolkit for Thinking about the Law
Table of contents

Table of contents

  • Title Page iii
  • Contents v
  • Preface vii
  • Acknowledgments xi
  • Part I - Incentives 1
  • 1 - Ex Ante and Ex Post 3
  • 2 - The Idea of Efficiency 13
  • 3 - Thinking at the Margin 24
  • 4 - The Single Owner 37
  • 5 - The Least Cost Avoider 47
  • 6 - Administrative Cost 57
  • 7 - Rents 66
  • 8 - The Coase Theorem 75
  • Part II - Trust, Cooperation, and Other Problems for Multiple Players 85
  • 9 - Agency with Eric Posner 87
  • 10 - The Prisoner's Dilemma 100
  • 11 - Public Goods 109
  • 12 - The Stag Hunt 117
  • 13 - Chicken 126
  • 14 - Cascades 136
  • 15 - Voting Paradoxes 144
  • 16 - Suppressed Markets with Saul Levmore 152
  • Part III - Jurisprudence 161
  • 17 - Rules and Standards 163
  • 18 - Slippery Slopes with Eugene Volokh 172
  • 19 - Acoustic Separation 182
  • 20 - Property Rules and Liability Rules 188
  • 21 - Baselines 198
  • Part IV - Psychology 207
  • 22 - Willingness to Pay and Willingness to Accept- The Endowment Effect and Kindred Ideas 209
  • 23 - Hindsight Bias 218
  • 24 - Framing Effects 224
  • 25 - Anchoring 230
  • 26 - Self-Serving Bias, with a Note on Attribution Error 237
  • Part V - Problems of Proof 247
  • 27 - Acoustic Separation 249
  • 28 - Standards of Proof 257
  • 29 - The Product Rule 273
  • 30 - The Base Rate 281
  • 31 - Value and Markets 294
  • Notes 305
  • Author Index 329
  • Subject Index 335
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