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“Coase Theorem”, Competitive Market and Products Liability Law

Published online by Cambridge University Press:  16 February 2016

Israel Gilead
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Extract

According to the famous “Coase Theorem”, market forces, under given conditions, will automatically, without any external intervention, bring about an efficient allocation of resources. These conditions, necessary for the smooth operation of the “invisible hand” which leads to efficiency, are denoted as “absence of transaction costs”, as the presence of transaction costs may impede this desired process. The main legal implication outlined by Coase is that absent transaction cost, there is no need, and no place, from an efficiency point of view, for liability rules: resource allocation would be the same either with or without them. An act which is efficient will be carried out despite a liability rule which imposes the burden of compensation on the actor. On the other hand, an inefficient act will be barred by market forces without the help of liability rules.

Type
Articles
Information
Israel Law Review , Volume 20 , Issue 1 , Winter 1985 , pp. 39 - 48
Copyright
Copyright © Cambridge University Press and The Faculty of Law, The Hebrew University of Jerusalem 1985

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References

1 Coase, R. H., “The Problem of Social Cost” (1960) 3 J.L. & Econ. 1CrossRefGoogle Scholar. See also Cooter, R.C., “The Cost of Coase” (1982) J. Legal Studies 1CrossRefGoogle Scholar; and Aivazian, V.A. & Callen, J.L., “The Coase Theorem and the Empty Core” (1981) 24 J.L. & Econ. 175CrossRefGoogle Scholar.

2 Posner, R.A., “Strict Liability: A Comment” (1973) 2 J. Legal Studies 205, 207CrossRefGoogle Scholar; Oi, W.Y., “The Economics of Products Safety” (1973) 4 Bell J. Econ. 3CrossRefGoogle Scholar; Shavell, S., “Strict Liability Versus Negligence” (1980) 9 J. Legal Studies 1, 6, 8, 17CrossRefGoogle Scholar; Hamada, K., “Liability Rules and Income Distribution on Product Liability” (1976) 66 Am. Econ. R. 228Google Scholar; McKean, R.N., “Products Liability: Trends and Implications” (1920) 38 U.Chi.L.R. 3, 30, 34, 43Google Scholar.

3 Pigov, A.C., The Economics of Welfare (London, 4th ed., 1950) 183–4, 204, 223–4Google Scholar; Mishan, E.J., Introduction to Normative Economics (New York, 1981) 391–5, 407–415Google Scholar.

4 See Calabresi, G., “The Decision for Accidents: An Approach to Nonfault Allocation of Costs” (1965) 78 Harv. L. R. 713, at 725–732CrossRefGoogle Scholar.