Research Handbooks in Law and Economics series
Edited by Kenneth Ayotte and Henry E. Smith
Chapter 15: The Economics of Nuisance Law
Keith N. Hylton* I. INTRODUCTION Nuisance law has been described as an impenetrable jungle.1 Judging by the dearth of efforts to codify it in the form of blackletter rules, this appears to have been an opinion shared by most legal scholars.2 The lack of clearly stated rules has probably delayed attempts to use economics to explain nuisance doctrine. In spite of this, some efforts have been made to provide an economic theory of nuisance law. Most of those efforts, stemming from Coase,3 have relied on the theory of transaction costs to explain the functional distinction between nuisance and trespass law.4 But the core of nuisance doctrine involves balancing tests and limitations on scope that are not easily understood on the basis of transaction cost theory. This chapter aims to explain the core doctrines of nuisance law. Instead of transaction cost analysis, I will rely on an approach that I will refer to as the externality model. In contrast to the traditional legal commentary, I find nuisance law a coherent body of rules that serves an explainable function. Nuisance law optimally regulates activity levels. Nuisance law induces actors to choose socially optimal activity levels by imposing liability when externalized costs are far in excess of externalized benefits or far in excess of background external costs. Proximate cause doctrine plays an important role, in this analysis, in generating optimal activity levels. II. ECONOMICS OF NUISANCES The literature on the economics of nuisance law can be divided into two branches. One is...
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