The evolution of externality rights: Flexibility versus ambiguity

Abstract

Coase argued that externality rights should sometimes be flexible, but warned that ambiguity can also hinder market transactions. Flexible liability is not uncommon and can be shown to provide useful information under nonconvexity. At a global optimum, each side must be able to compensate the other. There are also limited incentive gains from flexible liability for private externalities. For public externalities, however, claims will be exaggerated when agents are risk seeking and understated when they are risk averse. Efficient specifications of right are thus unlikely to emerge from self-interested litigation alone.

This is a preview of subscription content, access via your institution.

References

  1. BaumolW.J. (1972). “On Taxation and Control of Externalities.” American Economic Review 62, pp. 307–322.

    Google Scholar 

  2. CalebresiG., and D.Melamed. (1972). “Property Rules, Liability Rules, and Inalienability: One View of the Cathedral.” Harvard Law Review 85, pp. 1089–1128.

    Google Scholar 

  3. ChichilniskyGraciela, and GeoffreyHeal. (1993). “Global Environmental Risks.” Journal of Economic Perspectives 7 (Fall), pp. 65–86.

    Google Scholar 

  4. CoaseR.H. (1960). “The Problem of Social Cost.” Journal of Law and Economics 3, pp. 1–44.

    Google Scholar 

  5. CooterRobert J. (1980). “How the Law Circumvents Starrett's Nonconvexity.” Journal of Economic Theory 22, pp. 499–504.

    Google Scholar 

  6. CornesR. (1980). “External Effects: An Alternative Formulation.” European Economic Review 14, pp. 307–321.

    Google Scholar 

  7. CourseyDon L., John L.Hovis, and William D.Schulze. (1987). “The Disparity Between Willingness to Accept and Willingness to Pay Measures of Value.” Quarterly Journal of Economics 102, pp. 79–90.

    Google Scholar 

  8. DavisDouglas D., and Charles A.Holt. (1993). Experimental Economics. Princeton: Princeton University Press.

    Google Scholar 

  9. DiamondPeter A., and Jerry A.Hausmann. (1994). “Contingent Valuation: Is Some Number Better Than No Number?” Journal of Economic Perspectives 8 (Fall), pp. 45–64.

    Google Scholar 

  10. EpsteinRichard A. (1980). “The Static Conception of the Common Law.” Journal of Legal Studies 9, pp. 277–290.

    Google Scholar 

  11. GouldJohn. (1973). “The Economics of Legal Conflicts.” Journal of Legal Studies 2, pp. 279–310.

    Google Scholar 

  12. GreenJerry, and J.-J.Laffont. (1977). “Characterization of Satisfactory Mechanisms for the Revelation of Preferences for Public Goods.” Econometrica 45, pp. 427–438.

    Google Scholar 

  13. GrovesTheodore, and JohnLedyard. (1977). “Optimal Allocation of Public Goods: A Solution to the ‘Free Rider’ Problem.” Econometrica 45, pp. 783–809.

    Google Scholar 

  14. HahnRobert W. (1989). “Economic Prescriptions for Environmental Problems: How the Patient Followed the Doctor's Orders.” Journal of Economic Perspectives 3(2), pp. 95–114.

    Google Scholar 

  15. KahnemanDaniel, Jack L.Knetsch, and Richard H.Thaler. (1990). “Experimental Tests of the Endowment Effect and the Coase Theorem.” Journal of Political Economy 98, pp. 1325–1348.

    Google Scholar 

  16. Maler, Karl-Goran. (1989). Unpublished study on European pollution compensation, cited in “Acid Gains.” Economist, November 25, p. 77.

  17. McCoy, Charles. (1995). “Private Matter: The Push to Expand Property Rights Stirs Both Hopes and Fears.” Wall Street Journal, April 4, p. A1.

  18. MenellPeter S. (1991). “The Limitations of Legal Institutions for Addressing Environmental Risks.” Journal of Economic Perspectives 5(3), pp. 93–101.

    Google Scholar 

  19. MitchellRobert C., and RichardT. Carson. (1989). Using Surveys to Value Public Goods: The Contingent Valuation Method. Washington, DC: Resources for the Future.

    Google Scholar 

  20. PosnerRichard A. (1972). Economic Analysis of the Law. Boston: Little Brown.

    Google Scholar 

  21. PosnerRichard A. (1983). The Economics of Justice. Cambridge, MA: Harvard University Press.

    Google Scholar 

  22. PriestGeorge. (1987). “Measuring Legal Change.” Journal of Law, Economics and Organization 3(2), pp. 193–225.

    Google Scholar 

  23. RizzoMario J. (1980). “Law Amid Flux: The Economics of Negligence and Strict Liability in Tort.” Journal of Legal Studies 9, pp. 291–318.

    Google Scholar 

  24. RubinPaul. (1977). “Why Is the Common Law Efficient.” Journal of Legal Studies 6, pp. 7–23.

    Google Scholar 

  25. Sen, Amartya K. (1979). “Personal Utilities and Public Judgements: Or What's Wrong with Welfare Economics.” Economic Journal (September), 537–558.

  26. Schelling, Thomas C. (1992). “Some Economics of Global Warning.” American Economic Review (March), pp. 1–14.

  27. SchlesingerS., and S.Kinzer. (1982). Bitter Fruit: The Untold Story of the American Coup in Guatemala. New York: Anchor.

    Google Scholar 

  28. Schneider, Keith. (1992). “Environment Laws Face a Stiff Test from Landowners.” New York Times, January 20, p. A1.

  29. ScitovskyTibor. (1941). “A Note on Welfare Propositions in Economics.” Review of Economic Studies 9, 77–88.

    Google Scholar 

  30. StarrettDavid. (1972). “Fundamental Nonconvexities in the Theory of Externalities.” Journal of Economic Theory 4, 180–199.

    Google Scholar 

  31. StarrettDavid, and RichardZeckhsuser. (1974). “Treating External Diseconomies: Markets or Taxes?” In J.W.Pratt (ed.), Statistical and Mathematical Aspects of Pollution Problems. New York: Marcell Dekker.

    Google Scholar 

  32. Stodder, James. (1991). “Hold an Auction to Decide Who Gets the Nuclear Wastes.” Hartford Courant, July 26, p. D13.

  33. Tietenberg, T.H. (1990). “The Poverty Connection to Environmental Policy.” Challenge (September/October), 26–32.

  34. Tomsho, Robert. (1991). “Pollution Ploy: Big Corporations Hit by Superfund Clases Find Way to Share the Bill.” Wall Street Journal, April 2, p. A1.

  35. YeatsWilliam Butler. (1920). “The Second Coming.” Selected Poems. Edited by M.L.Rosenthal. New York: Macmillan.

    Google Scholar 

Download references

Author information

Affiliations

Authors

Rights and permissions

Reprints and Permissions

About this article

Cite this article

Stodder, J. The evolution of externality rights: Flexibility versus ambiguity. Eur J Law Econ 3, 61–81 (1996). https://doi.org/10.1007/BF00149083

Download citation

Keywords

  • property rights
  • externality
  • incentives
  • Coase theorem