An integration of equity and efficiency

Washington Law Review

Volumn 73, Issue 2, 1998, Pages 349-361

  Zerbe Jr , Richard O ^a  

^a UNIVERSITY OF WASHINGTON   (United States)

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EID: 0345777604     PISSN: 00430617     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (47)

1. Michael I. Swygert & Katherine Earle Yanes, A Unified Theory of Justice: The Integration of Fairness into Efficiency, 73 Wash. L. Rev. 249 (1998).
2. For an extended discussion of the Coase Theorem, see Steven Medema & Richard Zerbe, The Coase Theorem, in The Encyclopedia of Law and Economics (Boudewijn Bouckaert & Gerrit DeGeest eds., forthcoming 1998).
3. Id. The Coase Theorem does not define economic efficiency nor does it suggest what actions are efficient.
4. Initial rights determine a wealth floor in the Coase Theorem world because no one would agree to a bargain that makes him or her worse off. With zero transaction costs, everyone is part of every bargain.
5. Coase's purpose was to draw attention to the role of transaction costs, not to develop an economic theory based on zero transaction costs. See Medema & Zerbe, supra note 2.
6. Pareto efficiency is achieved when no one is made worse off and at least one person is made better off. See infra text accompanying notes 16-17 (defining Kaldor-Hicks efficiency).
7. John Rawls, A Theory of Justice 78 (1971).
8. John C. Harsanyi, Cardinal Utility in Welfare Economics and the Theory of Risk Taking, 61 J. Pol. Econ. 434, 434-35 (1953). In Harsanyi's treatment, the individual recognizes that he or she has an equal chance of being anyone in society. Rawls's concept of the original position is similar but with greater restriction of what one knows in this position (the veil of ignorance). See Rawls, supra note 7, at 78.
9. Indeed, Vickrey has shown that (contrary to Swygert and Yanes's assumption) people will maximize expected utility in an original position even assuming risk aversion. William Vickrey, Measuring Marginal Utility by Reductions in Risks, 13 Econometrica 319, 330 (1945). Expected utility simply includes risk aversion. Id.
10. Ed Bukszar & Jack L. Knetsch, Fragile Redistribution's Choices Behind a Veil of Ignorance, 14 J. Risk & Uncertainty 63, 72 (1997).
11. Williams v. Walker-Thomas Furniture Co., 198 A.2d 914 (D.C. 1964).
12. In both cases, Swygert and Yanes assume risk aversion, which is what drives their result.
13. Charles Fried, Right and Wrong 93 (1978).
14. Id. at 94.
15. See Richard A. Posner, Wealth Maximization Revisited, 2 Notre Dame J.L. Ethics & Pub. Pol'y 85, 101 (1985) [hereinafter Posner, Wealth Maximization Revisited].
16. Posner's inconsistency in defining economic efficiency and his use of it on occasion in a utilitarian manner has led one commentator to refer to Posner's approach to law and economics as "quasi-scientific mysticism." Robin Paul Malloy, Letters from the Longhouse: Law, Economics and Native American Values, 1992 Wis. L. Rev. 1569, 1621.
17. Elsewhere Posner has noted that wealth maximization is the same thing as KH efficiency. Richard A. Posner, Wealth Maximization and Judicial Decision Making, 4 Int'l Rev. L. & Econ. 131, 135 (1984);
18. see also Richard A. Posner, Economic Analysis of Law 13 (4th ed. 1992).
19. See Richard O. Zerbe Jr. & Dwight D. Dively, Benefit Cost Analysis in Theory and Practice 96-98 (1994).
20. The concept of KH efficiency is well captured in the following example: You are asked to compare two worlds. The first is the status quo: the world the way it is now. The second is identical with the status quo except for the change brought about by the project In the comparison, you take into account the ramifications of the project, differences in income to you and others, differences in habitat, and so on; but except for the changes brought on by the project, the two worlds are the same. Suppose that you value the first world more highly than the second . . . . Then you are asked what is the minimum you need to be compensated so that you would value the change (with the compensation) just as much as the status quo. If you value the world with the project more than the status quo, then you are asked how big a payment you could make in the changed world (with the project) so that you would just value equally the status quo . . . . The economic criterion says that if the sum of all the compensations (to those who would lose by the project) is less than the sum of the equilibrating payments (from the gainers from the project), then the change from the status quo is worth making. Talbott Page, Environmental Existentialism, in Ecosystem Health: New Goals for Environmental Management 97, 102 (Robert Costanza et al. eds., 1992).
21. See generally W.A.S. Hewins, Economics, in 7 Encyclopaedia Britannica 899, 900 (11th ed. 1911).
