Law and Economics Term Paper

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life we are always faced with situations where the rights on one individual overlap those of another, causing a legal conflict that is often decided upon in the court of law. In many cases, these are private rights, but we are sometimes in a situation when the rights delimitation is imposed by the government, as is the case with the tobacco industry and smoking regulations and delimitations.

The problem with smoking in public places bares much resemblance in Canada, Europe or the United States. The right of smoking individuals to smoke in public places was gradually and constantly diminished to the degree that nowadays smoking in restaurants, offices or any closed locations. The movement against smoking in public places seems to have started in Canada in the early 1990s, when the City of Toronto emitted a series of by-laws, referred to as The Workplace Smoking By-law. This law "requires all workplaces to be completely smoke-free, unless a designated smoking area is provided"

. Many companies (83%) chose to ban smoking altogether. In restaurants, the Public Place Smoking By-law was applied, with an 86% compliance level in Toronto

In terms of property rights, we may see, in my opinion, a double limitation here, although from Coase's point-of-view, the limitation is only pointed towards one part. In this sense, the smokers find their right to smoke anywhere grossly limited: no smoking in restaurants or buildings. On the other hand, the most important and significant rights limitation we face is towards the companies, restaurant owners, etc. Indeed, although the respective restaurant owner, for example, has the right to implement his own rules in the business he owns, the government limits them by imposing that he adopts strict anti-smoking rules in his establishment. We need to analyze now what Coase has to say about this.

Coase's article refers to harmful activities/businesses and to what the economic impact of the imposed measures against these activities is. In Coase's opinion, a restrictive measure against a harmful activity is imposed only when "the gain from preventing the harm is greater than the loss which would be suffered elsewhere as a result of stopping the action which produces the harm"

We may apply this statement either from the restaurant owner's point-of-view or from the governmental one. For the sake of the analysis, the governmental perspective seems more useful and interesting. There are several costs we need to take into consideration.

First of all, interdicting smoking in public places means a lower chance of getting sick due to passive smoking. From a governmental point-of-view, this may partially lower the part of the budget that goes to health and medical sectors. At the same time, this part of the budget can be used for other projects. This may be considered the gain from imposing the measure.

On the other hand, we need to pay close attention and analyze the losses caused elsewhere due to the measures imposed to stop the harm. The first and most obvious loss is for the cigarette producing companies. It is quite obvious that a restriction of places where you can smoke may, logically, lead you to smoking less than you would have otherwise. In turn, a decrease in sales may also have a negative impact on the government itself, due to reduced earnings before taxes. This certainly means less money from taxes to the budget.

The second loss is for the restaurant owner. We may assume that the fact that he is no longer allowed to let people smoke in his establishment may turn clients away from him and towards other activities.

In this sense, if we look at the non-smoking in public places measures imposed by the governmental authorities, lower costs on health and medical care are counterbalanced by lower earnings from taxes.

Coase's theories can be excellently applied in this case, however, it seems to me extremely relevant to quote one of his final statements: "problems of welfare economics must ultimately dissolve into a study of aesthetics and morals"

. Indeed, in my opinion, it is less likely that the state has actually analyzed the economical perspective, evaluating whether or not it was in an efficient situation by restricting the property rights in this particular case.

The problem here is, in my opinion, more closely related to morals. The individual property and usage rights were limited in several cases because smoking prevented all people from enjoying a fine meal or from working in a clean environment. The right limitation actions were taken, as such, because they trampled on other individual rights. This should explain why this had to be done with governmental intervention. It was the government's job to ensure that all its citizens could exercise their own rights.

In Coase's opinion, there are two separate situations that can be evaluated, depending on whether the cost of market transactions is taken into consideration. The first situation is really a case available only in theoretical practice. In fact, market transactions imply a series of variable costs and are generally focused towards bargaining between parties, negotiations which should turn to one of the parties' benefits. Logically speaking, if the variable costs of the transaction are higher than the benefits from bargaining, there is no point in having a negotiation anymore. In this case, as Coase explains, a rearrangement of rights takes place when "the increase in the value of production consequent upon the rearrangement is greater than the costs which would be involved in bringing it about."

Following this theory previously described, the government decides, in the particular smoking case we are referring to, to impose direct regulations in order to diminish the administrative costs implied by smoking in public areas. Indeed, the "rearrangement of rights" Coase refers to means that the government's evaluation is that it will be able to benefit more from imposing the non-smoking policy than the actual costs implied (some of which I have previously mentioned).

From Demsetz's discussion, the most important issue, closely related with what I have mentioned din the previous paragraph and to why this needed the government's intervention, is the fact that "property rights convey the right to benefit or harm oneself or others"

. In many cases, it is quite easy to morally determine whether something is harmful or not. In other situations, the economical costs implied come in handy (as is the case with Coase's theory). On the other hand, in many other situation, a higher authority needs to intervene a define when an activity turns harmful and what measures to be taken against it. This is the government. In this particular case, the government needed to give out laws that would protect the non-smokers from the harmful effects of public smoking.

On the other hand, Demsetz points out to an interesting aspect, which may somewhat resemble Coase's theory. At one point, Demsetz marks that "property rights arise when it becomes economic for those affected by externalities to internalize benefits and costs"

. In the smoking in public areas situation, we may be in the case of a communal ownership, where "the right can be exercised by all members of the community"

(the right to eat at the restaurant in a clean atmosphere, but also the right to practice one's vice anywhere in the city).

Both Coase's and Demsetz's theories attempt to point out towards the underlying economical explanations for different rights limitation actions. In my opinion, there are several important and notable observations to be made.

First of all, there is a clear differentiation between welfare economics, actions that are designed by the government to protect its citizens, and the everyday private economics, where any type of rights limitation is generally imposed by a judicial decision.

In one case, we are dealing with moral decisions, imposed, as I have said, because the…[continue]

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