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Economic Efficiency in Law and Economics

Richard O. Zerbe Jr.

In this path-breaking book, Richard Zerbe introduces a new way to think about the concept of economic efficiency that is both consistent with its historical derivation and more useful than concepts currently used. He establishes an expanded version of Kaldor–Hicks efficiency as an axiomatic system that performs the following tasks: the new approach obviates certain technical and ethical criticisms that have been made of economic efficiency; it answers critics of efficiency; it allows an expanded range for efficiency analysis; it establishes the conditions under which economists can reasonably say that some state of the world is inefficient. He then applies the new analysis to a number of hard and fascinating cases, including the economics of duelling, cannibalism and rape. He develops a new theory of common law efficiency and indicates the circumstances under which the common law will be inefficient.
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Chapter 5: Rights and the Relationship of Law to Efficiency

Richard O. Zerbe Jr.


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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