Law and Economics
Law and Economics
ByJenny B. Wahl
Edition 1st Edition
First Published 1999
eBook Published 13 September 2013
Pub. location New York
Pages 376 pages
eBook ISBN 9781315053370
Wahl, J. (1999). Law and Economics. New York: Routledge, https://doi.org/10.4324/9781315053370
First Published in 1999. Routledge is an imprint of Taylor & Francis, an informa company.
TABLE OF CONTENTS
is thereby reduced considerably. The point is important enough to eluci-date. Suppose an owner of a communal land right, in the process of plow-ing a parcel of land, observes a second communal owner construct-ing a dam on adjacent land. The farmer prefers to have the stream as it is, and so he asks the engineer to stop his construction. The engineer says, "Pay me to stop." The farmer replies, "I will be happy to pay you, but what can you guarantee in return?" The engineer answers, "I can guarantee you that I will not continue constructing the dam, but I cannot guarantee that another engineer will not take up the task be-cause this is communal property; I have no right to exclude him." What would bea simple negotiation between two persons under a pri-vate property arrangement turns out to be a rather complex negotia-tion between the farmer and everyone else. This is the basic explana-tion, I believe, fo r the preponderance of single rather than multiple owners of property. Indeed, an increase in the number of owners is an increase in the communality of property and leads, generally, to an in-crease in the cost of internalizing. The reduction in negotiating cost that accompanies the private right to exclude others allows most externalities to be internalized at rather low cost. Those that are not are associated with activities that generate external effects impinging upon many people. The soot from smoke affects many homeowners, none of whom is willing to pay enough to the factory to get its owner to reduce smoke output. All homeowners together might be willing to pay enough, but the cost of their getting together may be enough to discourage effective market bargaining. The negotiating problem is compounded even more if the smoke comes not from a single smoke stack but from an industrial district. In such cases, it may be too costly to internalize effects through the market-place. Returning to our land ownership paradigm, we recall that land was distributed in randomly sized parcels to randomly selected owners. These owners now negotiate among themselves to internalize any re-maining externalities. Two market options are open to the negotiators. The first is simply to try to reach a contractual agreement among own-ers that directly deals with the external effects at issue. The second op-tion is for some owners to buy out others, thus changing the parcel size owned. Which option is selected will depend on which is cheaper. We have here a standard economic problem of optimal scale. If there exist constant returns to scale in the ownership of different sized parcels, it will be largely a matter of indifference between outright purchase and contractual agreement if only a single, easy-to-police, contractual agreement will internalize the externality. But, if there are several ex-ternalities, so that several such contracts will need to be negotiated, or
those involving mergers. What shareholders really own are their shares and not the corporation. Ownership in the sense of control again be-comes a largely individual affair. The shareholders own their shares, and the president of the corporation and possibly a few other top executives control the corporation. To further ease the impact of management decisions on sharehold-ers, that is, to minimize the impact of externalities under this owner-ship form, a further legal modification of rights is required. Unlike partnership law, a shareholder may sell his interest without first ob-taining the permission of fellow shareholders or without dissolving the corporation. It thus becomes easy for him to get out if his preferences and those of the management are no longer in harmony. This "escape hatch" is extremely important and has given rise to the organized trad-ing of securities. The increase in harmony between managers and shareholders brought about by exchange and by competing managerial groups helps to minimize the external effects associated with the corpo-rate ownership structure. Finally, limited liability considerably re-duces the cost of exchanging shares by making it unnecessary for a purchaser of shares to examine in great detail the liabilities of the cor-poration and the assets of other shareholders; these liabilities can ad-versely affect a purchaser only up to the extent of the price per share. The dual tendencies for ownership to rest with individuals and for the extent of an individual's ownership to accord with the minimiza-tion of all costs is clear in the land ownership paradigm. The applica-bility of this paradigm has been extended to the corporation. But it may not be clear yet how widely applicable this paradigm is. Consider the problems of copyright and patents. If a new idea is freely appropria-ble by all, if there exist communal rights to new ideas, incentives for developing such ideas will be lacking. The benefits derivable from these ideas will not be concentrated on their originators. If we extend some degree of private rights to the originators, these ideas will come forth at a more rapid pace. But the existence of the private rights does not mean tha t their effects on the property of others will be directly taken into account. A new idea makes an old one obsolete and another old one more valuable. These effects will not be directly taken into ac-count, but they can be called to the attention of the originator of the new idea through market negotiations. All problems of externalities are closely analogous to those which arise in the land ownership example. The relevant variables are identical. What I have suggested in this paper is an approach to problems in property rights. But it is more than that. It is also a different way of viewing traditional problems. An elaboration of this approach will, I hope, illuminate a great number of social-economic problems.
