1. Econ 522 Economics of Law
Dan Quint
Spring 2017
Lecture 6

2. Property law – our story so far
Coase: absent transaction costs, if property rights are complete and tradable, we’ll get efficiency through voluntary negotiation
So we can always get efficient outcomes “automatically”…
…provided there are no transaction costs
But…
Demsetz: more complete property rights are costly, it’s not always worth it
And: what about when there are transaction costs? 1 1

3. Different types/sources of transaction costs
Search costs
Bargaining costs
Asymmetric information/ adverse selection
Private information/not knowing each others’ threat points
Uncertainty about property rights/ threat points
Large numbers of buyers/sellers – holdout, freeriding
Hostility
Enforcement costs

4. (Cool example of hostility as a bargaining cost)
Source:

5. Two approaches we could take
Design the law to minimize transaction costs
“Lubricate private bargaining”
(Normative Coase)
Design the law to minimize dependence on bargaining
Or, minimize losses due to bargaining failures
Or, aim to allocate rights efficiently
(Normative Hobbes)

6. When is each approach best?
When transaction costs are low (and info costs are high),
design the law to facilitate voluntary trade
When transaction costs are high (and info costs are low),
design the law to allocate rights efficiently when possible
So now we have two possible ideas of what property law should aim to accomplish
one, lubricate private transactions
or two, allocate rights to whoever values them more
And we saw one principle for when each one is more appropriate:
When transaction costs are low and information costs are high, structure the law so as to minimize transaction costs
When transaction costs are high and information costs are low, structure the law to allocate property rights to whoever values them the most

7. Today More principles for designing an efficient property law system
But first…

8. An experiment on “Coasian bargaining”
The Coase Theorem – and some of our conclusions about what an efficient property law system looks like – depend on peoples’ ability to bargain with one another
So… let’s see if it works!

9. Experiment: Coasian bargaining
Round 1 (full information)
Ten people, five of them have a poker chip to start
Each person is given a personal value for a poker chip
At the end of the round, that’s how much you can trade in a chip for
Purple chip is worth that number, red chip is worth 2 x your number
So if your number is 6 and you end up with a purple chip, I’ll give you $6 for it; if you end up with a red chip, I’ll give you $12 for it
Each person can only sell back one chip
Your number is on your nametag (common knowledge)

10. Experiment: Coasian bargaining
Round 2 (private information)
Ten people, five of them have a poker chip to start
Each person is given a personal value for a poker chip
At the end of the round, that’s how much you can trade in a chip for
Purple chip is worth that number, red chip is worth 2 x your number
So if your number is 6 and you end up with a purple chip, I’ll give you $6 for it; if you end up with a red chip, I’ll give you $12 for it
Each person can only sell back one chip
Only you know your number

11. Experiment: Coasian bargaining
Round 3 (uncertainty)
Six people, three poker chips
Value of each chip is determined by a die roll
If seller keeps the chip, it’s worth 2 x roll of the die
If new buyer buys chip, it’s worth 3 x roll of the die
No contingent trades – buyer must pay cash
Nobody sees the die roll until the end

12. Experiment: Coasian bargaining
Round 4 (asymmetric information)
Six people, three poker chips
Value of each chip is determined by a die roll
If seller keeps the chip, it’s worth 2 x roll of the die
If new buyer buys chip, it’s worth 3 x roll of the die
No contingent trades – buyer must pay cash
Seller knows the outcome of the die roll, buyer does not

13. What would an efficient property rights system look like?

14. Four questions we need to answer
what can be privately owned?
what can an owner do?
how are property rights established?
what remedies are given?
We’ll begin with the question: what remedy should we use?

