The Economics of Nuisance Law

Abstract

Economic analysis of nuisance law can be divided into two branches: the transaction cost model and the externality model. The two models provide a relatively complete positive theory of nuisance law. Under the externality model, nuisance law optimally regulates activity levels. Nuisance law induces actors to choose socially optimal activity levels by imposing liability when externalized costs are far in excess of externalized benefits or not reciprocal to other background external costs. Proximate cause doctrine plays an important role in inducing optimal activity levels.

Keywords: Nuisance Law, transaction cost model, externality model, proximate cause doctrine, socially optimal activity levels

JEL Classification: K00, K13, K32