6.4.1.4.The allocation of entitlements

Ownership 225

The role of the market

Yet, as Ronald Coase asked some forty years ago (and Posner considers in Extract 6.7 below), is the traditional approach really necessary? Consider two neighbouring landowners, a farmer who grows crops and a rancher who rears cattle on two unfenced plots of land. As cattle are no respecters of legal boundaries, let us assume that, in the course of a year, they trample down £1,500 worth of crops in their frequent forays onto the neighbouring land. Let us further assume that the cost to the farmer of fencing his plot would be £500, while the cost to the rancher of doing so to his larger acreage would be £1,000. On whom should the law place the burden? If one approaches the problem from the traditional lawyer’s position, it would seem to be the rancher. His cattle are the cause of the nuisance, and it would seem just that he should bear the cost of alleviating the nuisance by either compensating his neighbour for the £1,500 worth of trampled crops or for building a £1,000 fence. Faced with such a choice, one would expect the rancher to build the fence as it is the cheaper option. But there is another possibility, for the problem of the wandering cattle can equally be solved (as far as these two neighbours are concerned) by the farmer fencing his land. Yet this will cost him £500, and as long as the rancher is liable for the damage caused by the cattle the farmer has no incentive to do so. In contrast, the rancher has every incentive to persuade the farmer because he can alleviate the problem more cheaply than the rancher. The rancher will consequently offer the farmer an amount between £500 and £1,000 (say £750) to build a fence which will both save him money (£250) and reward the farmer (£250) for his efforts. Thus, despite the law placing the burden on the rancher, it is the farmer who, in this example, builds the fence.

What would have happened if the law had placed the burden on the farmer (rather than on the rancher) at the outset by not making the rancher liable for the damage caused by his cattle? In this case, faced with £1,500 worth of potential damage, the farmer would have built the fence for £500, so saving himself £1,000. There would be no opportunity to persuade the rancher to build the fence because it is cheaper for the farmer to do so. Thus, as Coase demonstrated, the farmer builds the fence irrespective of where the law places the initial burden. In the first instance, this is because the rancher pays him to do so, and, in the second, because it is cheaper than bearing the cost of damage to his crops.

Despite its simplicity, the analysis has profound implications for the law, as it appears to suggest that the initial allocation of rights is an irrelevance because the party who values the right the most will, as efficiency dictates, get it in the end; either because he had it from the outset or because he bought it from the person who did. If this is indeed the case, it prompts the question why do we as lawyers go to such trouble balancing out the rights of competing users of land when, no matter what we decide, the market will sort it out in the end. However, as Coase would be the first to point out, the reality is somewhat more complex due (at least in part) to what he described as ‘transaction costs’. This is a term which Coase uses