15. Calabresi and Melamed treat property and liability under a common framework
Calabresi and Melamed (1972), Property Rules, Liability Rules, and Inalienability: One View of the Cathedral
Liability
Is the rancher liable for the damage done by his herd?
Property
Does the farmer’s right to his property include the right to be free from trespassing cows?
Entitlements
Is the farmer entitled to land free from trespassing animals?
Or is the rancher entitled to the natural actions of his cattle?
we begin with an important paper from 1972 by Guido Calabresi and Douglas Melamed, titled, “Property Rules, Liability Rules, and Inalienability: One View of the Cathedral”
the topic of the is how property rights are enforced, that is, what remedies are used when rights are violated
Calabresi and Melamed state that their goal is to treat both property and liability law under a common framework, rather than keeping them as distinct topics
we’ve already been doing this
when we think about the rancher-farmer question, we can pose it in terms of liability – is the rancher liable for the damage his herd does?
or we can pose it in terms of property – does the farmer’s right to his property include the right to be free from trespassing cows? or does the rancher’s right to his herd include the right to not be punished when they stray?
Calabresi and Melamed were the first to consider both property and liability in the same terms
They consider both cases to be cases of “entitlements”
is the farmer entitled to land without trespassing animals, or is the rancher entitled to be free from herd-damage liability?
Similarly, are you entitled to have a noisy party, or am I entitled to get a good night’s sleep? 14 14

16. Three possible ways to protect an entitlement
Property rule / injunctive relief
Violation of my entitlement is punished as a crime
(Injunction: court order clarifying a right and specifically barring any future violation)
But entitlement is negotiable (I can choose to sell/give up my right)
Property Rules, or Injunctive Relief
This is when you are legally barred from violating my entitlement without my prior agreement
This is the usual rule for protecting private property – if it’s mine, you simply can’t take it unless I give it to you
And if you do choose to take it, you’ve committed a crime – you don’t just owe me the value of what you took, you may go to jail, you may face other severe consequences
(the idea of a property rule is that the punishment is so severe, you’ll never choose to violate my right without my permission)
An injunction is basically a court order clarifying someone’s rights and specifically barring someone from violating them
For example, if a factory is polluting and the neighbors object and take it to court, the court might issue an injunction, which would bar the factory from further pollution
The factory could still negotiate with the neighbors and reach some bargain where the neighbors agree not to enforce the injunction, but this would be completely at the discretion of the neighbors 15 15

17. Three possible ways to protect an entitlement
Property rule / injunctive relief
Violation of my entitlement is punished as a crime
(Injunction: court order clarifying a right and specifically barring any future violation)
But entitlement is negotiable (I can choose to sell/give up my right)
Liability rule / damages
Violations of my entitlement are compensated
Damages – payment to victim to compensate for damage done
Inalienability
Violations punished as a crime
Unlike property rule, the entitlement cannot be sold
Liability Rules, or Damages, is when you can violate my entitlement without my agreement, but must compensate me afterward for whatever damages I incur
under a liability or damages rule, the factory could go on polluting, and the neighbors would sue them for damages
the court would then have to calculate an objective value of the damage done
the neighbors can argue that the damage incurred was high, but they are only awarded what is considered fair value, not what they argue they would have held out for in the beginning
This is the type of rule behind eminent domain, which we’ll talk about in a bit
if the government wants to build a school, or an army base, or a town dump, on land that I own, they can force me to sell my land
and they can force me to sell at what is considered fair market value, not to hold out for whatever amount I want based on my sentimental attachment to the house I grew up in or anything else
Liability rules obviously work better than property rules in settings where prior negotiation is impossible
Clearly, I have an entitlement to not be hit by someone’s car when I’m walking, but it’s hard to imagine them approaching me beforehand and bargaining for the right to hit me.
The difference: damages are backward-looking – they compensate for harm already done, while injunctions and property rules are forward-looking – they specifically forbid future harms from occurring.
Third way to protect an entitlement – Inalienability – we’ll come back to later 16 16

