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Monopoly and the Allocative Inefficiency of First-Best-Allocatively- Efficientor T T Law in Our Worse-Than-Second-Best World: the Whys and Some Therefores

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Monopoly and the Allocative Inefficiency of First-Best-Allocatively- Efficientor T T Law in Our Worse-Than-Second-Best World: the Whys and Some Therefores Case Western Reserve Law Review Volume 46 Issue 2 Article 3 1996 Monopoly and the Allocative Inefficiency of First-Best-Allocatively- Efficientor T t Law in Our Worse-Than-Second-Best World: The Whys and Some Therefores Richard S. Markovits Follow this and additional works at: https://scholarlycommons.law.case.edu/caselrev Part of the Law Commons Recommended Citation Richard S. Markovits, Monopoly and the Allocative Inefficiency of First-Best-Allocatively-Efficientor T t Law in Our Worse-Than-Second-Best World: The Whys and Some Therefores, 46 Case W. Rsrv. L. Rev. 313 (1996) Available at: https://scholarlycommons.law.case.edu/caselrev/vol46/iss2/3 This Article is brought to you for free and open access by the Student Journals at Case Western Reserve University School of Law Scholarly Commons. It has been accepted for inclusion in Case Western Reserve Law Review by an authorized administrator of Case Western Reserve University School of Law Scholarly Commons. CASE WESTERN RESERVE LAW REVIEW VOLUME 46 WINTER 1996 NUMBER 2 ARTICLES MONOPOLY AND THE ALLOCATIVE INEFFICIENCY OF FIRST-BEST- ALLOCATIVELY-EFFICIENT TORT LAW IN OUR WORSE-THAN-SECOND-BEST WORLD: THE WHYS AND SOME THEREFORES Richard S. Markovits INTRODUCTION .................................. 316 A. The Vocabulary and Conceptual Structure of this Article . 329 1. The Basic Vocabulary of Distortion Analysis ..... 329 2. The Allocative-Efficiency Relevance of YXD(PirA...) Figures ............................. 331 (A) When the Marginal Choice Is Marginal in the Sense of Being Infinitesimally Small as Well as Being Last ..................... 332 (B) When the Marginal Choice Is Incremental Rather than Infinitesimally Small ......... 341 3. Predicting the Effect of a Given Change in a Partic- ular Individual-Pareto-Imperfection-Generated Pri- vate-Profitability Distortion on the Mean of the Distribution of Relevant [ID(P7rA...)j Figures .... 343 B. MD(PBUO), MD(PB~QV), and MD(PB ..R)and Their Im- plicationsfor the Value of the Monopoly Distortion in Various Components of MD(PCMPc4) and MD(PBmpc) as Well as for MD(PCpcA), MD(PBcA), and MD(Pirc) on Balance ............................. 346 CASE WESTERN RESERVE LAW REVIEW [Vol. 46:313 1. MD(PBuo), MD(PBQv), and MD(PBPR) and Their Implications for the Monopoly Distortion in Various Components of MD(PCPcA) and MD(PB cA) .... 347 (A) MD(PBUo) and Its Implications for the Monop- oly Distortion in One Possible Component of PC PcA and Two Possible Components of PBApcA ......................... 347 (B) MD(PBQv) and Its Implications for the Monop- oly Distortion in One Possible Component of PCpcA and Two Possible Components of PBA .cA......................... 349 (C) MD(PBPpR) and Its Implications for the Mo- nopoly Distortion in One Possible Component of PC,,cA and Two Possible Components of PBApcA ......................... 355 2. The Reasons for Concluding that Monopoly Virtu- ally Always Distorts PCpcA, PBpcA, and Pic&ApcA on Balance .......................... 363 C. MD(PicAPcA) = YD(PtzMPca) for Different Types of Last Marginal APCA Moves or Last Incremental APCA Moves That Break Even in an Otherwise-Pareto-PerfectEconomy That Does Contain Some Imperfections in Seller Competi- tion .................................. 365 1. The Relationship Between (A) MD(PBOo), MD(PBAQv), and MD(PBppR) and (B) the MD in the Private Profitability of Decisions to Reduce AP Costs by Shifting to a Known, Otherwise-More- Expensive Production-Process-MD(Prtcp,)--or to a Known, Less-AP-Cost-Prone Product-Variant or Location Whose Average Dollar Value to Its Con- sumers Equals the Average Dollar Value of Its More-AP-Cost-Prone Alternative to Its Possibly Different Consumers .................... 368 2. The Relationship Between (A) MD(PBuo), MD(PBAQv), and MD(PBapp) and (B) the MD in the Private Profitability of Decisions to Reduce AP Costs by Shifting to a Known, Less-AP-Cost-Prone but Otherwise-Less-Profitable Product-Variant or Location Whose Average Dollar Value to Its Con- sumers Is Different from the Average Dollar Value That Would Be Placed on Its More-AP-Cost-Prone Alternative by the Consumers of That Alternative Product-Variant or Location-MD(PtAv)..)....... 376 3. The Relationship Between (A) MD(PBuo), MD(PBAQv), and MD(PBppR) and (B) the MD in 19961 TORT LAW IN OUR WORSE-THAN-SECOND-BEST WORLD 315 the Private Profitability of Choices to Reduce AP Costs by Reducing UO or Shutting Down Altogeth- er-MD(PrcAuo) ........................ 382 4. The Relationship Between (A) MD(PBuo), MD(PBQv), and MD(PBpR) and (B) MD(P pcAR) for Different Kinds of APCAR ............... 