VOL. 76 NO. 2 SITING OF HAZARDOUS FACILITIES 287 Over half say they would accept such an scientific uncertainties about the risks they edifice if it were at least a mile from their pose to the public. At the local level, the houses. Majority acceptance of either the siting issue appears as an abrupt threat that industrial plant or the coal-fired electric involves a visible source (the site) for which power plant, facilities that are likely to be clear responsibility can be ascribed (the de-perceived as dirty and potentially obnoxious veloper)—characteristics that heighten pub-neighbors, occurs at approximately 9 miles. li c awareness of the perceived risk. In con-In contrast, the two facilities posing poten-trast to nuclear power plants or industrial tially catastropic but extremely low probabil-plants, for which there is usually a local ity risks, a nuclear power plant and a new, constituency, a HWF provides few benefits well-regulated disposal site for hazardous such as jobs or tax revenues (A. D. Tarlock. wastes, reach majority acceptance only at the 1984). Finally, residents may fear the decline 50-mile mark, a distance "premium" of 49 of local property values. miles from our arbitrarily selected baseline. The degree of concern about the risk ex-This suggests a crucial difference between the ternality posed by HWFs i s strongly in-siting of an ordinary industrial facility and a fluenced by the nature of the perceived risk. HWF: the "neighbors" affected by the latter The risks posed by thes e facilities include involve entire communities. Another differ-characteristics which have been shown in ence is the number of people who feel other contexts to be strongly associated with strongly about the issue. Whereas only 9 risk aversion (Paul Slovic et al., 1980). They percent expressed the extreme view that they are perceived as: 1) involuntary (imposed on did not want the two industrial facilities as the community without its consent); 2) lethal; neighbors "at any distance," 29 percent ex-3) memorable (due to being subject to arrest-pressed such a view about the two "risky" ing media coverage); 4) not susceptible to facilities. personal control; 5) persistent (having the potential to effect future generations); and 6) III. Protest Mobilization unfair (since most of the benefits accrue to those living far beyond the geographic area At the local level, the aversion to HWFs is subject to risk). translated into active protest whenever new Two characteristics of siting controversies facilities are proposed. Why do local resi-help lower mobilization costs. First, the local dents protest? Mobilization is facilitated by: character of the controversy makes it easy to 1) the high cost perceived to be imposed on identify and communicate with potential the local community by the HWF, 2) the low protesters. Geographic concentration also al-cost of protesting, and 3) the high probabil-lows use of preexisting social networks and ity of success. institutions (such as churches and neighbor-First, HWFs are a prime example of a hood organizations) for leader and member regulated entity whose costs and benefits are recruitment purposes. This reduces organiza-so distributed that the former are con-tional costs and makes free riding easier to centrated, while the latter are distributed, far manage through informal social control in beyond the local area. The principal costs the form of pressure to participate. Second, believed to be posed by HWF are the health public participation procedures used in many risks posed by groundwater and soil con-siting processes, such as hearings, offer a tamination in the case of landfills, and con-focal point both for organizing and for news tamination of the air by cancer-causing sub-media coverage, and easy access to decision stances in the case of incineration facilities. makers. The high level of perceived risks may be For individual participants, the cost of attributed both to the institutional context in mobilization involves time and money. This which these risks occur and to the nature of includes time spent in activities such as re-the risks themselves. cruitment, fund raising, and organizational The news media have highlighted past maintenance, as well as time spent in protest failures to handle toxic wastes properly and activities such as writing letters, working on