18. Comparing injunctive relief to damages rule
Injurer always prefers a damages rule
Injuree (person whose entitlement is violated) always prefers a property rule
Why? Under a property rule…
Punishment for violation is severe
If the two sides need to negotiate to trade the right, injurer’s threat point is lower
Even if both rules eventually lead to the same outcome, injurer will probably have to pay more
Under a damages rule, injurer has the option to just violate and reimburse – so a higher threat point
We know from Coase that either rule should lead to an efficient outcome if transaction costs are low
But they may still lead to different outcomes – the rules will favor different sides
In particular, a property rule will always be more favorable toward the injuree (the person whose entitlement is to be violated), and a liability rule will always be more favorable toward the injurer
This is because the punishment for violating an injunction without the other side’s permission is much harsher than damages – it may involve criminal trespass or violating a court order
So when the two sides bargain, the injurer will have a much lower threat point when facing an injunction, so the injuree will end up with a higher payoff if they do choose to cooperate
(We’ll see an example.)
We know from Coase that in a world without transaction costs, either rule should be sufficient to allow private bargaining to lead to efficiency
However, since the two rules give the two sides different threat points, they change the payoff achieved by each side during negotiations
In a world with transaction costs, of course, one may lead to a more efficient outcome than the other 17 17

19. Comparing injunctive relief to damages – example
E profits = 1,000 L profits = 300  100 E prevention = 500 L prevention = 100
Comparing injunctive relief to damages – example
Electric company (E) emits smoke, which dirties the laundry at laundromat next door (L)
E earns profits of 1,000
Without smoke, L would earn profits of 300
Smoke reduces L’s profits from 300 to 100
E could stop polluting at cost 500
L could prevent the damage at cost 100
Consider the example in Cooter and Ulen
There is an electric company E that emits smoke, which dirties the laundry at a laundromat L next door
The electric company earns profits of 1000
Without smoke, the laundromat earns profits of 300.
Smoke does $200 of damage (reducing profits to 100)
The electric company could stop emitting smoke by installing scrubbers in its smokestack, at a cost of 500.
The laundromat could also avoid the damage by installing filters on its ventilation system, at a cost of 100. 18 18

20. First, we consider the non-cooperative outcomes
E profits = 1,000 L profits = 300  100 E prevention = 500 L prevention = 100
First, we consider the non-cooperative outcomes
Polluter’s Rights (no remedy)
E earns 1,000
L installs filters, earns 300 – 100 = 200
Laundromat has right to damages
E earns 1,000, pays damages of 200  800
L earns 100, gets damages of 200  300
Laundromat has right to injunction
E installs scrubbers, earns 1,000 – 500 = 500
L earns 300
First, we’ll consider the non-cooperative outcome, that is, what happens when the two sides do not try to negotiate with each other
Given the remedies we’re considering right now, there are three possibilities
the electric company is allowed to pollute with no consequences;
the laundromat is entitled to damages;
or the laundromat can get an injunction preventing pollution 19 19

21. Noncooperative payoffs
E profits = 1,000 L profits = 300  100 E prevention = 500 L prevention = 100
Noncooperative payoffs
Polluter’s Rights
Damages
Injunction
E payoff (non-coop)
1,000
800
500
L payoff (non-coop)
200
300
300
Combined payoff (non-coop)
1,200
1,100
800
Clearly, the efficient outcome is for L to install filters, leading to combined profits of 1200
(This avoids $200 in damage at a cost of $100, and is the cheapest way to avoid the damage.)
This is the outcome that occurs in the Polluter’s Rights case
(No reason this should be true generally, just in this example)
In the other two cases, the noncooperative outcome is inefficient
But if there are not transaction costs, the two sides could still negotiate an agreement to achieve efficiency
But in each case, the threat points would be different, so the division of surplus will be different under the different rules. 20 20

