Property Rules, Liability Rules and Inalienability: One View of the Cathedral
Encyclopedia
Property Rules, Liability Rules and Inalienability: One View of the Cathedral is an article in the scholarly legal literature (Harvard Law Review
, Vol.85, p.1089, April 1972), authored by Judge Guido Calabresi (of the United States Court of Appeals
for the Second Circuit) and A. Douglas Melamed
, a legal scholar currently in private practice.
The article is a seminal contribution to the field of law and economics
, offering an ambitious attempt to treat various areas of the law through a uniform approach. It is grounded in the fact that the various interests created by the law enjoy various degrees and methods of protection. Certain interests are deemed human rights and inalienable as such. Other interests are protected by the criminal law
; meaning that the state will bear the cost of initiating legal action if violations of such interests are brought to its attention; here begins the criminal law. The burden of proof required for the state to prevail in such cases is higher; thus the beginning of criminal procedure
. Other interests give an injured party merely the option of petitioning for injunctive relief. There are yet other interests whose violation gives the injured party no more than the right to seek monetary damages, and only if the victim is willing to bear the costs of initiating legal action; such interests make up the essence of civil law
. The burden of proof in such cases is less than in actions initiated under criminal law; thus the beginning of civil procedure
.
’s series of paintings of Rouen Cathedral
, modestly implying that the authors’ ensuing academic analysis is but one look at a subject that can be considered from various points of view. The primary thesis of the article focuses on the notion of “entitlements,” or rights, which can be protected by either property, liability, or inalienability rules. The authors’ main goal, as noted in the Introduction, is to provide a conceptual framework within which the separate legal subject areas of Property and Torts can be approached from a unified perspective. The article then undertakes an analysis of the classic Law and Economics “Pollution Problem” and an analysis of various criminal sanctions, all within the new framework the authors have put forth.
” world where either the strongest or shrewdest emerge victorious in any conflict. Thus, as the authors point out, the fundamental thing that law (the setting of entitlements) does is to decide which of the conflicting parties will be entitled to prevail. The authors also point out, however, that successfully enforcing these entitlements (the law) is as important as establishing them in order to avoid the “might makes right” world. From this notion, the authors consider three types of entitlements: entitlements protected by property rules, entitlements protected by liability rules, and inalienable entitlements. According to Calabresi and Melamed, an entitlement protected by a property rule is one that must be bought in a voluntary transaction in which the value of the entitlement is agreed upon by the buyer and seller. With an entitlement protected by property rule, a collective decision is made as to who is to be given the initial entitlement, but not as to the value of the entitlement itself. An entitlement protected by a liability rule, however, involves a collective decision as to the value of the entitlement without the need for a voluntary transaction. A destroyer of an initial entitlement protected by a liability rule must pay an objectively valued sum to the holder of the entitlement. The final entitlement the authors consider in the article is an entitlement protected by an inalienability rule. As the authors define it, an entitlement is inalienable to the extent that its transfer is not permitted between a willing buyer and a willing seller. Under this rule, the state intervenes to determine the initial entitlement, to forbid its sale or purchase, and to determine compensation to be paid if it is sold or destroyed. To conceptualize these three entitlements, the authors use the example of an individual homeowner whose house may be protected by a property rule where another individual wishes to purchase it, a liability rule where the government seizes the home by eminent domain, or an inalienability rule where the homeowner is drunk or incompetent. Having defined the concept of entitlements and laid out the three rules that they will focus on, the article proceeds to explore the following two questions: (1) In what circumstances should a particular entitlement be granted? And, (2) In what circumstances should a property, liability or inalienability rule be used to protect an entitlement?
Coincidentally, at approximately the same time that Calabresi and Melamed postulated their Rule 4 as an additional approach to the Polluter / Resident problem, an Arizona
state supreme court decision independently illustrated the practical application of the “Rule 4” approach in deciding a case that had come before the court. In Spur Industries, Inc. v. Del E. Webb Dev. Co., 494 P.2d 700 (Ariz. 1972), Del Webb
, an Arizona real-estate developer developing a retirement community, sued for an injunction against Spur Industries, a pre-existing feedlot owner whose activities resulted in an alleged nuisance to the encroaching retirement community (causing Del Webb difficulties in selling properties close to the feedlot). In handing down its decision, the Arizona state supreme court ruled that Spur Industries’ activities did create a nuisance, but Del Webb had come to the nuisance and brought its unwitting retirees along with it. Balancing the various factors in the case, including the fact that Del Webb but not Spur Industries could have foreseen the nuisance problem and the fact that the residents of the retirement community had been dragged to the nuisance unwittingly, the court ruled that Spur Industries would be forced to move, but that Del Webb had to indemnify the business for its troubles.