22. According to Mayr, an eminent evolutionary biologist, people will care about others, even others to whom they are not related. See generally Ernst Mayr, This Is Biology (1997).
23. See Richard O. Zerbe Jr., Is Benefit Cost Legal? Three Rules for Benefit Cost Analysis, 17 J. Pol'y Analysis & Mgmt. (forthcoming 1998).
24. The major treatment is given in Richard O. Zerbe Jr., The Foundations of Kaldor-Hicks Efficiency in Law and Economics: On the Kindness of Strangers (University of Washington Graduate School of Public Affairs & School of Law Working Paper in Public Policy Analysis and Management No. 97-11, 1997) [hereinafter Zerbe, Foundations].
25. Zerbe, Foundations, supra note 19.
26. See supra note 19. Posner points out that in economics, wealth is not just money wealth. Posner, Wealth Maximization Revisited, supra note 15, at 86-87.
27. See generally Fay Lomax Cook & Edith J. Barrett, Support for the American Welfare State: The Views of Congress and the Public (1992);
28. Fay Lomax Cook, Who Should Be Helped: Public Support for Social Services (1979).
29. Richard A. Posner, The Justice of Economics, Economia Delle Schelte Pubbliche 15, 23 (1987).
30. Although the KH criteria assume that a dollar is worth the same to all, individuals may consider the different capacities of enjoyment that others have, and this may be incorporated into their WTP or WTA for others. See the commentary of the Biscuit on the relative capacities of the rich T. Patterson Frisby and the poor Biscuit to enjoy income. Pelham G. Wodehouse, Big Money 177-78 (Penguin Books 1953) (1931).
31. Swygert and Yanes create a modification of Rawls's original position that is in fact the same as Harsanyi's initial position. I will therefore refer to the "initial position."
32. See E.O. MacDevitt, Land Cases, Being a Collection of Reports of Decisions Under the Irish Land Acts Since the Passing of the Land Law (Ireland) Act 201 (1884).
33. Id. (emphasis added).
34. Arnold C. Harberger, On the Use of Distributional Weights in Social Cost-Benefit Analysis, 86 J. Pol. Econ. S87-S120 (1978).
35. Even if the actual position is one in which individuals know beforehand whether they will gain or lose, the initial position adds nothing to the analysis. Again, we cannot say that were these individuals to bargain in an initial position, they would arrive at a solution requiring compensation to the deserving person unless we can assume that individuals regard compensation as fair.
36. KH efficiency assumes away declining marginal utility of income, but the definition of efficiency can be and sometimes is easily expanded to account for the assumption. See Zerbe & Dively, supra note 16, at 98.
37. Similarly, in cases of gratuitous promises inducing reliance, there is no need to resort to an initial position to determine fairness; it is efficient to prevent wasteful reliance.
38. Peevyhouse v. Garland Coal & Mining Co., 382 P.2d 109 (Okla. 1962).
39. Swygert and Yanes say the court was unable "to stand in the shoes of both parties." Swygert & Yanes, supra note 1, at 323. This is, however, a claim that the court was not impartial, not that bargaining in the initial position was at issue. Indeed the actual bargain called for restoration. Peevyhouse, 382 P.2d at 111.
40. The discrepancy between the cost of restoration and the fall in the value of the land suggests that the landowners had peculiar tastes if restoration was really worth that much to them and not to potential buyers.
41. Talbott has shown that Rawls's approach does not work for certain types of cases thought to contain unconscionable exculpatory clauses. W.J. Talbott, Cost Spreading and Benefit Spreading in Tort Law, 11 Res. L. & Econ. 25 (1988).
42. 198 A.2d 914 (D.C. 1964). In this case, a single mother with seven children and limited education purchased many household items from Walker-Thomas Furniture Company over a six-year period under an installment plan. The contract provided that if an account was not paid in full, all items would be forfeited. Walker-Thomas reclaimed all of the items even though the total balance due was $678. Id. at 915-16.
43. Note that if we do not assume declining marginal utility of income then the Swygert and Yanes approach fails to suggest anything wrong with the original contract, absent inefficiency.
44. If Walker-Thomas were claiming too large a collateral, both parties would be served by a change in contract.
45. See supra p. 352.
46. See Paul Heyne, The Foundations of Law and Economics: Can the Blind Lead the Blind?, 11 Res. L. & Econ. 53, 59 (1988). Perhaps Swygert and Yanes contemplate situations in which judges would rise above the sentiment of the times and appeal to more advanced moral ideas. Yet what these more advanced ideas might be remains unclear.
47. I have introduced this method elsewhere. See supra note 19 and accompanying text.