Jean Monnet Center at NYU School of Law

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2. Comparative Cost-Benefit Analysis (CCBA)

This part will develop and critique comparative cost-benefit analysis ("CCBA").[45] This tradeoff device serves as a benchmark for evaluation of the actual tradeoff devices to be considered and compared below. It has the advantage, by definition, of maximizing the net regulatory costs and trade benefits. This part will begin to compare tradeoff devices in terms of a wider institutional cost-benefit analysis that, in addition to taking account of the ability of a tradeoff device to maximize the net sum of regulatory costs and trade benefits, examines administrability; distributive concerns, moral concerns and theoretical concerns (avoidance of interpersonal comparison of utilities). These considerations may give impetus to a retreat from CCBA to simplified or truncated, or simply different, tradeoff devices, including NTR, SMERT, NP, LTRAT and BT: the tests actually in use. "The difficulties of balancing or 'optimization' have also led scholars to define forms of 'bounded rationality' in which various rules of thumb substitute for fully comparative weighing of alternatives."[46]

a. CCBA Defined

As Farber and Hudec,[47] Pearce,[48] Runge[49] and Wils,[50] have noted, it is not difficult to begin to imagine a first-best tradeoff device from an economic standpoint. The simplest cost-benefit analysis, and the one most conventionally used in the regulatory context, is static cost-benefit analysis: is the regulatory benefit greater than the trade detriment?[51] However, this static, single-institutional analysis is insufficient, and should be replaced by a more dynamic comparative approach.[52] CBA should be replaced by CCBA because CBA alone fails to maximize benefits (or minimize net costs), but simply examines whether benefits exceed costs.

Domestic CBA has been formally implemented at least since 1981 in the U.S., with varying formulations in a number of contexts in legislation[53] and regulation and through executive order,[54] in order to discipline and inform the regulatory process. The 1993 formulation modified the original 1981 formulation by recognizing that benefits and costs cannot be limited to those that may be monetized. A "global" CBA would simply add international concerns to the domestic evaluation.[55] These concerns might include trade concerns, but might also include issues of externalization and the desire for explicit or implicit cooperation with other states.[56] Of course, once global CBA begins to include in its calculation adverse effects of regulation on foreign persons, either in the form of non-pecuniary externalities or pecuniary externalities, some kinds of regulation will appear more costly. On the other hand, regulation that protects foreign persons or removes externalities will appear more beneficial. Environmentalists and deregulators alike would be required to accept the consequences of thinking globally and acting locally.

A comparative global perspective would compare the cost-benefit profiles of various combinations of national regulation and international discipline of national regulation in a dynamic evaluative setting. CCBA maximizes the sum of (i) benefits of free trade plus (ii) loss of benefits of regulation.[57] CCBA has some unique and substantial benefits, but many faults. Of course, merely recognizing its faults is an insufficient basis for determining not to use it: assuming acceptance of the proposition that tradeoff is necessary, we must find a tradeoff device that is superior. In this section, we evaluate some of the parameters by which CCBA might be compared with other tradeoff devices: (i) maximization of net gains of trade and regulation, (ii) administrability, (iii) distributive concerns, (iv) moral concerns and (v) theoretical concerns. These factors themselves are not commensurable, and so we cannot place them on a simple tote-board to determine when CCBA should or should not be used. Rather, these factors must be examined and subjected to political or deliberative analysis in order to determine which tradeoff device should be used in particular circumstances.

b. Maximization of Net Gains of Trade and Regulation

By definition, CCBA is a relentless search for the solution that results in maximum net gains of trade and regulation. As noted above, one element of such maximization involves the inclusion of global effects. The inclusion of global effects may be examined using either the rhetoric of efficiency and externalization, or the rhetoric of political legitimation. These two rhetorics are two sides of the same coin.

One of the main arguments in favor of the use of the dormant commerce clause in the U.S. has been the problem of exclusion of affected foreign parties from the political process:

Underlying the stated rule has been the thought, often expressed in judicial opinion, that when the regulation is of such a character that its burden falls principally upon those without the state, legislative action is not likely to be subjected to those political restraints which are normally exerted on legislation where it affects adversely some interests within the state.[58]

This statement by Justice Stone reflects economic theory relating to externalities: states may be expected to seek, where possible, to externalize costs to outsiders. Such externalization is often presumed inefficient because the decision-makers do not take all of the costs of action into account, although Coase has shown the problematic nature of this proposition.[59] It is also seen as illegitimate insofar as the persons making the decisions are not the ones who will bear the full consequences of those decisions. Thus, in the commerce clause context, Prof. Tushnet has argued that "[a] national viewpoint must be inserted in the process if the real costs are to be fully considered. In a sense, national supervision is designed to guarantee that the external costs of regulation are considered by local legislatures."[60]

i. Externalization and Prescriptive Jurisdiction.

Thus an initial issue for any tradeoff device to address is the degree of externalization: how much of the effects of a local measure are felt externally, measured in either relative (percentage of total effects) or absolute (magnitude of external effects) terms?[61] In other words, how much jurisdictional overlap exists? It is important to note that the amount of overlap depends on horizontal allocation of prescriptive jurisdiction: on how prescriptive jurisdiction is allocated among states. It is theoretically possible to devise rules of prescriptive jurisdiction that would be ideal in fiscal federalism terms: that would exclude overlap. This would eliminate the externality problem discussed above and substitute a significant accounting or jurisdiction allocation problem.[62]

Prof. Levmore argues that in a specific type of externalization, cases of exploitation by one state of monopoly power to the disadvantage of outsiders, a per se rule of invalidity should apply.[63] In the case of mere interferences with interstate commerce, on the other hand, Levmore argues for CBA. He thus limits the scope of applicability of CBA. Levmore generalizes his exploitation-interference dichotomy by arguing that in circumstances in which externalization is greater, judicial scrutiny should be greater.[64] This is justified as a proxy for a balancing test: where externalization is greater, there is less likely to be a countervailing local benefit. However, this is not a per se rule: in some cases, CBA may indicate that a local regulation is justified even if most of the cost side falls on non-residents.[65]

Implicit in Levmore's distinction is a comparative institutional analysis that prefers to leave decisions to state political processes where they are likely fully to evaluate costs as well as benefits.[66] Where the state political processes cannot be expected to reach a globally efficient position, due to the accentuated capacity to externalize, he would truncate the analysis and simply hold the state legislation invalid. To the extent, on the other hand, that costs are borne internally, by domestic consumers or others, there is less reason to expect the state political process to act inefficiently, and so a per se rule of invalidity is not appropriate.