22. What about with bargaining?
E profits = 1,000 L profits = 300  100 E prevention = 500 L prevention = 100
What about with bargaining?
Polluter’s Rights
Damages
Injunction
E payoff (non-coop)
1,000
800
500
L payoff (non-coop)
200
300
300
Combined payoff (non-coop)
1,200
1,100
800
Gains from Coop
100
400
But now, suppose there are no transaction costs, and the electric company and laundromat owners are able to negotiate with each other
Clearly, the efficient outcome is for the laundromat to install air filters – this prevents the damage the cheapest way possible, and leads to the highest combined payoffs
So if the two sides bargain, that’s the outcome they’ll reach
In the polluter’s rights case, this is already the outcome – they have nothing to bargain over
But in the other two cases, they do
In the case of damages, the noncooperative outcome is inefficient – the electric company is paying $200 for damage that could be prevented for $100, so there are $100 in gains from trade
If we imagine the gains from trade are divided equally, each side will end up with $50 more than their threat point
In the case of injunction, the gains from trade are even bigger – now they create $400 in new surplus by bargaining
If this gets divided equally, the payoffs are 700 and 500
What does Coase say? That the bottom row are all the same – regardless of the initial allocation, bargaining leads to the efficient outcome
BUT, the two sides care very much about the initial allocation
The more favorable the initial rule is to E, the better he does in the end; and the more favorable the initial rule is to L, the better he does in the end
E payoff (coop)
1,000
850
800 + ½ (100)
700
500 + ½ (400)
L payoff (coop)
200
350
300 + ½ (100)
500
300 + ½ (400)
Combined
1,200
1,200
1,200 21 21

23. Comparing injunctions to damages…
E profits = 1,000 L profits = 300  100 E prevention = 500 L prevention = 100
Comparing injunctions to damages…
Injunctions are generally cheaper to administer
No need for court to calculate amount of harm done
But damages are generally more efficient when bargaining is impossible
Damages
Injunction
“No remedy” isn’t usually a good answer, so let’s compare the other two – injunctions versus damages
An injunction is cheaper for a court to implement
the court simply clarifies the property right; it does not have to calculate the exact amount of damage that was done
damages are more difficult for a court to implement, since they must assess the monetary value of damage that was done
(We’ll return to the question of how damages are computed when we get to tort law; but for now, just realize this requires going to court, expert testimony, and a judgment.)
Damages lead to better outcomes when transaction costs are high, that is, when bargaining is impossible (or likely to fail).
In example: injunction leads to E being forced to prevent damage (cost $500)
With damages, he can just pollute and pay for it (cost $300)
E payoff (non-cooperative)
800
500
L payoff (non-cooperative)
300
300
Combined payoff (non-cooperative)
1,100
800 22 22

24. Comparing injunctions to damages…
Injunctions are generally cheaper to administer
No need for court to calculate amount of harm done
But damages are generally more efficient when bargaining is impossible
In general, three possibilities: injurer prevents harm, injuree prevents harm, nobody prevents harm (someone pays for it)
Efficiency: cheapest of the three
Damages: injurer can prevent harm or pay for it;
injurer chooses whichever is cheapest
Injunction: injurer can only prevent harm
More generally, under damages, the injurer is responsible, but he has two options: prevent the harm, or pay for the harm
The injurer will choose whichever is cheaper to him (lower private cost)
But with damages, the injuree is indifferent between the two – the laundromat doesn’t care whether the harm is avoided, or whether he sustains $200 in harm and then gets a check for $200 in damages
Which means the injurer is no longer imposing an externality; so when he chooses between preventing the harm and paying for it, he chooses whichever is more efficient
But under an injunction, the injurer would be forced to prevent the harm, even if that’s more expensive than just paying for it afterwards
In the example we just saw, the electric company would have to install $500 scrubbers to prevent $200 worth of harm
Under a damages rule, the electric company could just pollute and then pay $200 in damages
(Still less efficient than having the laundromat install filters, but less inefficient…)
So when private negotiations are impossible – when transaction costs are high – damages lead to a more efficient outcome 23 23

25. So now we know… Any rule leads to efficient outcomes when TC are low
Injunctions are cheaper to implement
Damages lead to more efficient outcomes when TC high
Leads Calabresi and Melamed to the following conclusion:
When transaction costs are low, a property rule (injunctive relief) is more efficient
When transaction costs are high, a liability rule (damages) is more efficient
So, injunctions are cheaper to implement, but rely on bargaining being possible
Damages are more expensive to implement, but lead to better outcome if the parties can’t bargain
This leads Calabresi and Melamed to the following conclusion:
When transaction costs are low (or private negotiations can be expected to succeed), a property rule (or injunctive relief) is more efficient
When transaction costs are high (or there are impediments to private negotiations), a liability rule (damages) is more efficient 24 24