Though independent of Calabresi and Melamed’s article, Spur Industries proved that “Rule 4’s” novel approach could be practicably applied. Furthermore, Spur Industries showed that a successful balancing of efficiency, distributional, and other justice concerns, concerns articulated in the article that Calabresi and Melamed intended Rule 4 to blend, could be achieved.
A. Mitchell Polinsky, Josephine Scott Crocker Professor of Law and Economics at Stanford Law School
, argued that transactions costs are not the only impediments to bargaining, there is also the problem of assessment costs. Assessment costs are the costs associated in obtaining and processing information. There is a long understanding in the academic community that when transaction costs are high a liability rule will help substitute for bargaining. Judges, however, may have a difficult time in obtaining and processing information in order to assess damages. There are two ways to assess damages. An objective method uses the market price. The market price, however, can underestimate the truth of the matter. A subjective method of calculation is the alternative. Under the subjective method, the amount of damages is the minimum price the entitlement holder would accept in a bilateral exchange. Unfortunately, the objective method does not capture the correct amount of damages, and the subjective method would be difficult for a judge to implement
Rule 5, as advocated by James E. Krier
, Earl Warren DeLano Professor of Law at the University of Michigan Law School
, and Stewart Schwab, Professor of Law at Cornell Law School
, in Property Rules and Liability Rules: the Cathedral in another Light provides for a solution for the shortfalls of Rule 4. Under Rule 5, the court would use a best-chooser principle:
All other things being equal, when liability rules are used the party who is the best chooser should be confronted with the decision whether or not to force a sale upon the other party.
Krier and Schwab argue that the best-chooser principle is “faithful to the approach of Calabrasi & Melamed [because] other things being equal, costs of activity ‘should be put on the party or activity which can with the lowest transaction costs act … to correct an error in entitlements by inducing the party who can avoid social costs most cheaply to do so.’”
The first step in implementing Rule 5 begins with picking the best chooser. Usually, the best chooser is the smallest number party. The best chooser will then have to “compare its own opportunity cost to the opportunity cost (figured by the judge) of the other party or parties.” The second step is the implementation of the double-reverse twist proposed by Krier and Schwab. First, the judge estimates the other party’s social costs (damages caused by the best chooser). Then, the judge enters an order requiring the best chooser to decide whether to continue causing damage to the other party without receiving any compensation or stop causing damage and receive compensation. Therefore, if the best chooser decides to stop causing harm to the other party, then the other party will have to pay the best chooser damages calculated by the judge. Should the best chooser decide to stay, then the best chooser continues to cause harm and receives no payment.
Harvard Law Review
The Harvard Law Review is a journal of legal scholarship published by an independent student group at Harvard Law School.-Overview:According to the 2008 Journal Citation Reports, the Review is the most cited law review and has the second-highest impact factor in the category "law" after the...
, Vol.85, p.1089, April 1972), authored by Judge Guido Calabresi (of the United States Court of Appeals
United States court of appeals
The United States courts of appeals are the intermediate appellate courts of the United States federal court system...
for the Second Circuit) and A. Douglas Melamed
Douglas Melamed
A. Douglas Melamed is a nationally known American legal scholar who is currently Senior Vice President and General Counsel at Intel Corporation...
, a legal scholar currently in private practice.
The article is a seminal contribution to the field of law and economics
Law and economics
The economic analysis of law is an analysis of law applying methods of economics. Economic concepts are used to explain the effects of laws, to assess which legal rules are economically efficient, and to predict which legal rules will be promulgated.-Relationship to other disciplines and...
, offering an ambitious attempt to treat various areas of the law through a uniform approach. It is grounded in the fact that the various interests created by the law enjoy various degrees and methods of protection. Certain interests are deemed human rights and inalienable as such. Other interests are protected by the criminal law
Criminal law
Criminal law, is the body of law that relates to crime. It might be defined as the body of rules that defines conduct that is not allowed because it is held to threaten, harm or endanger the safety and welfare of people, and that sets out the punishment to be imposed on people who do not obey...
; meaning that the state will bear the cost of initiating legal action if violations of such interests are brought to its attention; here begins the criminal law. The burden of proof required for the state to prevail in such cases is higher; thus the beginning of criminal procedure
Criminal procedure
Criminal procedure refers to the legal process for adjudicating claims that someone has violated criminal law.-Basic rights:Currently, in many countries with a democratic system and the rule of law, criminal procedure puts the burden of proof on the prosecution – that is, it is up to the...
. Other interests give an injured party merely the option of petitioning for injunctive relief. There are yet other interests whose violation gives the injured party no more than the right to seek monetary damages, and only if the victim is willing to bear the costs of initiating legal action; such interests make up the essence of civil law
Civil law (common law)
Civil law, as opposed to criminal law, is the branch of law dealing with disputes between individuals or organizations, in which compensation may be awarded to the victim...
