2. Causation: not accurate to say cedar owners caused harm to apple growers. Harm and benefits are RECIPROCAL; cedar hurting apple, but apple hurting cedar by being susceptible to the disease.
3. So there will be harm; it's just a policy decision of who should pay for it.
4. Miller can be explained in two ways:
a. Economics: there were high transaction costs (no Coase), so to get the efficient result it was necessary to put the entitlement on apple growers, who could theoretically compensate the cedar grower (Kaldor-Hicks).
b. Politics (theory of collective action): Apple growers were small group of highly interested people, with low costs of organization (no free riders), which results in more effective lobby.
II. Property Rights and Economic Efficiency
A. Economic efficiency is measured by two theories:
1. Pareto efficiency is a situation where no allocation of resources exists that can make someone better off without making someone else worse off.
2. Kaldor-Hicks efficiency is based on willingness and ability to pay. It is where total benefits exceed costs such that if one party benefits at the expense of another, the benefited party can theoretically compensate the injured party.
a. there is no binding requirement that the benefited party must compensate the loser
b. one person can be hurt if benefits still exceed costs
c. can't measure preferences, comes down to $ because that's the only way to measure costs/benefits
B. Coase theorem: in a world of zero transaction costs and clearly defined property rights, the efficient allocation of resources will occur regardless of who gets the legal entitlement.
1. In every case, the injured party will bargain with the other party and "bribe" him to stop or curtail the harmful activity.
2. No transaction costs is a big assumption; if there are transaction costs, where you put the legal entitlement is important because the efficient result may not occur.
a. Strategic bargaining (bilateral monopoly) may breakdown an agreement by demanding compensation so high that it would not be profitable for the other party to pay you
b. Also, if a large group of people is involved on either side, a breakdown in bargaining is likely.
i. FREE RIDER problem occurs when large group is forced to compensate, every member has incentive not to pay, and still reap benefits
ii. HOLDOUT problem occurs when one member of compensated group holds out for an unreasonably high price, thinking that other side will pay no matter what.
3. Coase forces us to examine the issues of causation carefully and take into account the reciprocality of harms and benefits.
4. It also helps us determine situations where law is and is not necessary to create efficient situations.
a. If we don't have to be concerned with efficiency (because there are no transaction costs), then we can focus on distribution.
b. It helps us decide which actions the government should take to lower transaction costs and establish clear property rights. For example, class actions may help clear bargaining hindrances.
C. Schlag argues that if efficiency is your main concern, gov't should give entitlement to who values it most, so there are no transaction costs.
D. Economics is a valuable tool because it says a lot about human nature.
1. All things being equal, more is better than less.
2. Self interest motivates people.
E. But economic efficiency doesn't say much about a fair distribution of wealth, and it includes a circular argument: What is optimal is what people are willing and able to pay for, and what people are willing and able to pay for is optimal.