Values

This chapter describes the economic theory of externalities, which forms the conceptual framework for the subsequent analysis of legal rules and institutions. Externalities are unwanted harms, whether accidental or intentional. The goal of internalizing harm is most directly achieved by imposing a corresponding cost on the party that caused the harm, whether in the form of a monetary sanction (a Pigovian tax) or some other form of punishment. Consideration of values besides efficiency, like fairness or justice, can be incorporated into the enforcer’s decision by adding a side constraint, possibly resulting in an enhancement or a mitigation of the imposed punishment. The chapter concludes by describing the model of precaution, which accounts for actions injurers and victims can take to reduce, if not eliminate, risk.