However, externalization cannot be the lone touchstone for determining when local legislation must fall to integrationist goals.[67] First, externalities are extremely difficult to define. Second, the Coase theorem[68] has exposed the distributive ramifications, and inescapably value- laden nature, of the definition of externalities and decisions to "internalize" externalities.[69]

Economists take property rights as givens, and define externalities based on the effects of one person's actions on the property rights of another, although the latter may not have any legal recourse.[70] In this jurisdictional context, it is necessary first to define the scope of each unit's regulatory jurisdiction, before we can speak of externalities.[71] Demsetz recognizes that "[e]xternality is an ambiguous concept," that includes external costs, external benefits, and non-pecuniary as well as pecuniary externalities.[72] "[C]ompetitiveness externalities are pecuniary externalities. According to standard economic theory, pecuniary externalities, which are reflected in market prices, should not result in market failures."[73] In the international trade context, we tend to think of the competitive benefits flowing to an exporter from lesser environmental standards as a pecuniary externality imposed upon the producers of similar products in the importing state. However, if there were a legal rule requiring the exporting state to maintain a higher level of environmental standards, then this effect would not be a pecuniary externality but an ordinary externality. Pigouvian economic theory would suggest that the ordinary externality should be internalized.

Consistent with Coase's attack on Pigou, Demsetz theorizes that "property rights develop to internalize externalities when the gains of internalization become larger than the cost of internalization."[74] In the international trade context, this means that an externality exists--and is unaddressed--where there is a harmful effect but the states involved do not enter into arrangements to internalize the harmful effect. However, law--property rights--may be developed by government to do so. In the international context, "government" is not extremely active, and, to the extent it exists, has a more contractual nature.

ii. Representation and Legitimation.

As noted above, externalization and political legitimation through representation are two sides of the same coin: one in economic terms and the other in political terms. The exclusion of foreigners argument includes, or, translated from economic into political terms, is, a claim regarding legitimacy: that the internal political process is insufficient to legitimate the application of domestic law to the disadvantage of foreigners, who, by definition, have not participated in the formal political process that led to the legislation.[75] However, the suggested remedies for this alleged illegitimacy raise other issues of legitimacy: (i) is it appropriate for central decision-makers to override local decisions, and (ii) are central courts the appropriate forum to do so?[76] These questions, which combined ask whether central courts should supervise local legislatures, raising the "government close to the people" concern of subsidiarity, recall at least part of the legitimacy problem with Lochner era substantive due process.[77] In a sense, the rejection of Lochner[78] is a recognition that efficiency cannot be determined in the abstract, but only by political processes.[79] This point is central to the discussion of courts versus legislatures, and is elaborated throughout this article. One difference between substantive due process and commerce clause balancing is that, as noted above, commerce clause balancing always includes an additional set of values that are not normally expected to be incorporated in local legislatures' deliberations.[80] The argument from representational legitimacy, like the argument from externalization, seems to have a reciprocal nature in the Coasean sense.[81]

c. Administrability: Standards versus Rules and Courts versus Legislatures

Administrability is an important parameter by which to critique CCBA, as CCBA entails substantial costs of administration: the costs of evaluating regulatory costs and benefits and trade costs and benefits. One way of evaluating administrability is by reference to the distinction between a standard and a rule. In this sense, CCBA is a standard, while a tradeoff device like NTR or SMERT may be considered more rule-like. NTR or SMERT, for example, are less likely to invalidate local regulation, leaving it to the political process to address inefficiencies remaining when local legislation is left standing. Therefore, administrability also implicates the choice of courts versus legislatures as institutional devices for doing tradeoffs.

i. Standards versus Rules

NP, BT and CBA rebel against legal formalism, holding that mere categories are insufficient to determine rights, but that evaluative measures must be applied. Legal formalism is thus hostile to these tradeoff devices.[82] However, Prof. Sullivan counters that "[s]tandards make visible and accountable the inevitable weighing process that rules obscure."[83] One might re-state this observation to the effect that standards make weighing occur on a case-by-case basis at the court level, while rules are the result of generalized pre-weighing at the legislative level.

In terms of administrability, it seems that rules would be preferred to standards as a general matter. They facilitate planning by private actors, and reduce the costs of adjudication after activity has occurred. However, there are many detailed and situation-specific factors to consider in comparing rules with standards. Putting aside the institutional choice between courts and legislators, Prof. Kaplow analyzes the choice in terms of costs of promulgation, costs of learning the law, costs of compliance advice, error costs due to over-inclusiveness or under-inclusiveness, flexibility, predictability, enforcement costs and consistency.[84] He concludes that the "central factor influencing the desirability of rules and standards is the frequency with which a law will govern conduct. If conduct will be frequent, the additional costs of designing rules--which are borne once--are likely to be exceeded by the savings realized each time the rule is applied."[85] Conversely, "[i]f behavior subject to the law is infrequent, . . . standards are likely to be preferable." "Of particular relevance are laws for which behavior varies greatly, so that most relevant scenarios are unlikely ever to occur."[86] Perhaps international society as it stands today may be viewed as an example of a context in which "trade and . . . problems" have thus far occurred with relative infrequency, making use of a standard appropriate. As these problems occur with greater frequency, legislation of specific rules may become appropriate.[87]

Of course, even formal rules have potentially significant costs: the exceptions, and their determination, may devour the formal realizability[88] of the rule. In practice, courts may develop distinctions, exceptions and strained interpretations in order to allow the court's vision of substantive justice to triumph over predictability and administrability.[89]

