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Law Rules

How we resolve our disputes

Entries in economics (1)


Economics, Coase Theorem & Mediation

An excellent article appears in the current edition of the Verdict on It discusses the economic principle that has come to be known as the Coase Theorem in the context of recent reports of disputes about reclining seats on airplanes. Specifically, conflicts arise when people disagree about who has the right to precious space (i.e., in economic terms, a “scarce resource”). More importantly, the absence of a dispute resolution system to handle these conflicts expeditiously has lead to disruptive and sometimes physical altercations. The Coase Theorem says that assigning property rights will lead to an efficient outcome through bargaining and negotiation. However, it also recognizes that transaction costs are ubiquitous and important to consider. These costs include having enforcement and dispute resolution mechanisms in place. The airlines will have to remember this if and when they ultimately establish rules regarding the “right” to recline or to prevent reclining.

The author concludes that “Problems are solved not by assuming them away, but by confronting them and thinking about them clearly.” Indeed, the airlines will have to confront this problem. In order to preserve comfort and peace on airplanes, it is important that they think this through completely and explain their decision coherently. This is what makes negotiation and dispute resolution, and life itself, complex. It is also why I have advocated getting a neutral third-party involved when making such decisions. Things are not always as simple as we wish them to be.