Paternalism vs. Externalities: Limiting Contractual Freedom

TL;DR

The law can limit freedom of contract by prohibiting certain contracts and terms, with normative justifications based on protecting parties within or outside the contract.

Transcript

the law can limit contractual freedom by prohibiting certain kinds of contracts thus federal law prohibits the sale of human organs these laws that limit freedom of contract create in alienable rights and duties the law can also limit contractual freedom by prohibiting certain terms in agreement these laws create mandatory are immutable rules manda... Read More

Key Insights

• 👮 The law can limit contractual freedom by prohibiting certain contracts and terms.
• ❓ There are two main justifications for restricting freedom of contract: paternalism and externalities.
• ❓ Some limitations on contracts may be motivated by a combination of paternalism and externality concerns.
• 🥳 Externalities concerns can be addressed by giving third parties veto rights over contracts.
• 🥳 Paternalism concerns can be addressed by improving parties' ability to protect themselves and providing better information.
• ☸️ Prohibitions on contracts involving pollution or harm to others are justified by externalities concerns.
• 🚫 Infants are prohibited from contracts due to paternalism concerns.

Questions & Answers

Q: What are some examples of contracts that are prohibited due to externalities?

Contracts that involve polluting or assassinating someone, as these can have negative effects on third parties and society as a whole.

Q: Why are infants prohibited from entering contracts?

Infants are not able to provide informed consent, and there is a paternalism concern that they may not understand the consequences of their decisions.

Q: How can externalities concerns be addressed in contracts?

One solution is to give third parties a right to veto contracts that adversely affect them, effectively making them a part of the contract and eliminating the externality concern.

Q: How can paternalism concerns be addressed in contracts?

Rather than eliminating contractual freedoms, paternalism concerns can be addressed by improving the ability of parties to protect themselves and providing better information about the consequences of their decisions.

Summary & Key Takeaways

• The law restricts contractual freedom by prohibiting certain contracts and terms, creating mandatory rules.

• Two main justifications for restricting freedom of contract are paternalism (concern for parties' capacity to consent) and externalities (concern for third-party effects).

• Some limitations may be motivated by both paternalism and externality concerns, such as the prohibition of prepayment penalties in mortgages.