ABSTRACT
Before we can set out to study nuisance, accidents and contracts in detail, that is to say, cases where the possession and the use of property rights are impaired, we ought to develop some tools. Essentially, there are two such tools we need to consider here. The first is labelled ‘externalities’. An externality obtains whenever a beneficial activity by one person interferes with the activities of third parties in a way which causes harm. We will see later, however, that the interference could also be beneficial, but we are more concerned about harm here. Interestingly we can distinguish two cases: one is the typical situation, where the victim can be identified ex ante; to illustrate, this holds in the case of smoke from a barbecue party creeping over the neighbour’s garden, thus causing nuisance to her. The other situation is such that a victim cannot be identified beforehand, as is the case in an accident because of reckless driving (hitting a certain person on purpose falls within a different category of action, namely that of a criminal offence). Both cases of (negative) externality show obstacles to overcoming them or acknowledging them by means of compensation. With the victim known ex ante, negotiations could be hampered by the unwillingness of one or both sides to comply, because of the power they have compared with the opponent. When the victim is not known ex ante then negotiations can hardly take place. Note that there are obstacles in both cases that fall into the category of ‘transaction costs’. We will deal with these types of problem in the first part of this chapter.
