Saturday, June 14, 2025 :::
If firm 1 engages in activity that imposes a $10,000 cost on person A but has a $20,000 benefit to person B, and firm 2 engages in activity that imposes a $10,000 cost on person B but has a $20,000 benefit to person A, then person A will sue firm 1 and person B will sue firm 2. If the firms each benefit $6,000 from their activities, then, knowing this in advance, they simply don't engage in those activities. Litigiousness has various obvious costs (court costs, etc.), but one of them is that externalities tend to be treated in a one-sided way; if the firms could plausibly sue the beneficiaries of the activities to internalize some of that benefit, then (even assuming Coase's solution doesn't work), perhaps things work out better.
In a few cases, though, people do seem to sue for benefits. In IP lawsuits, you occasionally hear about some small company suing a large company for infringing its patent, or a band has a big hit and is then sued by the rights holder of a song that was, generally, much less financially successful, and the "damages" claimed are not actually plausible estimates of how much money the IP owner would have earned had the infringement not taken place; it is more nearly based on the benefit that the infringer received. This may be true for other kinds of property-related torts — this feels to me like a consequence of using a property rule rather than a liability rule — and it feels like the compensation is not for the infringing activity per se but for the failure to pay a royalty in advance to use the IP; if you knew you were going to have a big hit, you perhaps would have been willing to pay a large amount of money for the right to create it, and the legal "damages" reflect that.
::: posted by dWj at 4:33 PM
