Because in the real world there are costs of bargaining and information gathering, legal rules are justified to the extent of their ability to allocate rights to the most efficient right-bearer.
[1] Coase argued that if we lived in a world without transaction costs, people would bargain with one another to produce the most efficient distribution of resources, regardless of the initial allocation.
[2] Coase used the example of a nuisance case named Sturges v Bridgman, where a noisy sweetmaker and a quiet doctor were neighbours and went to court to see who should have to move.
[3] Coase said that regardless of whether the judge ruled that the sweetmaker had to stop using his machinery, or that the doctor had to put up with it, they could strike a mutually beneficial bargain about who moves that reaches the same outcome of productive activity.
In these cases, the transaction costs eat away, and ultimately eclipse, the price signals that would have led to the most efficient distribution of resources.
So Coase argues that the courts should only intervene in cases that cause an unreasonable amount of nuisance after a wide analysis with regard to the total effect of such interventions.
[8] Coase and others like him wanted a change of approach, to put the burden of proof for positive effects on a government that was intervening in the market, by analysing the costs of the action.
[citation needed] Guido Calabresi in his book The Costs of Accidents (1970)[10] argues that it is still efficient to hold companies liable that produce greater wealth.