New Horizons in Law and Economics series
Chapter 5: Rights and the Relationship of Law to Efficiency
5. Rights and the relationship of law to efﬁciency 5.1 THE LAW AND EFFICIENCY This chapter considers efﬁcient rules for the assignment of rights. The law inﬂuences these rules in two ways. First, the law affects issues of economic standing, which determines whose values are to be counted, and what goods are legitimate and should be counted. Second, the law determines how values are to be counted: whether a WTP or a WTA should be used. In large part, these are questions of legal ownership. The law affects the psychological reference points, which determine felt ownership. One cannot lose what one does not have, nor gain what one already has a right to. Yet ownership also affects the choice of the measure of value, since what one is willing to accept to bear a loss of a good may be different than what one would pay to obtain it. I will show, ﬁrst, that even the efﬁciency part of the Coase Theorem applies only to commercial goods, and that otherwise it is both technically wrong and misspeciﬁed, since it fails to take into account the divergence between WTP and WTA. I will show that where no psychological ownership exists, rights should be assigned to the highest bidder, subject to the regard for others. The regard for others, however, may lead society to experience a loss unless the right is given to a person who is not the highest bidder – in which case it would not...
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