What\u27d I Say?: Coase, Demsetz and the Unending Externality Debate

Economists study various problems referred to as market failure - situations that, at least potentially, justify government intervention to solve them. Externalities (or social costs ) are viewed as perhaps the greatest market failure problems. The externality issue has also occasioned much re-thinking of fundamental economic principles, particularly in the context of Ronald Coase\u27s article on The Problem of Social Cost. Coase explained that externalities manifested a more fundamental issue in economics, the costs of transacting over rights to affect other\u27s welfare. Following Coase\u27s work, economists almost reflexively consider social costs problematic only when transaction costs are relatively high. Yet, Coase\u27s analysis has resulted in much confusion, even disagreement. For example, Harold Demsetz has recently objected to aspects of the Coase approach, as a matter of both economics and of government policy. As economics, Demsetz says, Coase\u27s focus on transactions costs is not helpful in resolving questions concerning externalities. Even if transaction costs were zero, externalities would still exist. Moreover, Demsetz objects that focus on transaction costs to explain persistent externalities furnishes spurious reasons for undesirable government intervention in markets. This paper summarizes and evaluates Demsetz objections, maintaining that Demsetz sometimes ignores points that Coase has made. At the same time, Demsetz adds new insights to the Coase Theorem

Doctrinal Analysis and Statistical Modeling in Law: The Case of Defective Incorporation

The first purpose of this Article is to suggest that more substance may exist in the defective incorporation cases than has been evident heretofore. The Article investigates the reasons for the apparent fuzziness and proposes alternative grounds for explaining the cases explored. In particular, recent learning about the standards that courts apply in piercing the corporate veil offers a different perspective on the rationale underlying defective incorporation doctrines. Because the issues presented in the two sorts of cases are very similar, one naturally wonders whether the criteria judges invoke in piercing the veil decisions are also influential in defective incorporation decisions. Second, the Article suggests that the difficulty of identifying standards in any line of cases, including defective incorporation, may lie as much in deficiencies of legal research techniques as in any judicial fuzziness. Rarely, if ever, do judges claim to rely on only a single factor in deciding disputes in a given domain of law. Rather, judges announce a number of factors, each of which, all other things equal, will make a decision for one side or the other more likely. With several factors at work simultaneously, predicting judicial outcomes becomes a more complicated task which, therefore, requires more sophisticated statistical techniques. This Article uses one such method, multiple regression, to determine, from the same sample used by Frey, the relative importance of different factors that might explain judges\u27 decisions in defective incorporation cases

Why Wonder Bread Lost No Dough: Materiality, Settlements and the FTC\u27s Ad Substantiation Program

Previous studies (e.g., by Sam Peltzman) demonstrate the powerful share-value effects of Federal Trade Commission (FTC) actions against firms whose advertising the FTC claims violate the law. Curiously, however, when the FTC announces an investigation but simultaneous settlement of the case with the advertiser, no adverse impact results, an empirical finding thus far unexplained. This article uses a recent FTC action, in which the accused advertiser suffered no adverse equity impact, to explain that result. Many advertising messages challenged by the FTC are not material to consumers. If not - and especially when, as in the case discussed here, the advertiser had much earlier discontinued the advertising challenged - the advertiser predictably would not suffer. Econometric evidence supports the findings of no adverse impact, and of lack of materiality in the messages the FTC challenged