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James Stodder
Coase argued that externality rights should sometimes be flexible, but warned that ambiguity can also hinder market transactions. Flexible liability is not uncommon and can be shown to provide useful information under nonconvexity. At a global optimum, each side must be able to compensate the other. There are also limited incentive gains from flexible liability for private externalities. For public externalities, however, claims will be exaggerated when agents are risk seeking and understated when they are risk averse. Efficient specifications of right are thus unlikely to emerge from self-interested litigation alone.