26. Exactly agrees with principle from last week
Transactions costs low  design law to facilitate trade
Property rule does this: clarifies right, allows trade
Transaction costs high  design law to minimize losses due to failures of private bargaining
Liability rule does this: gives injurer ability to violate entitlement when efficient, even without prior consent
This agrees with the rule we came up with a little while ago
When TC are low, we should default to the Normative Coase: design the law to lower them even further
In this case, that means a property rule, which is cheaper to implement and clarifies rights to “lubricate” bargaining
When TC are high, default to the Normative Hobbes: design the law to allocate rights more efficiently
In this case, that means a damages rule 25 25

27. High transaction costs  damages Low transaction costs  injunctive relief
“Private bargaining is unlikely to succeed in disputes involving a large number of geographically dispersed strangers because communication costs are high, monitoring is costly, and strategic behavior is likely to occur.
Large numbers of land owners are typically affected by nuisances, such as air pollution or the stench from a feedlot. In these cases, damages are the preferred remedy.
On the other hand, property disputes generally involve a small number of parties who live near each other and can monitor each others’ behavior easily after reaching a deal; so injunctive relief is usually used in these cases.”
(Cooter and Ulen)
Cooter and Ulen point out that in a wide range of cases, this is how things are actually done
“Private bargaining is unlikely to succeed in disputes involving a large number of geographically dispersed strangers because communication costs are high, monitoring is costly, and strategic behavior is likely to occur. Large numbers of land owners are typically affected by nuisances, such as air pollution or the stench from a feedlot. In these cases, damages are the preferred remedy.”
On the other hand, property disputes generally involve a small number of parties who live near each other and can monitor each others’ behavior easily after reaching a deal; so injunctive relief is usually used in these cases.
But, in the first case – where transaction costs are high, so bargaining is likely to fail – a liability rule is only efficient when the court is able to correctly calculate the amount of damages
(Damages get the injurer to internalize his externality – he pays the cost that he imposes on the injurer – but if damages are calculated wrong, he pays the wrong cost, and so he won’t behave efficiently)
On the other hand, injunctive relief is efficient any time the court can determine who values the right more, regardless of its absolute level
(If the court assigns the right to the correct party, no bargaining is necessary)
This leads Cooter and Ulen to a different interpretation of efficient remedies in the case of high transaction costs: 26 26

28. Low transaction costs  injunctive relief
Cheaper for the court to administer
With low transaction costs, we expect parties to negotiate privately if the right is not assigned efficiently
But… do they really?
Ward Farnsworth (1999), Do Parties to Nuisance Cases Bargain After Judgment? A Glimpse Inside The Cathedral
20 nuisance cases: no bargaining after judgment
“In almost every case the lawyers said that acrimony between the parties was an important obstacle to bargaining…
Frequently the parties were not on speaking terms...
…The second recurring obstacle involves the parties’ disinclination to think of the rights at stake… as readily commensurable with cash.”
When transaction costs are low, injunctive relief is assumed to be more efficient
because it is cheaper for the court to implement
and by making property rights clear, it is more likely to encourage negotiations
Calabresi and Melamed defend injunctions as being optimal by assuming that the parties will privately negotiate after the court rules
Cooter and Ulen (on their website) mention a paper by Ward Farnsworth, examining whether this occurs.[1]  Quoting:
Farnsworth "examines twenty nuisance cases and finds no bargaining after judgment in any of them; nor did the parties’ lawyers believe that bargaining would have occurred if judgment had been given to the loser.
Farnsworth asked the lawyers why they though that no bargaining occurred after judgment.  The lawyers cited two impediments to post-judgment bargaining.
"First, in almost every case the lawyers said that acrimony between the parties was an important obstacle to bargaining.  The parties in these cases often thought that their adversaries were behaving in ways that were unreasonable, discourteous, and unneighborly.  Frequently the parties were not on speaking terms by the time the case was over (sometimes much earlier).  ... 
The second recurring obstacle involves the parties’ disinclination to think of the rights at stake in these cases as readily commensurable with cash."   [1] Ward Farnsworth, “Do Parties to Nuisance Cases Bargain After Judgment?  A Glimpse Inside the Cathedral,” 66 U. Chi. L. Rev. 373 (1999).  27 27