Prof. Hadfield applies an incomplete contracts analysis to vague statutes, which we in turn can apply to vague constitutions and treaties.[90] Constitutions and treaties may be optimally incomplete with appropriate instructions to decision-makers to complete the "contract" in particular cases. The parameters to consider include (i) the costs of advance specification, (ii) the stochastic nature of the future, (iii) the ability to customize to particular facts in specific cases, and (iv) the potential value of diversity of compliance techniques.

ii. Courts versus Legislatures

As part of the decision whether, and what extent of, central supervision of local regulation is efficient, it is necessary to determine whether the central supervision should be effected by adjudicative or legislative institutions. While this article does not try to address the way that legislatures make tradeoffs, legislation represents the default option, preferred by many, for making tradeoffs. Choice of a less intrusive judicial tradeoff device is consonant with an emphasis on central legislative action to make tradeoffs. There are several issues that affect the choice between legislation and adjudication in this context. The first that we will address is institutional competence. Second is the dichotomy examined above between rules (which purport to give more control to the legislator) and standards (which purport to confer a measure of discretion to the adjudicator). Third, and most important, is the question of which institution best reflects constituent interests: best serves as a forum for the revelation of preferences. Fourth, and most sophisticated, is the question of how central adjudicative and legislative institutions work together, and how they work with local legislators.

It is a commonplace that legislatures, the consummate political branches, are best able to engage in subtle balancing and weighing of competing social interests.[91] Like other common knowledge, origins and bases of this commonplace are often forgotten. "[T]he competing considerations in cases involving state proprietary action often will be subtle, complex, politically charged, and difficult to assess under traditional Commerce Clause analysis. . . . [T]he adjustment of interests in this context is better suited for Congress than this Court."[92] However, given the realist and critical insight that judicial decisions inevitably are also politically charged, and given the fact that all good adjudication is subtle and complex, this commonplace may be usefully subjected to further analysis. While this commonplace is suspect as a matter of bureaucratic institutional competence, it may be revalidated by virtue of the fact that legislatures provide a more direct forum for revelation of individual preferences than do courts.

". . . I do not know what qualifies us to make . . . the ultimate (and most ineffable) judgment as to whether, given importance-level x, and effectiveness-level y, the worth of the statute is 'outweighed' by impact-on-commerce z."[93] This statement adds to our discourse in two ways. First, it frames CBA in something akin to Hand Formula[94] terms. By doing so, it implicitly raises the question, if courts can balance this way in negligence cases, why can they not balance this way in interstate or international commerce cases? Second, in this statement, Scalia asks the question that this article must begin to address: what qualifies courts to engage in CBA? Academic commentators also beg the question of judicial competence to engage in BT or CBA. Consider the following statement by Prof. Regan:

The court has no warrant for second-guessing the [state] legislature either about what counts as a good effect (providing the legislature is not aiming at something forbidden, which gets us back to the purpose inquiry), or about the valuation of the good effect . . . or about just how much of the good effect is actually achieved. For that matter, the court has no basis for deciding how bad is what would have to be regarded as the bad effect in a balancing analysis, namely the diversion of business . . . .[95]

First, Regan appears to be referring to state (not federal) legislatures as the appropriate evaluators of good effects. Accepting this assumption (while recognizing the countervailing public choice and social choice critiques), we may consider that the state may also enter into agreements with other states in order to maximize good effects. Similarly, each individual is presumptively the best observer of his own values. However, when an individual enters society, he or she accepts that the things he values may be evaluated differently, and traded off differently, by a court. Again, negligence law provides an apt example. Thus, when a state enters a federation or economic integration organization, it may choose to accept that the things it values may be evaluated differently by that organization's organs. If it does not, it would not allocate power over those issues to that organization. While within the United States, this contractarian perspective may be stale, in the sense that it was more or less true in 1787, but may no longer be true today, the GATT/WTO and EU social contracts comprise fresh examples of states giving up autonomy in exchange for reciprocal action by other states.[96] The question Regan begs is whether or not the states have done so.

Second, Regan argues that the bad effects can only be measured by reference to the economic status quo, and that neither an individual state nor the collectivity has any legally cognizable interest in maintaining the status quo. This intriguing and revolutionary argument cannot be accepted, as it would lead to great loss, and to a Hobbesian war of all against all, not to mention its inconsistency with the notion of Pareto efficiency, which looks to whether any person is made worse off, given the status quo. Regan's approach would allow states "incidentally" to confer grave detriments on other states, in pursuit of even the smallest benefit at home. It would allow the growth of large and disproportionate barriers to trade. Consider the potential consequences to domestic society if there were no legally cognizable property rights--no legally cognizable interest in maintaining the status quo. Individuals would engage in activities without regard for the interests of their neighbors, and chaos would result. We have property rights and liability rules in domestic society to avoid such chaos. It is strange to suggest that interstate or international society are so different as to render inapplicable these basic tools of social order.[97]

In the end, it is necessary simply to recognize that the policy opinion offered by Regan when he stipulates that "provided they do not single out foreigners, the states need not attend positively to the foreign effects of laws they adopt nor to the distribution between locals and foreigners of the benefits and burdens of those laws"[98] is unsupported by either theoretical or empirical argument. Federal governments like the U.S., regional integration organizations like the EU, and international organizations like the WTO exist not simply to police discrimination,[99] and have seen fit through both legislative and adjudicative action to enhance regulatory cooperation in more intrusive respects.[100] Why would these entities simply leave the gains from this type of cooperation on the table? Implicit in Regan's argument, but not analytically supported, is the assumption that this cooperation should be effected by legislative bodies but not through the use of adjudicative bodies.

Certainly, individual courts seem to have fewer analytical resources at their disposal than the U.S. Congress.[101] However, if magnitude of analytical resources were the only determinant of whether courts should decide cases, there might never be any adjudication. Is the tradeoff question special in a way that indicates that it should be answered legislatively rather than judicially? One important respect in which the tradeoff question is special is that it is a constitutional, or meta-legislative question: it deals with the allocation of power to legislate. Of course, in the horizontal, as opposed to vertical, federal context, courts deal with this problem frequently, under the label of "conflict of laws" or "prescriptive jurisdiction."[102] In addition, courts are frequently called upon to apply constitutional rules to invalidate legislative acts: this is what constitutional rules are for, and this is what judicial review is for.[103] Courts are required to balance and integrate multiple social values in most types of cases, including, as mentioned above, tort cases (applying the Hand Formula), choice of law decisions (applying the "modern" approach that requires balancing of multiple factors) and various types of constitutional judicial review. In each of these types of cases, courts implicitly balance or decide who balances, with or without the benefit of a legislated rule.

