Asymmetric Liability, Common Law, & Urbanization

Tort law is interesting. You can argue that someone harmed you, and you can cite almost no legislation in the process. Torte law in the US uses case law – the precedent set by previous rulings in the context of social norms. But, what cases did the early cases cite? They also cited earlier cases and social norms, though we may no longer have a record. The beauty of tort law it allows for changing relative costs in prudence and negligence.

Can you imagine a legislature attempting to codify the appropriate amount of neglect by, say, a painter? The standards would quickly go out of date. The relative cost of resources including labor, communications, materials, and the price differences among competitors of differing quality all change over time. Multiply these factors by 20 and then again by the number of occupations and regions in a country. You will quickly see that legislating the appropriate degree of prudence and neglect through congress is a fool’s errand. The challenge is too complicated and the world changes too quickly. In fact, attempting to legislate definitions for neglect and prudence could even backfire and result in regulatory arbitrage, which occurs when firms comply with de jur rules while avoiding them de facto.*

Externalizing Costs

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Coase and COVID

Update: I added a comment on the post to clarify why I don’t think that having seniors stay at home is the correct Coasean solution. In short: social isolation has high costs!

Bryan Caplan has an interesting post on COVID and reciprocal externalities. Caplan starts off with the straightforward Coasean statement: “Yes, people who don’t wear masks impose negative externalities on others. But people who insist on masks impose negative externalities, too.”

For those not familiar with Coase’s 1960 article, one of his fundamental insights about property rights is that when property rights are not clearly defined, both parties can be imposing costs on one another. The externalities are reciprocal, not just in one direction. The efficient outcome, when bargaining is not possible, is to allocate the property right such that the “least cost avoider” is the one that adjusts their behavior. In other words, you allocate the property right to the party who would obtain the property right if bargaining were possible.

But Caplan uses this Coasean framework to come to the opposite conclusion that I would. Why?

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