Legal Commentary

Traditional welfarist analysis considers whether a given change in law is optimal by considering the incentives and disincentives it will have on affected actors. Take cap and trade for example. If we give carbon emission credits to domestic industries and allow them to buy and sell them, we can limit emissions, efficiently distribute the production of those emissions, and generate revenue for low-pollution industries?apparently a Pareto-optimal move.

Similarly, if there are couples out there who want babies but can?t conceive, and women who want money and have a womb to spare, we can simply allow those women to rent out their uteruses (uteri?) to the couples, and bingo?Pareto-optimality again, right? Well, not so much it turns out. A large and very interesting literature questions whether markets in surrogacy (and organs, and living babies, and many other things) should be permitted.

There are many different angles to the critique of taboo markets, so I?ll focus instead on one classic objection to them that leads in a slightly different direction. Some work (e.g., Margaret Radin?s ?Market-Inalienability?) suggests that even when the parties to a transaction are made better off by exchange, the fact of the law?s ratifying that transaction can itself have dynamic, and possibly deleterious, effects on society. A legal regime that permits women to rent out their wombs for profit might begin to regard uteruseses, or women, or bodies in general, as indistinguishable from other objects in trade, and these distributed social costs may overwhelm the localized welfare gains of permitting the transactions.

This is just one example of what I?ve come to think of as ?system externalities?: situations where the law?s approbation of conduct or transactions may send messages or have other negative effects on our worldview that cut back against the immediate welfare gains created by the conduct or transaction. I give several other examples of system externalities, and raise some other questions about them, below the fold.

Some examples



System externalities are most familiar from the forbidden markets literature, but they arise in many other legal contexts. Last week I wrote a post about Doug Lichtman?s interesting IP Colloquium conversation about the Shepard Fairey case. During that conversation, Mark Lemley (Fairey?s counsel) raised a concern that requiring artists like Fairey to get permission in advance of creating appropriation art could lead to a ?permission culture? that is ?corrosive?. Bracketing for now the question whether Lemley?s assertion is accurate, this is a classic system externality argument. I understand Lemley to be suggesting that even if it would have been Pareto-optimal for Fairey to have obtained permission from the owner of the Obama photo in order to use it, the law would be entrenching a problematic norm by requiring artists to always seek permission before use. Such a norm could chill the increasingly robust remix culture emergent on the internet, for example.

System externalities appear in work of various ideological and methodological stripes. A classic work in this vein is one of my favorite classic law articles, Richard Epstein?s ?Blackmail, Inc.? This article addresses the blackmail puzzle: why does law make blackmail illegal when it makes both parties better off? Epstein?s answer is that by countenancing blackmail, the law would incentivize the creation of industries that profited off blackmail, the effect of which would overwhelm any welfare gains produced by permitting that conduct.

Objections to certain kinds of stem cell research may also fall into the system-externality category. If the materials used for such research exact no costs on living humans, and using these materials for medical research may produce important health gains, it seems hard to understand why the government should stand in the way of this research, at least from a purely utilitarian point of view. Among the objections to stem cell research are that permitting it may cause us to think of human life as less precious and more cheap, and if this perception became widespread it could make all of us worse off.

General thoughts



Since blogs are the water coolers of legal academia (albeit ?bugged? water coolers, as Kate Litvak pointed out), I wrote this post to see what others might make of this. Here are a few more specific inquiries.

First, does ?system externalities? seem a promising or interesting way to slice across various subject matter and substantive areas of law, as I?ve suggested it is? Or do all these examples seem disparate in some way? On the other hand, maybe someone out there has already sliced things this way, rendering this all redundant. (I freely admit that I?ve done no preemption checking on this so far, though I worry that this is just a re-tread of the law-and-norms and/or expressivist literature that was in vogue during the early 2000s.)

Second, do judges ever invoke system externalities explicitly in cases, or do they implicitly rely on this idea when making decisions? Here?s a possible example from property law: spite fences. These are structures built on one owner?s property that are eyesores designed to antagonize a neighbor, and courts typically bend over backwards to enjoin them (even in the absence of a clear positive-law basis for doing so). Perhaps system externalities provide an explanation: even if the value the owner derives from building the spite fence is greater than the costs suffered by his neighbor, it might still be a good idea to enjoin the owner because we don?t want to live in a world littered with spite fences.

Third, how can we fit system externalities into a welfarist decision-making calculus? System externalities are often dismissed as purely expressive or aesthetic arguments, but I don?t think this tells the whole story. They are often (though not always) expressive arguments, but they have real-world impacts; the idea is even law?s most localized decisions construct the world in particular ways that can have long-term, distributed negative impacts. But even if you buy the theory, it?s hard to say just how these kinds of delayed, systemic effects should be folded into a decision-making process involving two transacting parties.