Courts have the ability to engage in context-specific analysis, whereas statutes are usually for general application. To the extent that rules differ from standards, the establishment of standards delegates substantial work to courts. In the U.S. dormant commerce clause context, "courts created the doctrine early, and undertook to monitor it, because Congress could not anticipate and provide for every conceivable impingement on interstate commerce, and the Union might not have survived if the courts had not intervened."[104] Courts have the ability to accept from legislatures a general bargain--a rule--and to implement that bargain in particular cases.

iii. Institutional Synergies: Central and Local, Legislative and Adjudicative.

In the common law, property rights and liability rules developed initially through the elaboration of rules by iterative adjudication. Especially in the area of nuisance, a hybrid of property rights and liability, judicial balancing is the rule, at least in the U.S. It is open to legislatures to override or supplement common law rules, and this happens often, given the fact that in domestic society we have well-developed legislative capacity. The same is true in the U.S. federal system, and in the EU's common market: adjudication works together with legislation, and legislation intercedes where adjudication is determined by the legislature to produce an inadequate outcome. The EU provides a vivid example of this type of interaction.[105] There are also interactions and synergies between adjudicative decision-making and legislative decision-making in the U.S. system.[106]

Redish and Nugent argue that state statutes within the U.S. should be excluded from judicial review under the dormant commerce clause because Congress can legislatively "review" and invalidate state statutes under the supremacy clause, and the states "have a special ability to protect their interests through resort to the national political process."[107] This is an argument against the doctrine of implicit preemption, which allows local regulatory barriers to trade to be addressed by courts prior to the legislation of specific (and supreme) central law. The argument in favor of dormant commerce clause preemption is bureaucratic and political, relying on the assertion that central legislatures are constrained by time and politics so that they cannot address all of the trade barriers local legislatures might create, and need pre-emptive assistance from courts. Furthermore, it is worth noting that preemption simply reverses the bureaucratic burden of seeking central legislation, as, in the dormant commerce clause and EU article 30 context, judicial invalidations may generally be "reversed" legislatively.[108] Thus, Congress may eliminate any commerce clause problem with state legislation, and may reverse a judicial determination of invalidity of state legislation under the commerce clause. On the other hand, the possibility of legislative reversal may help to legitimate and embolden judicial action invalidating state laws.[109] The EU system lacks the broad legislative capacity of the U.S. Congress, and the WTO lacks any conventional legislative capacity at all.

In each of the circumstances studied in this paper--the EU, the GATT/WTO and the U.S.--the need to establish free trade has challenged local prerogatives. In fact, the expansive definition of trade or commerce in the EU and U.S. has significantly eroded the notion that there is a hard core of sovereignty reserved to their components.[110] Of course, many worry about both these challenges to state sovereignty, and about challenges posed by the GATT/WTO system, as it expands and deepens its coverage of issues traditionally considered part of the domaine reservé.[111] However, the larger threat to sovereignty seems to come from the legislative capacity of the federal government in the U.S., and of the EU institutions in the EU. This is a critical institutional difference between the U.S. and EU, on the one hand, and the WTO, on the other. The dormant commerce clause and articles 30 and 36 provide negative integration, but there is ample legislative capacity for positive integration, assuming political will. In the GATT/WTO system, there is little realized legislative capacity,[112] and thus it is impossible to produce the kind of pro-integration judicial-legislative dynamic that has proven so powerful in the EU.[113]

d. Distributive Concerns

It is impossible to separate issues of externalization and representational legitimation from issues of distribution. We consider externalization and legitimation above from the standpoint of whether the interests of foreigners are taken into account in the decision process; here, we consider whether those who lose due to the decision finally taken are compensated for their loss. Interestingly, none of the tradeoff devices considered here provide for any direct compensation.

The U.S. commerce clause is often justified by reference to the political utility of economic union, and to the value of avoiding the jealousies, resentment and retaliation that might arise from state actions that harm outsiders.[114] The EU's goal of economic union also has political motivations, and the GATT/WTO system also seeks, perhaps less explicitly and more indirectly, to promote political harmony. These political goals may be recharacterized as problems of distributive effects: the distributive effects of local law should not be, and should not be seen to be, too adverse for a particular outside group, or for the group of outsiders as a whole.[115] Thus, even where the global costs of a local law are less than its global benefits, it is worth considering the distribution of those costs and benefits. There are several ways of rationalizing the inclusion of distributive concerns in our analysis. First, in the standard analysis, economic efficiency is compromised for the political stability that arises from a certain distribution of incomes. Second, and more complex and theoretically challenging, economic efficiency is defined broadly enough to include non-economic values, such as political stability born of narrower distribution of incomes. In both cases, it is recognized that a tradeoff between efficiency (in the form of maximization of net gains) and distribution is rational; the only question is whether the tradeoff is one that economics can address.

Considering economic efficiency and distribution in the first sense, it is clear that one of the central issues in analysis of "trade and . . . problems" is the distributive consequences of any determination: tradeoff problems arise where increased freedom of trade comes at the expense of local regulatory benefits, and conversely, local regulatory benefits give rise to costs in trade terms. The trade costs fall on outsiders, as well as local consumers, and standard public choice theory indicates that local producers will often prevail against these interests. From a practical standpoint, distributive consequences may stand in the way of change: state A may request that state B revise its regulation in order to ameliorate adverse trade consequences to state B, and state A may refuse because the requested revision would confer a detriment on its residents, without consideration of the relative magnitude of the detriment conferred on state B residents.

