My classes uses A. Mitchell Polinsky’s short classic, An Introduction to Law and Economics, as one of the texts – this is the class’s introduction to the Coase Theorem applied to various basic areas of law. Being a first year elective introductory class, we limit ourselves to chapters dealing with fundamental common law topics – contract, tort, property, criminal law. In one of the chapters on criminal law, Polinsky (quoted below) explores the application of the Coase Theorem as viewed through the work of Gary Becker (“Crime and Punishment: An Economics Approach,” 76 J. Pol. Econ. 169 (1968)):
If individuals are risk neutral, then the efficient system of law enforcement is one in which the
finepunishment is as largesevere as possible – equal to the wealthlife of the individuals whose behavior is being controlled. This allows the probability of detection to be very low in order to save enforcement costs. Note that the logic of this result does not depend on the magnitude of the costs imposed on others by the harmful activity. Thus, for example, if some activity imposed only a $1 cost on others, it still would be efficient to use as large a fine as possible – $10,000 in the example – in order to achieve optimal deterrence with the smallest possible expenditure on enforcement …. Although there is nothing logically wrong with the preceding argument, it is premised on an assumption – risk neutrality – that is not likely to be correct when the finepunishment is as high as the wealthlives of the individuals whose behavior is being controlled.
Although I won’t do it, it is tempting to give students the (photoshopped, I’m sure) photo, the quote, and then “Discuss.” (H/T to my student Brianna.)