VOL. 76 NO. 2 SITING OF HAZARDOUS FACILITIES 289 developer meeting state requirements. The minister and enforce and contract estab-terms of the arrangement would be proposed lished by the referendum? This would un-by the developer and incorporated into the doubtedly fall to the local political authori-ballot proposal. Both the develope r and the ties first, and ultimately to the state. Doubts state, to the extent that it desired the siting, about enforcement would only increase the would have strong incentives to develop win-payments required to pass the referendum. ning proposals. Developers obviously woul d There must be sufficient administrativ e flexi-aim at selecting potential site s where voters bility to respond to new EPA regulations and would be more likely to agree to the least to technological change. How shoul d the expensive package of measures designed to boundaries defining who should be allowed compensate a community for accepting the to vote on the proposal be defined? This is HWF. Designing the package and promoting an admittedly difficult political question it would necessarily involve the equivalent of which the state legislature would have to a public participation program. Naturally the decide. costs of the package woul d be passed on to enterprises that wished to use the facility. In Assigning the right to refuse a risk exter-order for such a proposal to be viable, there nality to those who claim it, and exercising would have to be enough technically accept-coercion only to the extent of requiring them able sites available so that the political market to vote on legitimate offers to compensate could be sustained, and n o single community them for accepting the risk, has several de-would have a siting monopoly. sirable properties in this case. The developer and the state have stron g incentives to ad-A large number of possible compensatory dress the issues of most concern to the com-measures have been suggested in recent years. munity, and the state's role is more con-The contents of a developer's particular sistent with its interest i n the outcome. The package could vary according to the nature community's incentive to be intransigent is of the facility, the characteristics of the site, minimized because it has the power to say and the community's concerns. Th e types of no. The community is presumably protected measures which might be included are: from unwittingly accepting too grea t a risk guarantees against property value declines, because the facility would have to meet strict incentive payments to the community (which federal and state safety regulations. More-could be earmarked to reduce property taxes over, the debate occasioned by the refer-or for other purposes), outside monitoring, endum should ensure close scrutiny of the
THE LIGHTHOUSE IN ECONOMICS the Department, there are also present at the conference members of the lights Advisory Committee, a committee of the Chamber of Shipping (a trade association) representing shipowners, underwriters and shippers. The Lights Advisory Committee, although without statutory authority, plays an important part in the review procedure and the opinions it expresses are taken into account both by the lighthouse authorities in drawing up their budgets and by the Department in deciding on whether to approve the budgets. The light dues are set by the Department at a level which will yield, over a period of years, an amount of money sufficient to meet the likely expenditures. But in deciding on the program of works and changes in existing arrangements the participants in the conference, and particularly the mem-bers of the Lights Advisory Committee, have regard to the effect which new works or changes in existing arrangements would have on the level of light dues. The basis on whic h light dues are levied was set out in the Second Schedule to the Merchant Shipping (Mercantile Marine Fund) Act of 1898. Modifica-tions to the level of the dues and in certain other respects have been made since then by Order in Council but the present method of charging is essen-tially that established in 1898. The dues are so much per net ton payable per voyage for all vessels arriving at, or departing from, ports in Britain. In the case of "Home Trade" ships, there is no further liability for light dues after the first 10 voyages in a year and in the case of "Foreign-going" ships, there is no further liability after 6 voyages. The light dues are different for these two categories of ship and are such that, for a ship of given size, 10 voyages for a "Home Trade" ship yield approximately the same sum as 6 voyages for a "Foreign-going" ship. Some categories of ship pay at a lower rate per net ton: sailing vessels of more than 100 tons and cruise ships. Tugs and pleasure yachts make an annual payment rather than a payment per voyage. In addi-tion, some ships are exempt from light dues: ships belonging to the British or Foreign Governments (unless carrying cargo or passengers for remunera-tion), fishing vessels, hoppers and dredges, sailing vessels (except pleasure yachts) of less than 100 tons, all ships (including pleasure yachts) of less than 20 tons, vessels (other than tugs or pleasure yachts) in ballast, or put-ting in for bunker fuel or stores or because of the hazards of the sea. All these statements are subject to qualification. But they make clear the general nature of the scheme. The present position is that the expenses of the British lighthouse service are met out of the General Lighthouse Fund, the income of which comes from light dues. In addition to expenditures on lighthouses in Great Britain
OVER the last few decades, the debate over whether goods and services should be provided by the government or by private enterprise has been
