Efficiency and Equity: What Can Be Gained by Combining Coase and Rawls?

Abstract

This article responds to an argument made by Professors Swygert and Yanes that legal rules be constructed so as to take account of efficiency and equity simultaneously.

First, we present an approach that lawmakers can use when allocating property rights if they wish to pursue an efficient allocation of such entitlements and simultaneously insure that the social benefits of assigning the entitlement efficiently are divided between the competing claimants. We call this theory the "market contrarian" approach to entitlement allocation, and distinguish it from the market mimicking and market facilitating approaches to entitlement allocation favored in most law and economics analyses. We then argue that the joint goals of efficiency and equity might be served by protecting entitlements, once allocated, with what we term "super liability" rules. Such rules have the effect of permitting a disappointed entitlement claimant to take an entitlement from a less efficient owner while insuring that the cooperative surplus created by such an exchange is shared by the parties.

Second, we argue that strategies for constructing legal rules that simultaneously consider both equity and efficiency will usually be inferior to a strategy of creating efficient legal rules and then later using the tax and transfer system to create equity. There are two primary reasons for this: (1) doing equity in the context of a single legal rule will often have the effect of promoting broader inequities; and (2) constructing legal rules to promote equity creates substantial disincentives to the production of social resources.