392 D. Some Preliminary TBLE Analyses of the Allocative Effi- ciency of Various Tort Law Doctrines, Tort Law Institu- tions, and Worker-Health-and-Safety Regulations ...... 403 1. Monopoly and the Allocative Efficiency in an Other- wise-Pareto-Perfect Economy of (A) Shifting from Strict Liability to a "Perfectly Defined" but "Imper- fectly Applied" Negligence Regime and (B) Dis- missing Some Tort Suits on Proximate Cause Grounds ............................ 404 (A) Monopoly and the Analysis of the Allocative Efficiency of Shifting from a Strict Liability plus Contributory Negligence System to a Negligence plus Contributory Negligence Com- bination When "Negligence" and "Contributory Negligence" Are Defined in a FBLE Way but Applied in the Current Non-FBLE Way ..... 404 (B) Monopoly and the Allocative Efficiency of the Most-Allocatively-Efficient "Proximate Cause" Doctrine One Could Devise for an Otherwise- Pareto-Perfect World in Which Tort-Claim Processing Is Allocatively Transaction-Costly . 414 2. Monopoly and the Allocative Efficiency of (A) Determining Negligence and Contributory Negli- gence by Comparing the Allocative Rather than the Private Benefits and Costs of Avoidance and (B) Supplementing Traditional Tort-Damage Awards with Positive and Negative Fines Designed to Elimi- nate the Distortion in the Private Profitability of Avoidance to the Relevant Potential Avoiders .... 422 (A) The Allocative Efficiency of Basing Negligence and Contributory Negligence Conclusions on Allocative Rather than Private Benefit/Cost Comparisons ...................... 424 (B) The Allocative Efficiency of Supplementing Traditional Tort-Damage Awards with Positive and Negative Fines Designed to Eliminate What Would Otherwise Be the Distortion in the Private Profitability of the Most- Allocatively-Efficient Avoidance Move ..... 427 CASE WESTERN RESERVE LAW REVIEW [Vol. 46:313 3. Some Related Institutional Reforms ........... .429 4. The Allocative Efficiency of Assuming That Any Worker-Health-and-Safety Regime That Is Recom- mended by a Joint Labor-Management Worker- Health-and-Safety Committee Is Allocatively Effi- cient .............................. 430 CONCLUSION ................................... 431 APPENDIX A ................................... 433 THE RELEVANCE OF THE DISTINCTION BETWEEN ADDITIVE AND NON-ADDITIVE CASES FOR THE PREDICTABILITY OF THE EFFECT OF A POLICY THAT WOULD ELIMINATE OR REDUCE ONE TYPE OF INDIVIDUAL-PARETO-IMPERFEC- TION-GENERATED DISTORTION IN PRIVATE PROFITS ON THE MEAN OF THE RELEVANT FD(PA ... ) DISTRIBUTION 433 APPENDIX B .................................... 439 AN ILLUSTRATION THAT REVEALS WHY THE BUYER SURPLUS DEFLATION OF PBQv IS SMALLER THAN THE FACTOR- PRICE-DEFLATION-GENERATED INFLATION OF PBQv .... 439 APPENDIX C ................................... 443 THE TENDENCY OF MONOPOLY TO DEFLATE CRITICALLY THE P7E OF AP-COST-AVOIDING PPR (APCAR) FOR MONOP- OLISTIC PRODUCERS WHOSE TORT LIABILITY IS GOV- ERNED BY "TRADITIONAL" NEGLIGENCE-A NEGLIGENCE RULE THAT IS NOT APPLIED TO PPR ............. 443 APPENDIX D ................................... 447 TABLE OF ACRONYMS AND SYMBOLS ................ 447 INTRODUCTION According to The General Theory of Second Best, if one or more members of a set of optimal conditions cannot be fulfilled, there is no general reason to believe that fulfilling more of the remaining conditions will bring you closer to the optimum than fulfilling fewer of the remaining conditions. Second-Best Theory has startling implications for allocative-efficiency' analysis. It im- 1. I substitute "allocative-efficiency" analysis for the standard term "economic-efficien- cy" analysis to remind readers that the concept is a technical term and that one cannot assume that choices that increase allocative efficiency are either desirable from any legiti- 19961 TORT LAW IN OUR WORSE-THAN-SECOND-BEST WORLD 317 plies that, since two Pareto imperfections can counteract each other, one cannot assume without further argument that a situation in which there are more Pareto imperfections2 will be less allocatively efficient than one in which there are fewer Pareto imperfections. Virtually all economists have responded in one of two unsatis- factory ways to The General Theory of Second Best. The over- whelming majority have ignored the theory3 and assumed that any decrease in the number or magnitude of Pareto imperfections will always lead to an improvement in resource allocation. I use the acronym "FBLE" to stand for the type of first-best-allocative-effi- ciency analyses that adopt this assumption because "FBLE" resem- bles the word "fable" and these analyses are based on the "fable" that a decrease in a particular Pareto imperfection necessarily in- creases allocative efficiency. A few economists have rejected such FBLE analyses in favor of general equilibrium models that determine the most-allocatively- mate personal-ultimate-value perspective or consistent with our
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