Asymmetric liability, common law and urbanization – An economist writes every day

The law of civil liability is interesting. You can argue that someone has wronged you, and you can cite almost no legislation in the process. In the United States, tort law uses case law – the precedent set by previous decisions in the context of social norms. But what cases did the first cases cite? They also cited past cases and social norms, although we may no longer have a record. The beauty of tort law is that it can alter the relative costs of prudence and negligence.

Can you imagine a legislature attempting to codify the appropriate degree of negligence by, say, a painter? The standards would quickly become obsolete. The relative cost of resources, including labor, communications, materials, and price differences between competitors of different quality, all change over time. Multiply these factors by 20 and then again by the number of occupations and regions in a country. You will quickly see that legislating the appropriate degree of care and neglect through Congress is a wild ride. The challenge is too complicated and the world is changing too fast. In fact, attempting to legislate the definitions of negligence and prudence could even have the opposite effect and result in regulatory arbitrage, which occurs when companies comply with by right rules while avoiding them de facto.*

Cost outsourcing

Economists treat externalities as symmetric. This means that the costs imposed go both ways. Does a yodeler impose on his meditating neighbors? Or do they impose silence on the yodeler? We may have moral intuition or strong feelings about who should get what they want. But economic theory argues that the costs are symmetrical. The two parties have a conflict of visions and they would like to impose their way on the other – preferably at a lower cost.

Sometimes the courts intervene when the two parties cannot solve the problem otherwise. One can imagine, however silly it may seem, people being sued for noise or verbal harassment about noise. Another bigger case could come after a homeowner completes some landscaping, changes drainage patterns, and causes their neighbor’s basement to flood. We are now talking about substantial costs. And while a noise ordinance may exist, there may not be an explicit ordinance regarding drainage and landscaping. A court will refer to case law and precedents.

One of the reasons the yodeling and draining examples are easy to understand is that they are cases of negative externalities. A person imposes a charge on another person without their consent. The culture and the courts determine whether the cost is appropriate. The culture says that kids play hard outside is usually fine. Courts say children’s music that rocks the neighbor’s house is not acceptable.

Asymmetrical before the law

Property rights are a funny thing. If I charge you and your property without your consent, then you can charge me again by suing me and receiving a favorable decision. In economics jargon, we say that you force me to “internalize” my costs, rather than externalizing them to you. These are my expenses, you say, and I should keep them.

But positive externalities are a whole other ball game according to most people’s moral intuition and according to the courts. Suppose your basement floods frequently, so your house would sell for $150,000. After you complete landscaping that changes drainage patterns, your basement stops flooding and your house would sell for $180,000. It is a positive externality that I imposed on you without your consent. Indeed, if it was important for me to internalize my costs, why not oblige me to internalize my benefits. There is no need to go to court – you can just transfer money to me to make sure my benefits stay with me. Basically, why can’t I sue you for the value I imposed on you? Indeed, you would not be worse off if I could recover all of my benefits that I imposed on you.

Which give? We can sue because of negative externalities, but not because of positive externalities. Why the hell not? In both cases, there can be non-consent and negligence. But in only one of the cases, a lawsuit will be heard by the court. From a strictly economic point of view, the asymmetry is disconcerting – at the beginning anyway.

Consider the alternative.

Humans are social creatures. It’s not that we want to get along with each other. Rather, we need each other to enjoy the standard of living we desire. Think of economies of scale, gains from trade and agglomeration. It all goes out the window if we live far from each other. Pursuing people because of their negative externalities is how we deal with closeness to others. We don’t necessarily want to be near other people and all their activities. But the list of advantages seduces us.

Being able to sue someone for their negative externalities improves the problems that emerge from conflicting preferences and the challenges of overpopulation. It allows for greater population density and all the benefits that come with it. Suing for outsourced benefits would impose at least a transaction cost on others. It would also encourage us to keep a little more distance from our neighbors. Part of moral aversion relates to action. Someone could be sued for being a passive recipient of benefits. The only way to avoid the benefits would be to increase the distance between us and lose the benefits of urbanization.

Imagine if your neighbor could sue you after you renovated their house and, therefore, increased the value of yours. It seems quite fair (symmetrical?) that he keep the benefits he negligently imposed on you without your consent. But being able to prosecute someone in this way doesn’t solve a social ill – at least not the one we want solved. Institutions and human rules emerge to resolve conflicts and challenges. Of course, I would love, love, love to impose transfers in order to internalize all my outsourced benefits. If I could do it for free, then the world would be a better place. I would engage in other beneficial activities that I am currently forgoing due to lack of internalized benefits.

But, the world being what it is, there are transaction costs. Going to court can quickly get expensive. Being able to sue for outsourced, non-consensual and negligent benefits could add at the costs of population density (and probably would). Our challenge is how to live close to each other. The introduction of additional costs aggravates the problem rather than improving it. To some extent, we have our legal system to thank for urbanization. A seemingly arbitrary difference in how we deal with negative and positive externalities drives us to get along, if not get along.

*I am not a lawyer. Please excuse my lack of proper vocabulary.

Scott R. Banks