more or less costly. But that cost depends on the existing technologies of collection. When it becomes technologically cost effective to collect for the provision of a good, private parties will find it worth their while to provide the good. Calling such goods "public goods" misses the
foreign or nonlocal vessels, it may be hard for the lighthouse operator to do this. He may not have reasonably cheap means at his disposal to announce his intention to all possible passing ships and to bind himself to follow that intention. If he cannot do this, many ships may choose to avoid the lighthouse by taking more circuitous routes or by traveling by day only. As a consequence, the lighthouse's revenues would be de-pressed and would threaten the economic viability of the enterprise.
for the provision of one good may be greater than for other goods. This is exactly the case with lighthouses. Instead of a dichotomy between private and government provision, we might imagine a continuum between the poles of pure private provision with no government support to full governmental provision out of general revenues. In the case of lighthouses, it might include these different points: (1) private provision with no government enforcement of property or contract rights; (2) private provision with government enforcement of property and contract rights only; (3) private provision with government fixing rates, granting monopolies, and enforcing collection of specified user levies; (4) government provision from collection of specified user levies; and (5) government provision from general revenues. In fact, the lighthouses that have existed fall into categories 3, 4, or 5. They existed because the government was able to provide a feasible technology to address the excludability and small-numbers problem. Those problems did not necessitate that the government "own" the lighthouses or provide lighthouse services out of general revenues as some economists suggest. As Coase points out, many lighthouses were "owned" by private individuals in the sense that private individuals sup-plied the capital to build the lighthouse. Moreover, it may have been, as Coase infers, that private ownership enjoyed a decided advantage over government ownership (whether of category 4 or 5) in reducing adminis-trative costs. There are, however, no examples of lighthouses operating
is a choice of a specific institutional type or form to govern lighthouse services. For example, when the available private technology of collec-tion and exclusion is less effective than the government's enforcement powers, one should expect government support for the collection pro-cess. Likewise, when it is difficult for lighthouse operators to make credi-ble claims that they will adhere to afixedp rice schedule and not try to charge a passing shi p more, one should expect the government to perform this credibility function by specifying a fixed schedule of legal charges and punishing departures from it. The government provides a cost-effective technology that makes provision of the service possible. The institutional choice is thus not the stark one that the current debate of full private provision versus full governmental provision suggests. There may be a mixed system in which the government provides specific services that make the provision of a good economical, even if the pro-vider remains private. In some cases, those services will be above and
hermit, tried to provide his lighthouse on a charitable basis. He quickly discovered that he required more certain income and enlisted the mayor of Hull to petition the king for a grant to collect dues from each ship entering the harbor. The Youghal lighthouse on the southern coast of
rized fee of twelve pence on each passenger and a yearly toll on fishing boats. On complaints to members of Parliament by adversely affected mariners, the Parliamentary Committee of Grievances "decided that Reading's patent formed 'a common grievance' and advised the king to annul it." In response, it appears that Reading ceased this practice and
British shipping. While advocates were not entirely clear, there was a sense that the American taxpayer, not the American consumer, was the more appropriate beast of burden for lighthouse services. Obviously, governmental provision from general revenues has the ad-vantage of avoiding by fiat the problems of lighthouse provision identified above. While such an approach poses added administrative problems, as Coase argued, these problems do not appear to have been serious. Al-though Alexander Hamilton and his successors appear to have been fine administrators concerned with conserving public funds, the real reason may be that, by the turn of the twentieth century, the role of the light-house began to decline. With the subsequent development of the radio and other navigational aids, the benefits of lighthouses have been ex-ceeded by their production costs even with government assistance. All signs indicate that the days of