Property Rules versus Liability Rules

Abstract

A fundamental legal problem is whether property rights should be protected by property rules or by liability rules. In this Article, we provide a systematic economic analysis of the choice between property and liability rules. We answer a basic question: why is it that liability rules are commonly used in the context of harmful externalities (such as pollution and automobile accidents), whereas property rules are generally employed to protect possessors of things against potential takers? In the course of our analysis, we demonstrate that many commonly held beliefs about property and liability rules are mistaken. Our analysis is also relevant to policy; for example, we show that in important contexts liability rules (and pollution taxes) are more efficient than property rules (including much regulation) even when damages must be set using only limited information about harm.