Property Rules vs. Liability Rules

Transcript

to really know the contours of legal right you need to know not only the substantive content of the right but also you need to know how the right is protected in an immensely important article Guido Calabresi now a judge on the Second Circuit of the United States Court of Appeals and Doug Melamed who was a former head of the Justice Department's An... Read More

Key Insights

• 📏 Legal entitlements can be protected by either property rules or liability rules based on the nature of the right and the circumstances.
• 😘 Property rules are more efficient when transaction costs are low and parties can easily contract.
• ✋ Liability rules are more efficient when transaction costs are high and contracting is infeasible.
• 📏 Property rule punishments deter potential takers, while liability rule compensates for the loss.
• 🗯️ Constitutional rights, such as the Full Faith and Credit Clause, also require examination of the type of protection needed.

Questions & Answers

Q: What is the difference between property rules and liability rules?

Property rules seek to deter third parties from taking an entitlement without consent, often through jail or punitive fines. Liability rules instead require compensation when an entitlement is taken without consent. The former focus on potential takers, while the latter focus on compensating entitlement holders.

Q: When are property rules more efficient than liability rules?

Calabresi and Melamed suggest property rules are more efficient when transaction costs are low and the parties can readily negotiate. Strong punishment then channels potential takers toward consensual transfers through contracts.

Q: When are liability rules more efficient?

Liability rules are more efficient when transaction costs are high or the parties have no practical opportunity to contract. They allow a non-consensual taker to approximate a market exchange by paying compensation afterward.

Q: Can one legal entitlement receive both kinds of protection?

Yes. Most areas of law use mixtures of property and liability rules, and the protection may depend on who takes the entitlement or how the taking occurs. A home, for example, receives different protection against a private trespasser than against a government taking.

Q: How is a homeowner protected against private and government takings?

A home is protected against a private citizen by the property rule of criminal trespass. When the government takes the property, the Constitution’s Takings Clause instead provides a liability rule requiring just compensation.

Q: Why does the law treat an intentionally taken car differently from a negligently destroyed car?

If someone intentionally takes a car, criminal law may send that person to jail, reflecting property-rule protection. If someone negligently destroys the car, tort law generally requires compensation, reflecting liability-rule protection.

Q: How does the dock-in-a-storm example illustrate a liability rule?

Under normal conditions, a dock owner’s exclusive-use entitlement is protected by a property rule because others can bargain to rent the dock. During a severe storm, the doctrine of necessity permits a ship owner to use it without consent and pay reasonable compensation because bargaining may be impossible.

Q: How are contractual entitlements normally protected?

Contract law normally protects contractual entitlements with the liability rule of expectation damages, which compensates the non-breaching party. It does not ordinarily require specific performance backed by the threat of jail, although some contractual entitlements receive stronger property-rule protection.

Summary & Key Takeaways

• Legal entitlements are protected through property rules, which deter non-consensual taking through punitive measures, or liability rules, which compensate for the loss of an entitlement.

• Property rules are designed for deterrence, while liability rules are designed for compensation.

• The extent of protection depends on the party taking the entitlement and the circumstances of the taking.