A state of affairs like that described above is Pareto efficient if it is impossible to improve the welfare of state B without diminishing the welfare of state A (and vice-versa). Thus, assuming for a moment that it is impossible to bribe state B, the Pareto efficiency criterion will not examine the relative size of the detriments, and will accept this state of affairs, even if it could be shown that the regulatory benefit to state B is only worth $1,000,000, while the trade detriment to state A is worth $10,000,000. However, if representatives of state A can communicate, negotiate and contract with state B to divide the $9,000,000 surplus, they would be expected to do so. Thus, if transaction costs are less than the surplus, this state of affairs is not Pareto efficient, and such procurement of consent is an acceptable means of reaching Pareto efficiency.

In law and economics, it is not uncommon to use a slightly different test of efficiency: potential Pareto efficiency ("PPE"), otherwise known as Kaldor-Hicks efficiency.[116] Another way of looking at PPE is that it would be equivalent to Pareto efficiency, assuming a condition of zero transaction costs. PPE merely requires that enough surplus be generated to compensate the injured outsiders, without concerning itself with whether compensation is actually paid, or whether the transaction costs of such payment exceed the surplus generated, in which case it would not be expected that compensation would be paid. In other words, a particular move is potential Pareto superior to the status quo if its net benefits exceed those of the status quo, and is PPE, or potential Pareto efficient, if its net benefits exceed those generated by any other conceivable structure.[117]

An important distinction between simple Pareto efficiency and PPE is that PPE conceived in this way is comparative and unique: given the ability to compensate losers, only one structure satisfies the criterion that no-one can be made better off without someone being made worse off. Thus, PPE entails comparative cost-benefit analysis searching for a unique maximum net benefit. While this is interesting in theory, in practice, we can only look at finite alternatives and determine which alternative is potential Pareto superior.

PPE assumes away transaction costs and the problem of distribution, but reaches a potentially higher aggregate net benefit, and assumes that transactions will occur to reach that higher aggregate net benefit. For this reason, PPE is often an unsatisfactory policy tool: it cannot be assumed that a PPE state of affairs will be reached, due to the actual existence of transaction costs. Thus, a tribunal applying CBA would be well-advised to consider the potential for redistributive transactions between the principals, and the distributive consequences of its decision. PPE is often eschewed by liberal economists because it allows policy changes to be justified without regard to their distributive consequences: a regulatory change that benefits the rich more than it harms the poor would be validated under PPE, but invalidated under Pareto efficiency analysis.

In the real world, redistributive payoffs may be direct and in cash, but more frequently, especially in the international context, they will take the form of formal or informal, diffuse or narrow, reciprocity.[118] Often redistributive payoffs are agreed and then required pursuant to law or other institutional arrangements. For example, agreement to legislate by majority vote, as in the EU, may be viewed as an institutional structure for an unspecified, and only partially anticipated, series of transactions.[119] Agreement to a particular tradeoff device to be applied by an adjudicative tribunal may be viewed similarly. Sometimes you will be disciplined and sometimes I will be disciplined: we will receive roughly equivalent payoffs, and even if in the fullness of time yours turns out to be larger, the present value of mine is larger than what I would have received without such agreement.

PPE is an armchair mechanism for striking hypothetical bargains. The armchair academic speculates as to what people want and calculates a bargain that they might enter into to maximize the aggregate preferences of the participants. Therefore, PPE has two problems. First, we have little basis for confidence that its speculated preferences are correct. Second, its phantom compensation raises the specter of adverse distributive effects.

e. Moral Concerns: Commensurability

Coincident with the rise of CBA in environmental and other regulatory areas, and its use and misuse to restrain such regulation, has developed a critical literature, suggesting problems with CBA.[120] This literature has criticized CBA both in theory and in practice. Some of the practical critiques of CBA as used are clearly correct. For example, CBA that considers only regulatory costs, or only monetary costs and benefits, is simply ignorant, unless there is a transaction cost or other plausible justification for ignoring benefits and other costs. The more serious critiques, of the more thoughtful form of CBA, argue that this CBA relies on commensuration, which is (a) morally deficient and (b) theoretically objectionable as it involves inter-personal comparisons of utility.[121]

Prof. Steven Kelman critiques CBA as a moral philosophy, and argues that as a moral philosophy, CBA is circular: it relies on moral positions for its inputs.[122] However, "moral philosophy" seems too high a standard by which to measure CBA. Rather, CBA is better considered a tool of liberal moral relativism. It is not itself a moral philosophy, but an institutional mechanism for analysis and synthesis of disparate values, which may be used to assist us to integrate, and ultimately decide among, contending moral, and perhaps other, mandates.[123]

Most of us seem to engage in this type of CBA in our individual decisions, trading off one moral principle against another, or morality against the achievement of other goals. Where we might otherwise consider a moral tenet to be a side constraint, a more parsimonious theory, with greater explanatory power, might consider a moral tenet a preference. Morality is a preference that each of us (hopefully) has,[124] but that is heterogeneous in the real world. For example, "there are legitimate reasons for diversity in environmental regulation across countries."[125] Certainly some moral tenets, such as that against taking another life, have pre- emptively high, or nearly pre-emptively high values.

When we form groups, we must institutionalize procedures to engage in this type of CBA for our collective decisions, recognizing that our individual moralities, and our other preferences, are different; each forming a vector to be combined with that of others. Thus, while CBA itself is not a useful moral theory,[126] it might be a useful way to organize various moral perspectives, and it is a useful way for people with varying moral theories, people with the same moral theories and different other preferences, and even people with the same moral theories and the same preferences, to analyze policy together. CBA is thus consistent with the tradition of liberal individualism exemplified by Hobbes, Locke, Rawls, Nozick and Buchanan.[127]

The evaluation of costs and benefits of collective decisions is a political act, but is also probably a useful analytical step in understanding the consequences of the proposed decision. What role does monetization serve? Different endowments and different preferences make it impossible in the real world to use money to engage in interpersonal comparison of utilities. However, in a zero-transaction cost world, one in which potential Pareto efficiency is the same as ordinary Pareto efficiency, an infinite series of costless transactions would result in each of us maximizing his or her own utilities, and the prices at which these transactions took place (if they used money) would be good indicators of our utilities. This is why the fundamental theorem of welfare economics chooses market transactions as the best engine of welfare: the zero-transaction cost market results in perfect revelation of utility. Thus there may be low transaction cost circumstances, perhaps where there are highly liquid markets, in which market valuation in money terms is a (relatively) good indicator of utility. Furthermore, to be selected as a tool of analysis, monetary evaluation need not be a perfect indicator of utility or method of arraying information. It need only be a better indicator than the alternatives. And so, we turn to comparative institutional analysis: what structure allows us to make social decisions that best reflect our collective individual preferences?

