Property Rights and Liability Rules: The Ex Ante View of the Cathedral

This Article aims to contribute to the study of how the law should allocate and protect entitlements in the presence of externalities. In their classic article published thirty years ago, Calabresi and Melamed studied such questions and offered what they labeled “one view of the Cathedral.” I seek to add to the inquiry started by Calabresi and Melamed by offering an ex ante perspective and analyzing how allocations of entitlements affect parties’ ex ante actions and investments. Suppose that an upstream Factory would benefit from an activity that would pollute a river and harm an activity conducted by a downstream Resort. In this as in many other cases, the respective rights of the parties must be determined. Does Factory have the right to engage in the polluting activity, or does Resort .have the right to water free of pollution? If Resort is entitled to unpolluted water, should it be protected by a property right or by a liability rule?2 Calabresi and Melamed, and the subsequent extensive literature on the subject,3 have primarily conducted what I will label an “ex post analysis.” I use this term to refer to an analysis·that takes as given the payoffs that parties would have with and without externalityproducing actions. In the above example, an ex post analysis would take as given both the presence of Factory and Resort and their potential costs and benefits from their respective activities. Taking these elements of the situation as given, the analysis would examine which entitlement allocations would lead to the efficient level, if any, of pollution- producing activity on the part of Factory.