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In an important article, Calabresi and Melamed distinguish two different techniques for protecting legal entitlements. One they call a "property" rule and the other a "liability" rule. According to Calabresi and Melamed, a right or entitlement is protected by a property rule when it can be appropriated by a non-owner only if he first purchases permission to do so from the owner of the right. When a right is protected by a rule of this sort, one who appropriates it without the owner's permission will always be subject to a special sanction—typically, a fine or imprisonment. If a right is protected by a liability rule, in contrast, a non-owner who unilaterally appropriates it need only compensate the owner, after the taking, for any loss the owner suffers. The compensatory amount which a nonowner must pay for taking a right protected by a liability rule is set by a representative of the state rather than by the owner of the right in a voluntary transaction between owner and taker.

Calabresi and Melamed attempt to explain why some legal entitlements are protected by a property rule and others by a liability rule. They suggest that in certain cases the cost of negotiating the voluntary transfer of a right may be sufficiently high to frustrate the transfer. Where this is so, a property rule, which is intended to encourage transfers of this sort, is likely to promote an inefficient allocation of resources. This point is illustrated by automobile accidents and pollution torts. In both cases, a voluntary transfer of entitlements is almost certain to be prohibitively expensive: in the case of an automobile accident because of the cost of identifying the victim beforehand, and in the case of pollution torts because of freerider and hold-out complications which are likely to make any negotiated settlement enormously difficult and time-consuming.

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