Conventional CBA seeks to reduce all costs and benefits to monetary terms, so that they will be comparable mathematically. It does so using a "willingness to pay" criterion for benefits.[128] For example, it is possible to deduce the willingness of individuals to pay for cleaner air by analyzing the price differentials for housing in locations with high air quality versus locations with low air quality.[129] CBA in the context discussed here necessarily involves the comparison of differently denominated values, such as free trade versus environmental protection.[130] None of these values, including the market-type values of free trade and competition, are easily monetized.[131] However, this only means that they cannot easily be compared in formal mathematical terms along a single dimension; it does not mean that they cannot be compared at all: apples are red, while oranges are orange, oranges contain more acid, both are somewhat spherical but with different distinctive shapes, etc.[132] Each of these qualities may be quantified, but their quantification cannot be combined, except arbitrarily. Perhaps the integration of multiple policies, and less formal analysis that compares without mathematics, is the domain of law, rather than of mathematical economics. If it is, law still has much to learn from economics.

Moreover, the act of choice is an act of either explicit or implicit commensuration. That is, our tradeoff decisions may be analyzed as circumstances of revelation of preferences, and combined with the tradeoff decisions of others to provide information about relative "prices." This does not mean, however, that it is incumbent on courts or legislatures to commensurate in particular circumstances: whether they should do so is a separate question. It is a question of comparative institutional analysis. Nor does it mean that we must monetize: it may not assist clarity of analysis to do so. However, in any decision-making context, the decision-maker must commensurate. Prof. Kelman responds to this argument only by pointing out the difficulties and subjective nature of monetization.[133] By doing so, he seems to accept the point that commensuration is necessary, but objects to the methodologies used to commensurate. The existentialist would respond that we may struggle within the circumstances in which we find ourselves, but we may not escape them. Monetization, if it is useful, simply facilitates comparison, and facilitates the delegation of comparison responsibilities, by allowing the principal to direct the agent in discrete numerical terms. If it makes choice easier and better, it should be used. Monetization in this sense may itself be subjected to cost-benefit analysis.

The application of the potential Pareto superiority criterion requires some metric of comparison to make sense of the requirement of full compensation, but neither that criterion nor the commitment to subjective criteria for the evaluation of personal welfare entail selecting money (or wealth) as the metric. Money is an appealing metric (or unit of account) for economists because it is the medium of exchange and therefore is the convenient denominator for comparing interpersonal exchange values of events or options.[134]

It is impossible directly to translate the values of local regulatory autonomy into monetary terms. Indirect market methods,[135] contingent valuation methods[136] and the development of a liquid market for barter of regulatory jurisdiction[137] may provide rough guides to conversion. Where there is no monetized market that may reveal valuation of particular regulatory or trade measures, the only available test of the Pareto efficiency or PPE of a particular outcome is whether it is accepted by the parties involved.[138]

On the other hand, when we translate dissimilar values into monetary amounts and seek to commensurate on that basis, we engage in interpersonal comparison of utility, by virtue of the assumption that a dollar is worth as much to one person as to another.[139]

f. Theoretical Concerns: Avoidance of Interpersonal Comparison of Utility

Even if it were possible to monetize all values, interpersonal comparison of utility, using money as a reference or not, would still raise difficult theoretical problems. Despite its widespread use in law and economics, the concept of PPE is criticized by some economists, because it entails the theoretical problem of interpersonal comparison of utilities.[140] In our context, it does so by juxtaposing the costs (and benefits) incurred by state A with those incurred by state B, and purporting to compare them. This requires not only that the costs be measured in comparable terms (here money), but also that a monetary unit be a valid reflection of utility for each individual involved.

Finally, it would seem useful to imagine the problem of CCBA as a problem of institutions. When an individual engages in decision making, she may commensurate between her own values on a relatively consistent and rational basis, and engages only in intrapersonal comparison of utility. When and to the extent that she enters society and shares decision-making authority, she agrees structures that will allow her input into the relevant social unit's decisions, presumably reflecting to a satisfactory extent her values. While Arrow showed that preferences cannot be aggregated in this sense, again,[141] people seem to form institutions to do so. They can mandate those institutions to make decisions based on a gestalt or on "deliberative judgment," or they can mandate those institutions to monetize. Either way, the institutions will commensurate; either way they will engage in interpersonal comparison of utility. The choice of method will depend on an evaluation of which method provides the best decisions at the lowest cost.

[45] Cost-benefit analysis may be static: considering the costs and benefits of a single alternative and considering whether the benefits exceed, or otherwise justify, the costs. On the other hand, cost-benefit analysis may be comparative or dynamic: identifying a series of alternatives and choosing the alternative that provides the greatest net benefits or the smallest net costs. For a description of cost-benefit analysis in a comparative mode, see, e.g., JAMES T. CAMPDEN, BENEFIT, COST, AND BEYOND: THE POLITICAL ECONOMY OF BENEFIT-COST ANALYSIS 22 (1986).

[46] Gottlieb, supra note 22, at 855, citing JAMES G. MARCH, DECISIONS AND ORGANIZATIONS at 3, 12-14 (1988).

[47] Farber & Hudec, supra note 9, at 1417: "A cost-benefit analysis would insure that the rules were optimal, and also that regulators had taken regulatory burdens on outsiders into account." Farber and Hudec argue that courts avoid CBA because of its Lochnerian implications, and turn to a search for intent. The search for intent turns into a search for proxies for intent. However, the search for proxies leads back toward more inchoate balancing tests. We thus vacillate between formalism and realism.