29. A different view of the high-transaction-costs case…
“When transaction costs preclude bargaining, the court should protect a right by an injunctive remedy if it knows which party values the right relatively more and it does not know how much either party values it absolutely.
Conversely, the court should protect a right by a damages remedy if it knows how much one of the parties values the right absolutely and it does not know which party values it relatively more.”
(Cooter and Ulen)
This leads them to a different take on efficient remedies in the high-transaction-costs case:
For example: suppose the court knows that a good night’s sleep is worth exactly $200 to me. Then it can protect this right be damages; then you’ll only have a party if having the party is worth more than $200 to you, since that’s what you’d have to pay me; and this is exactly what’s efficient.
On the other hand, suppose the court has no idea what a good night’s sleep is worth to me, but knows it’s worth more to me than having a party is to you. The court can’t use damages, since it won’t know how much damages to assess; but it can give me an injunction against noise, and then you won’t be able to have the party, which is efficient in this case. 28 28

30. Third way to protect an entitlement: inalienability
Inalienability: when an entitlement is not transferable or saleable
Allocative externalities (enriched uranium)
As the title of the paper suggests, Calabresi and Melamed also talk about a third way to protect entitlements: inalienability
This is when violation of my entitlement is punished as a crime, like with property laws;
but the entitlement is not seen as property, because it cannot be sold
(In some cases, it’s legal to give away the entitlement, just not for money; in other cases, you can’t even give it away.) Kidneys, sex, cocaine, babies, votes, nuclear weapons, unlicensed legal advice
From a Coase point of view, this doesn’t make sense. We said earlier that to achieve efficiency, we should let people trade; now we’re not letting them.
But there are a few instances where prohibiting trade may make sense.
The first is when the allocation of rights imposes an externality
We said earlier, efficiency means every resource is owned by whoever values it the most
But this is only literally true if ownership of this resource does not impose any externalities
If it does – if other people care whether you or I own your car – then it’s more complicated
Example: I’m a nuclear physicist, and I have some enriched uranium left over from an experiment
It’s worth very little to me
Along comes a terrorist, who wants to turn it into a dirty bomb and blow it up in a major city
He’s very determined, and has a lot of money; so the uranium is worth more to him than it is to me
Is it efficient for him to have it?
No, because if he gets it, this imposes a big negative externality on lots of other people (his victims)
So what does Coase say?
Well, in the extreme Coasian view, where there are no transaction costs, there’s still no problem
Because everyone else effected by the sale – all his potential victims, their families, etc. – could take up a collection to pay me not to sell the uranium to this terrorist
And if it’s truly efficient for him not to get it, they could theoretically raise more money than he’s willing to pay, to stop the sale
In the real world, however, this is obviously impossible, for many reasons
So the law takes the simple solution: just makes it illegal for me to sell the uranium at all 29 29

