Torts - Cases, Principles, and Institutions Fifth Edition, 2016a

Witt & Tani, TCPI 2. Intentional Harms
entitlement to the doctor, who thereafter had the power to stop the confectioner from using the
loud machines. But Coase observed that a rational doctor would have been willing to
waive his right and allow the machinery to continue in operation if the confectioner
would have paid him a sum of money which was greater than the loss of income
which he would suffer from having to move to a more costly or less convenient
location or from having to curtail his activities at this location or, as was suggested
as a possibility, from having to build a separate wall which would deaden the noise
and vibration.
Ronald N. Coase, The Problem of Social Cost, 3 J.L. & ECON. 1, 9 (1960). In turn, the baker
“would have been willing to do this,” if and only if “the amount he would have to pay the doctor
was less than the fall in income he would suffer if he had to change his mode of operation at this
location, abandon his operation or move his confectionery business to some other location.” Id.
The only real question, in Coase’s account, was whether “continued use of the machinery adds
more to the confectioner’s income that it subtracts from the doctor’s.” If it did, then the baker
would buy from the doctor the right to continue with the machinery. Indeed, Coase’s insight was
that the same outcome would obtain no matter whether the court found for the doctor or the baker.
But now consider the situation if the confectioner had won the case. The
confectioner would then have had the right to continue operating his noise and
vibration-generating machinery without having to pay anything to the doctor. The
boot would have been on the other foot: the doctor would have had to pay the
confectioner to induce him to stop using the machinery.
Just as in the first scenario in which the doctor won, the parties will trade the entitlement so that
the party valuing it most ends up with it. As Coase concludes: “With costless market transactions,
the decision of the courts concerning liability for damage would be without effect on the
allocation of resources.” Coase’s point is that where trading is possible, entitlements will tend to
go to their highest value users. Id. at 9-10.
At around the same time Coase wrote The Problem of Social Cost, Guido Calabresi made
a similar observation in a classic article, The Decision for Accidents:
[A]lthough there are situations in which the choice of an original loss bearer is
relatively easy because it . . . makes no difference . . . there are other situations in
which the choice of an original loss bearer or, if you wish, the question of what loss
belongs to what activity, is not only important, but hard!
Guido Calabresi, The Decision for Accidents, 78 HARV. L. REV. 713, 732 (1965). Calabresi
emphasized the pervasiveness of transaction costs, where Coase emphasized the power of
markets. But together their insights have produced elaborate literatures in law and economics in
the years since.
Some of the claims in the law and economics literature are quite contentious because they
make strong assertions or assumptions about the efficiency of markets. But the basic point—that
common law adjudications are often not the final word on the allocation of an entitlement—is a
straightforward, important, and widely accepted one.
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