[48] David Pearce, The Greening of the GATT: Some Economic Considerations, in TRADE & THE ENVIRONMENT: THE SEARCH FOR BALANCE 20 (James Cameron, Paul Demaret & Damien Geradin, eds. 1994). Pearce considers the cost-benefit analysis globally: is free trade more valuable than environmental protection? Luckily, we may avoid this choice. The present article argues that a more atomistic approach, examining more particular cases, provides more efficient results.


[50] Wouter P.J. Wils, The Search for the Rule in Article 30 EEC: Much Ado About Nothing, 1993 EURO. L. REV. 475 (1993). See also Dunoff, supra note 4, at 1449 (arguing for a cost-benefit balancing test); Saul Levmore, Interstate Exploitation and Judicial Intervention 69 VA. L. REV. 563, 574 (1983) (arguing for use of CBA in cases of "interferences," and invalidation in cases of "exploitations" under the U.S. commerce clause).

[51] See also Farber & Hudec, supra note 9, at 1405: "In a community consisting of several smaller units of government (a United States consisting of individual states, or a GATT consisting of individual nations), the ultimate question is whether the gain of the regulation for insiders outweighs the harm it causes to outsiders" (footnote omitted). The footnote omitted from this quotation indicates that the gain to insiders considered by Farber & Hudec is "tangible economic gain" from trade protection. The present article, on the other hand, considers the broader gain from regulation, recognizing, with Farber & Hudec, that protectionism alone offers little gain to the greater society. In fact, the present article recognizes that the trade detriment may be felt both at home and abroad.

[52] See Wils, supra note 49, at 478-79. Wils establishes a first-best balancing test between "valued regulatory effects" (VRE) and "anti-integrationist effects" (AIE), then shows how under art. 30 of the Treaty of Rome, the ECJ has retreated from and advanced to such a test. He explains moves to second-best, truncated or simplified tests on the basis of error costs and administration costs. It is not clear from Wils' exposition precisely how AIE would be calculated, although Wils refers to measuring "the extent to which the national measure influences production and consumption activities throughout the Community," weighting this influence by reference to the degree of currently achieved integration. To put it more finely, costs must be the deadweight losses caused by the trade effects of the national measure: it must be expressed in terms of lost gains from trade. Furthermore, it is not clear why the degree of currently achieved integration is relevant. Wils states that "[t]he further integration advances, the weightier becomes the anti-integrationist effect of the same national measure." Perhaps this is a way of evaluating the lost gains from trade against the potential gains from trade, which I argue below is necessary. However, Wils does not explain his measure in these terms. On the benefit side, Wils "weights" the regulatory objective by the effectiveness of the measure. Again, there is a more parsimonious way of defining benefits: what is the value of the regulatory measure? This definition of benefits incorporates issues of effectiveness. Wils also "weights" the regulatory objective "negatively" by reference to "the degree to which the objective is already being served by Community action." This is relevant again from a comparative perspective--which provides the best cost-benefit profile as between national action and Community action--but it is not clear how this factor would be applied in a non-comparative context. Wils has not included other factors necessary to a full comparative perspective.

[53] See, e.g., the Unfunded Mandates Reform Act of 1995, Pub. L. No. 104-4, 109 Stat. 48 (to be codified in 2 U.S.C. § 1501) [hereinafter, the "Unfunded Mandates Act"]. Section 201 of this statute requires covered agencies, with exceptions, to "assess the effects of Federal regulatory actions on State, local, and tribal governments, and the private sector . . . ." Before engaging in rulemaking that would result in government or private expenditures greater than $100,000,000, a covered agency must prepare a statement containing, inter alia, "a qualitative and quantitative assessment of the anticipated costs and benefits of the Federal mandate, including the costs and benefits to State, local, and tribal governments or the private sector, as well as the effect of the Federal mandate on health, safety, and the natural environment . . . ." Section 205(a) requires the relevant agency to "identify and consider a reasonable number of alternatives and from those alternatives select the least costly, most cost-effective or least burdensome alternative that achieves the objectives of the proposed rule." While "least costly, most cost-effective or least burdensome" are three different things, this clearly requires a comparative cost-benefit analysis.

[54] Executive Order No. 12,866 establishes a requirement of cost-benefit analysis. 3 C.F.R. 638 (1994). See also the well-known Reagan era predecessor, Executive Order No. 12,291, 3 C.F.R. 127 (1981).

[55] CBA must "include all costs and all benefits of a programme, no matter to whosoever they accrue, over as long a period as is pertinent and practicable." H.E. Klarman, Application of Cost Benefit Analysis to Health Services 4 INT'L J. HEALTH SERV. 326 (1974). But see the Unfunded Mandates Act, supra note 52, §§ 202, 205 (excluding effects on foreign governments, and perhaps implicitly including only U.S. private sector effects); Economic Analysis of Federal Regulations Under Executive Order 12866, a report dated January 11, 1996, prepared by an interagency group convened by the Administrator of the Office of Information and Regulatory Affairs of the Office of Management and Budget, available at This report makes the following statement on international effects:

Regulations limiting imports--whether through direct prohibitions or fees, or indirectly through an adverse differential effect on foreign producers or consumers relative to domestic producers and consumers--raise special analytical issues. The economic loss to the United States from limiting imports should be reflected in the net benefit estimate. However, a benefit-cost analysis will generally not be able to measure the potential U.S. loss from the threat of future retaliation by foreign governments. This threat should then be treated as a qualitative cost. . . .

This provision would only consider effects outside the U.S. indirectly, at best. A further important question is which types of domestic benefits may be considered: can the benefits of protection of local industry and jobs be included on the benefit side of the equation? We ordinarily would not include such pecuniary externalities in the equation, but it is important to recognize that these considerations are critical in political contexts, and that any equation that did not reflect them would have little predictive power. Furthermore, can the benefits of re-election or other benefits to politicians and bureaucrats derived from protectionism be included? See Philip Jones & John Cullis, Legitimate and Illegitimate Transfers: Dealing with "Political" Cost-Benefit Analysis, 16 INT'L REV. L. & ECON. 247 (1996). A full theory would respond to these questions.