. The burden of proof in such cases is less than in actions initiated under criminal law; thus the beginning of civil procedure
Civil procedure
Civil procedure is the body of law that sets out the rules and standards that courts follow when adjudicating civil lawsuits...
.
Thesis
The title of the article references artist Claude MonetClaude Monet
Claude Monet was a founder of French impressionist painting, and the most consistent and prolific practitioner of the movement's philosophy of expressing one's perceptions before nature, especially as applied to plein-air landscape painting. . Retrieved 6 January 2007...
’s series of paintings of Rouen Cathedral
Rouen Cathedral
Rouen Cathedral is a Roman Catholic Gothic cathedral in Rouen, in northwestern France. It is the seat of the Archbishop of Rouen and Normandy.-History:...
, modestly implying that the authors’ ensuing academic analysis is but one look at a subject that can be considered from various points of view. The primary thesis of the article focuses on the notion of “entitlements,” or rights, which can be protected by either property, liability, or inalienability rules. The authors’ main goal, as noted in the Introduction, is to provide a conceptual framework within which the separate legal subject areas of Property and Torts can be approached from a unified perspective. The article then undertakes an analysis of the classic Law and Economics “Pollution Problem” and an analysis of various criminal sanctions, all within the new framework the authors have put forth.
The Concept of Entitlements
The article begins by discussing the crucial concept of “entitlements,” which are defined as the rights established and protected by law, the absence of which would result in a “might makes rightMight makes right
Might makes right is an aphorism with several potential meanings :* In English, the phrase is most often used in negative assessments of expressions of power....
” world where either the strongest or shrewdest emerge victorious in any conflict. Thus, as the authors point out, the fundamental thing that law (the setting of entitlements) does is to decide which of the conflicting parties will be entitled to prevail. The authors also point out, however, that successfully enforcing these entitlements (the law) is as important as establishing them in order to avoid the “might makes right” world. From this notion, the authors consider three types of entitlements: entitlements protected by property rules, entitlements protected by liability rules, and inalienable entitlements. According to Calabresi and Melamed, an entitlement protected by a property rule is one that must be bought in a voluntary transaction in which the value of the entitlement is agreed upon by the buyer and seller. With an entitlement protected by property rule, a collective decision is made as to who is to be given the initial entitlement, but not as to the value of the entitlement itself. An entitlement protected by a liability rule, however, involves a collective decision as to the value of the entitlement without the need for a voluntary transaction. A destroyer of an initial entitlement protected by a liability rule must pay an objectively valued sum to the holder of the entitlement. The final entitlement the authors consider in the article is an entitlement protected by an inalienability rule. As the authors define it, an entitlement is inalienable to the extent that its transfer is not permitted between a willing buyer and a willing seller. Under this rule, the state intervenes to determine the initial entitlement, to forbid its sale or purchase, and to determine compensation to be paid if it is sold or destroyed. To conceptualize these three entitlements, the authors use the example of an individual homeowner whose house may be protected by a property rule where another individual wishes to purchase it, a liability rule where the government seizes the home by eminent domain, or an inalienability rule where the homeowner is drunk or incompetent. Having defined the concept of entitlements and laid out the three rules that they will focus on, the article proceeds to explore the following two questions: (1) In what circumstances should a particular entitlement be granted? And, (2) In what circumstances should a property, liability or inalienability rule be used to protect an entitlement?
The Birth of Rule 4
In answering these questions, Calabresi and Melamed expanded upon the pre-existing Law and Economics literature and added to the discussion the breakthrough that has come to be known as “Rule 4.” In keeping with the classic Law and Economics hypothetical of the Polluter and the Resident (whereby P (Polluter)’s affirmative actions have encroached upon R (Resident)’s passive enjoyment of his property), the authors advocate a novel approach to the problem whereby a court might permit Polluter to continue his actions unless Resident chose to pay Polluter damages in order to enjoin further pollution. Modeled along with the traditional Law and Economics approaches to the Polluter / Resident problem, the scheme of available remedies appears thus:| Initial Entitlement | Injunction / Property Rule | Damages / Liability Rule |
|---|---|---|
| Resident | Rule 1: Court issues an injunction against Polluter | Rule 2: Court finds a nuisance but permits pollution to continue if the Polluter chooses to pay damages |
| Polluter | Rule 3: Court finds the pollution not to be a nuisance and permits the Polluter to continue without paying damages | Rule 4: Court permits Polluter to continue unless Resident chooses to pay Polluter damages in order to enjoin further pollution |
Coincidentally, at approximately the same time that Calabresi and Melamed postulated their Rule 4 as an additional approach to the Polluter / Resident problem, an Arizona
Arizona
Arizona ; is a state located in the southwestern region of the United States. It is also part of the western United States and the mountain west. The capital and largest city is Phoenix...
state supreme court decision independently illustrated the practical application of the “Rule 4” approach in deciding a case that had come before the court. In Spur Industries, Inc. v. Del E. Webb Dev. Co., 494 P.2d 700 (Ariz. 1972), Del Webb
Del Webb
Delbert Eugene Webb was an American construction magnate, real estate developer and sports-team owner, who is most significant for founding and developing the retirement community of Sun City, Arizona.-Early life:...