lighthouses are numbered." This article has pointed out that the stark dichotomy between "pri-vate" provision and ''government" provision of goods and services that stalks many general discussions of public policy is, at best, a useless abstraction and, at worst, a barrier to understanding how goods and ser-vices are provided in the real world. The dichotomy veils the great variety of institutional structures in which the provision of goods and services takes place. The case of the lighthouse is one in which the specific nature of the problems posed, the wider legal rules, and the available technology all helped determine the institutional form of the service. Historically, the institutions that provided lighthouse services relied more on govern-mental assistance than is the case with other services and goods. In many cases, however, the level of governmental involvement has fallen far short of full government provision out of general revenues. Particularly, as technology that provides cheaper solutions to the problem of exclusion is developed, one might expect to see changes in the institutional struc-tures used to provide other goods and services. In fact, recent changes in the purpose of lighthouses points this out. Today, many lighthouses are kept more as historical landmarks than as navigational guides. In this newer role, the problem of excludability may
be less severe. As most tourists know, it is quite easy to exclude those who are unwilling to pay the entrance fee to climb to the top of a light-house. While free riders can still view the lighthouse from afar, only those who pay can experience what it is like to look out over the sea from the lonely vantage point of the lighthouse keeper. Moreover, while light-houses are great fun, tourists enjoy a competitive market seeking their holiday dollar. Ironically, in this new function, the lighthouse is no longer in need of governmental aid to make it a viable enterprise.
Instruction 5 stated: "You are hereby instructed that one may use reason-able force in the protection of his property, but such right is subject to the qualification that one may not use such means of force as will take human life or inflict great bodily injury. Such is the rule even though the injured party is a trespasser and is in violation of the law himself." Instruction 6 stated: "A n owner of premises is prohibited from willfully or intentionally injuring a trespasser by means of force that either takes life or inflicts great bodily injury; and therefore a person owning a premise is prohib-ited from setting out 'spring guns' and like dangerous devices which will likely take life or inflict great bodily injury, for the purpose of harming trespassers. The fact that the trespasser may be acting in violation of the law does not change the rule. The only time when such conduct of setting a 'spring gun' or a like dangerous device is justified would be when the trespasser was commit-ting a felony of violence or a felony punishable by death, or where the trespasser was endangering human life by his act." . . . The overwhelming weight of authority, both textbook and case law, supports the trial court's statement of the applicable principles of law....
whole period, 1954-83, there were on average 52.2 fouls called per game. Hence, the effect of adding the third official was substantial—a 50 percent increase in the number of enforcers was associated with a 34 percent reduction in the number of arrests. The other results in table 1 are consistent with rational behavior on the part of the participants. The time trend has been to increase the number of fouls called by about two per game per year. SCORE, as a proxy for speed and action on the court, is positively associated with more fouls per game; more action begets more fouls although the direction o f effect could be the opposite. Each 10 points scored is associated with about one more foul. The better either team shoots, as proxied by FREEPCT and FGPCT, the less it is fouled. On average a 1 percentage point increase in free throw accuracy by one team is associated with about eight fewer fouls per game by the opponent. The greater the difference between the heights of the two teams, the more fouls per game. The more disparate is the experience of the two coaches in a given game, the more fouls are called. The opposite is true for players' experience. Referees' experience has a negative and significant coefficient. Attendance is a proxy for the importance of the outcome of the game. The two rule changes, SHOOT and
official era. A positive association between officials and output would imply that the crime rate declined. In a purely technical sense, output on a basketball court is the score of each team. This does not mean that the economic output of a basketball game is the score. Winning the game may be paramount to the fans. As a wise coach once observed, an ugly win is better than a pretty loss. Nonetheless, we believe that economic output and techni-cal output are monotone transformations of each other.