Tort Bunnies: Loss Distribution

July 12, 2010. A lot of legal questions boil down to who pays for what. One way of approaching this to look at what would be the most economically efficient outcome, i.e. what provides the proper incentives for maximizing the overall production of goods and sevices. According to my Contracts professor, the Coase theorem states, "It doesn't matter. Efficiency happens." More specifically, it holds that no matter how you split the pie, people will bargain among themselves in such a way that each party gets the optimal amount of pie, assuming that bargaining is relatively cheap (and possible).

That doesn't mean that the outcome is fair or just however, only that it's economically efficient. Despite that, the Coase theorem is often invoked as the answer to life, the universe, and everything -- mostly against law students who are terrified of economics by those who know better. Economists are, of course, more than happy to wield the dismal science like a brain-melting scythe.

Brain-melting scythes are half off at the University of Chicago.