Columbia Law School Scholarship Archive Faculty Scholarship Faculty Publications 2008 Market Damages, Efficient Contracting, and the Economic Waste Fallacy Alan Schwartz Robert E. Scott Columbia Law School,
[email protected] Follow this and additional works at: https://scholarship.law.columbia.edu/faculty_scholarship Part of the Contracts Commons, and the Law and Economics Commons Recommended Citation Alan Schwartz & Robert E. Scott, Market Damages, Efficient Contracting, and the Economic Waste Fallacy, 108 COLUM. L. REV. 1610 (2008). Available at: https://scholarship.law.columbia.edu/faculty_scholarship/186 This Article is brought to you for free and open access by the Faculty Publications at Scholarship Archive. It has been accepted for inclusion in Faculty Scholarship by an authorized administrator of Scholarship Archive. For more information, please contact
[email protected]. MARKET DAMAGES, EFFICIENT CONTRACTING, AND THE ECONOMIC WASTE FALLACY Alan Schwartz* Robert E. Scott** Market damages are the best default rule when parties trade in thick markets: They induce parties to contract efficiently and to trade if and only if trade is efficient, and they do not create ex ante inefficiencies. Courts commonly overlook these virtues, however, when promisors bundle services that are not separately priced. For example, a promisor may agree to pay royalties on a mining lease and later to restore the promisee's property. When the cost of completion is large relative to the "market delta "--the increase in market value-courts concerned with avoiding "economic waste" limit the buyer to the market value increase. This concern is misguided. Since the buyer commonly prepays for the service, a cost-of-completion award actually has a restitution element-the prepaid price-and an expectation interest element-the market damages.