, an Arizona real-estate developer developing a retirement community, sued for an injunction against Spur Industries, a pre-existing feedlot owner whose activities resulted in an alleged nuisance to the encroaching retirement community (causing Del Webb difficulties in selling properties close to the feedlot). In handing down its decision, the Arizona state supreme court ruled that Spur Industries’ activities did create a nuisance, but Del Webb had come to the nuisance and brought its unwitting retirees along with it. Balancing the various factors in the case, including the fact that Del Webb but not Spur Industries could have foreseen the nuisance problem and the fact that the residents of the retirement community had been dragged to the nuisance unwittingly, the court ruled that Spur Industries would be forced to move, but that Del Webb had to indemnify the business for its troubles.
Though independent of Calabresi and Melamed’s article, Spur Industries proved that “Rule 4’s” novel approach could be practicably applied. Furthermore, Spur Industries showed that a successful balancing of efficiency, distributional, and other justice concerns, concerns articulated in the article that Calabresi and Melamed intended Rule 4 to blend, could be achieved.
Rule 5: An Expansion of the Cathedral
With the opportunity to use either liability or property-based rules to protect entitlements, the academic community soon concluded that the key to figuring out which rule to use turned on the transaction costs. Therefore, if there were low transaction costs, then property rules should be used. If the transaction costs were high, then liability rules should be used.A. Mitchell Polinsky, Josephine Scott Crocker Professor of Law and Economics at Stanford Law School
Stanford Law School
Stanford Law School is a graduate school at Stanford University located in the area known as the Silicon Valley, near Palo Alto, California in the United States. The Law School was established in 1893 when former President Benjamin Harrison joined the faculty as the first professor of law...
, argued that transactions costs are not the only impediments to bargaining, there is also the problem of assessment costs. Assessment costs are the costs associated in obtaining and processing information. There is a long understanding in the academic community that when transaction costs are high a liability rule will help substitute for bargaining. Judges, however, may have a difficult time in obtaining and processing information in order to assess damages. There are two ways to assess damages. An objective method uses the market price. The market price, however, can underestimate the truth of the matter. A subjective method of calculation is the alternative. Under the subjective method, the amount of damages is the minimum price the entitlement holder would accept in a bilateral exchange. Unfortunately, the objective method does not capture the correct amount of damages, and the subjective method would be difficult for a judge to implement
Rule 5, as advocated by James E. Krier
James E. Krier
James E. Krier is the Earl Warren DeLano Professor of Law at the University of Michigan Law School and the father of performer Andrew W.K. His teaching and research interests are primarily in the fields of property, contracts, and law and economics, and he teaches or has taught courses on...
, Earl Warren DeLano Professor of Law at the University of Michigan Law School
University of Michigan Law School
The University of Michigan Law School is the law school of the University of Michigan, in Ann Arbor. Founded in 1859, the school has an enrollment of about 1,200 students, most of whom are seeking Juris Doctor or Master of Laws degrees, although the school also offers a Doctor of Juridical...
, and Stewart Schwab, Professor of Law at Cornell Law School
Cornell Law School
Cornell Law School, located in Ithaca, New York, is a graduate school of Cornell University and one of the five Ivy League law schools. The school confers three law degrees...
, in Property Rules and Liability Rules: the Cathedral in another Light provides for a solution for the shortfalls of Rule 4. Under Rule 5, the court would use a best-chooser principle:
All other things being equal, when liability rules are used the party who is the best chooser should be confronted with the decision whether or not to force a sale upon the other party.
Krier and Schwab argue that the best-chooser principle is “faithful to the approach of Calabrasi & Melamed [because] other things being equal, costs of activity ‘should be put on the party or activity which can with the lowest transaction costs act … to correct an error in entitlements by inducing the party who can avoid social costs most cheaply to do so.’”
The first step in implementing Rule 5 begins with picking the best chooser. Usually, the best chooser is the smallest number party. The best chooser will then have to “compare its own opportunity cost to the opportunity cost (figured by the judge) of the other party or parties.” The second step is the implementation of the double-reverse twist proposed by Krier and Schwab. First, the judge estimates the other party’s social costs (damages caused by the best chooser). Then, the judge enters an order requiring the best chooser to decide whether to continue causing damage to the other party without receiving any compensation or stop causing damage and receive compensation. Therefore, if the best chooser decides to stop causing harm to the other party, then the other party will have to pay the best chooser damages calculated by the judge. Should the best chooser decide to stay, then the best chooser continues to cause harm and receives no payment.