31. Third way to protect an entitlement: inalienability
Inalienability: when an entitlement is not transferable or saleable
Allocative externalities (enriched uranium)
“Indirect” externalities (human organs)
I’ll give another example where inalienability may be appropriate not because of a direct externality, but because of an indirect one: human organs
Specifically, kidneys
Human beings are born with two kidneys, but only need one to live a happy, healthy life
On the other hand, people can’t live without a functioning kidney; but people with kidney disease can live a long, healthy life after receiving a new kidney via transplant
So there are lots of potentially Pareto-improving trades, whereby people with two good kidneys give up one to someone who needs it
This does happen, but it doesn’t happen as much as it could: in 2004, about 15,000 kidney patients received transplants (more than half from dead bodies), but 60,000 more people were waiting for a kidney
Part of the reason for the shortage is that in the U.S., it’s illegal to financially compensate the donor
So, the economist would say, there’s a price cap – the price is legislated to be zero, less than the market-clearing price, so there’s excess demand
If people were allowed to buy and sell kidneys, there would presumably be a market-clearing price – those who needed one, and could afford it, would get one; donors would be willingly giving up an organ, so presumably they’re better off as well; it’s hard to see how outside parties are directly effected, so there don’t seem to be substantial externalities
So what’s the problem?
Well, here’s one.
Today, suppose you pull someone into an alley and beat them to death with a crowbar
You get their wallet and cell phone – nice, but probably not enough to make it worth the risk
Imagine a world where human organs are sold freely
Now if you pull someone into an alley and beat them to death, you can sell all their organs for perhaps hundreds of thousands of dollars
All of a sudden, because we’ve allowed these transactions, perhaps the murder rate goes up 30 30

32. Third way to protect an entitlement: inalienability
Inalienability: when an entitlement is not transferable or saleable
Allocative externalities (enriched uranium)
“Indirect” externalities (human organs)
Paternalism
So in some instances where entitlements are inalienable, there are good reasons – either direct or indirect externalities that might be hard to solve in other ways
But in many cases, I think, inalienability is simply a case of governmental paternalism – legislators believing they know what’s right for people, and trying to impose their view of morality or “correct” behavior through laws
This is how I think about laws governing the drinking age, or prohibiting certain drugs, or laws about gambling – they’re defended on grounds of externalities, but to me, they’re usually more an issue of government trying to ban behavior it doesn’t like
Which is not to say the government is always wrong.
Here’s a recent story from China. A 17-year-old boy wanted an iPad 2 but could not afford it, so he contacted a black-market organ broker and sold one of his kidneys for 20,000 yuan, about $3400.
Turns out, the boy’s parents didn’t know until afterwards; the hospital where the surgery was done wasn’t really qualified to do it; and not surprisingly, the broker has disappeared
Unfortunately, now the boy is having health problems related to the surgery and regrets it, but it’s too late to do anything
So maybe sometimes the government is right to try to ban certain types of transactions
source: National/2011/06/02/Boy%2Bregrets%2Bselling%2Bhis%2Bkidney%2Bto%2Bbuy%2BiPad/ 31 31

33. Another interpretation of inalienability: bans on “repugnant markets”
markets that are illegal because people find them morally or aesthetically objectionable
CA ban on serving horse and dog meat
Paying birth mother to adopt a child
Bans on dwarf tossing
Ticket scalping, price gouging, gambling, drugs, prostitution
Roth: repugnance an important constraint on markets
What people find repugnant changes over time
Charging interest used to be repugnant!
Repugnance has to be considered in practical market design
2012 Nobel Prize winner Al Roth
We just discussed inalienability as referring to certain entitlements that can’t be sold – or certain transactions that aren’t allowed
I gave a couple examples of markets with externalities, where such a ban might make sense
But there’s another interpretation for why certain types of transactions aren’t allowed – which is repugnance
Roth (in “Repugnance as a Constraint on Markets”, Journal of Economic Perspectives 21(3), Summer 2007) writes, “Many Californians not only don’t wish to eat horses or dogs themselves, but find it repugnant that anyone else should do so, and they enacted this repugnance into California law… in 1998.”
Dwarf tossing

34. Recapping our conclusions on remedies…
When transaction costs are low, use injunctive relief
Either rule will lead to efficient allocation (Coase)…
…but injunctions are cheaper to implement
(court doesn’t have to assess level of harm)
When transaction costs are high, use damages
If bargaining is impossible, damages  more efficient outcomes
(Example: polluter can choose to pollute and pay when that’s more efficient than preventing the damage)
Agrees with principle from last week
TC low: design law to facilitate trade (normative Coase)
TC high: design law to not rely on bargaining (normative Hobbes) 33 33