Ambiguous Quality Changes from Taxes and Legal Rules

Abstract:     
Legal rules have long been analogized to taxes. Conventional analysis has often assumed that the mix of attributes within commodities is either fixed or costlessly measured. This Article explores the consequences for legal rules from dropping this neoclassical assumption of constant quality. Instead, attributes are costly to measure, and substitution can occur by altering levels of attributes (such as durability) within commodities, services, and activities. The Article extends models of quality under commodity-excise taxes to the more complex case of legal rules mandating product enhancements (such as nondisclaimable warranties) and to rules aimed at pricing external harms (such as pollution taxes). The Article shows that the range of possible quality effects, direct and indirect, of legal rules is greater than that in the case of excise taxation and that quality changes present issues of measurement cost that have been overlooked. In particular, these quality responses provide alternative and very different explanations for key data invoked by proponents of behavioral law and economics and by advocates of liability rules over property rules. The possibility of quality changes highlights difficult measurement issues in evaluating the efficiency and equity of legal rules.

Keywords: Quality, liability rule, property rule, informational subset argument, measurement, per unit tax, ad valorem tax, behavioral law and economics, pollution, warranty

JEL Classification: H20, K11, K12, K13, K34, L15

Accepted Paper Series