[56] This fact indicates the need for greater functional integration in international society: while the GATT/WTO system is concerned with trade matters, and its CBA would not address for example international environmental benefits, it is necessary to include all costs and all benefits in an integrated analysis.

[57] This maximization formula is congruent with the minimization formula posited by new institutional economics scholars in respect of institutions more generally. "Institutions will be chosen that minimize total costs, the sum of transformation and transaction costs, given the level of output." Douglass C. North & John J. Wallis, Integrating Institutional Change and Technical Change, 150 J. INST. & THEO. ECON. 609 (1994). "Economizing takes place with reference to the sum of production and transaction costs, whence tradeoff in this respect must be recognized." OLIVER E. WILLIAMSON, THE ECONOMIC INSTITUTIONS OF CAPITALISM 22 (1985). Tradeoff devices are created in a broader institutional context, where the creation of the tradeoff device itself is a transaction in which we might expect similar maximization. There are important transaction cost, transaction gain and transaction loss reasons arising at the level of creation of tradeoff devices that may explain why the tradeoff devices we observe fall short of comparative cost-benefit analysis. Thus, while the formula described above is particularistic, there may be significant cost savings that could be derived from treating groups of somewhat diverse cases similarly. In addition, we must recognize that there are limits on the number of hypothetical solutions that can be evaluated: our maximization efforts would be rationally ignorant.

[58] South Carolina State Highway Department v. Barnwell Bros., Inc., 303 U.S. 177, 185 n.2 (1938).

[59] See Coase, The Problem of Social Cost, supra note 24.

[60] Mark Tushnet, Rethinking the Dormant Commerce Clause, 1979 WISC. L. REV. 125, 143 (1979).

[61] For a review of the economics of externalization, see Maureen L. Cropper & Wallace E. Oates, Environmental Economics: A Survey, in 30 J. ECON. LIT. 675, 677 (1992).

[62] See Richard Epstein, Holdouts, Externalities and the Single Owner: One More Salute to Ronald Coase, 36 J. L. & ECON. 553 (1993).

[63] Levmore, supra note 49, at 567. See also Frank H. Easterbrook, Antitrust and the Economics of Federalism, 26 J. L. & ECON. 23 (1983).

[64] Levmore, supra note 49, at 610 ("In examining local regulations, courts should be more suspicious of those imposing substantial costs out-of-state than those placing costs primarily within the legislating jurisdiction").

[65] Of course, this leaves open a significant distributive issue. See Jacques Leboeuf, The Economics of Federalism and the Proper Scope of the Federal Commerce Power, 31 SAN DIEGO L. REV. 555 (1994).

[66] See also id.; Tushnet, supra note 59, at 132-33.

[67] But see Leboeuf, supra note 64 (arguing that externalization is the appropriate touchstone).

[68] For a summary and reference to further literature, see Robert D. Cooter, The Coase Theorem, in THE NEW PALGRAVE: A DICTIONARY OF ECONOMICS 457, 457-60 (1987). See also Elizabeth Hoffman & Matthew Spitzer, The Coase Theorem: Some Experimental Tests, 25 J. L. & ECON. 73 (1982); Robert D. Cooter, The Cost of Coase, 11 J. LEG. STUD. 1 (1982).


[70] To a realist lawyer, this is a strange formulation: if the harm can be done with impunity, the property rights bundle must not include the relevant stick. This leads us to a recognition that the entire concept of externality begs the question of legal rights. Therefore, it would be circular to design legal rights to internalize externalities.

[71] See Joel P. Trachtman, Externalities and Extraterritoriality: The Law and Economics of Prescriptive Jurisdiction, forthcoming in JAGDEEP BHANDARI & ALAN O. SYKES, COMPARATIVE ASPECTS OF INTERNATIONAL LAW (1997) (analogizing rules of prescriptive jurisdiction in international society to rules of property in domestic society).

[72] Harold Demsetz, Toward a Theory of Property Rights, 57 AM. ECON. REV. PAPERS AND PROCEEDINGS 347, 348 (1967).

[73] Stewart, supra note 4, at 1341.

[74] Demsetz, supra note 71 at 350. It is also plausible to expect that the costs of establishing and enforcing property rights would decline, and the benefits would increase, as population density increases. Greater functional economic integration would presumably yield similar results in the international arena.

[75] Regan refers to this argument as the Carolene Products theory of the dormant commerce clause. Donald Regan, The Supreme Court and State Protectionism: Making Sense of the Dormant Commerce Clause, 84 MICH. L. REV. 1091, 1103 (1986): "The central idea of [this theory] is that the courts should supervise state economic regulation in order to guarantee that out-of-state interests, which are unrepresented in the legislature that produced the regulation are fairly treated." See also id. at 1160-67; United States v. Carolene Products Co., 304 U.S. 144 (1938), and especially n.4 thereof, which suggests a process or representation basis for judicial review. For a proponent of this theory, see Tushnet, supra note 59. See also LEA BRILMAYER, CONFLICT OF LAWS: FOUNDATIONS AND FUTURE DIRECTIONS 206 (1991) (arguing against the application of one state's laws to impose costs on persons not part of its political community).

[76] Another remedy, which we will not address here, is the establishment of choice of law rules that will eliminate externalization. See Trachtman, supra note 70.

[77] Lochner v. New York, 198 U.S. 45 (1905). Justice Peckham's majority opinion in Lochner speaks of a means- ends rationality type review. 198 U.S. at 57-58. Tushnet draws the parallel between substantive due process and commerce clause balancing. Tushnet, supra note 59, at 143-150.

[78] West Coast Hotel Co. v. Parrish, 300 U.S. 379 (1937).

[79] However, Lochner might be resurrected by the recognition that adjudication too is a political process, or at least the exercise of power delegated from the political process.

[80] There is, however, an argument that local legislatures would consider "global" values in order to induce reciprocity, or as a matter of specific agreements (subject to the Compacts Clause, U.S. CONST., art. 1, § 10, within the U.S.) between local governments.

[81] See note 38, supra.

[82] On the issue of formal rules versus standards, see Ronald A. Cass, Judging: Norms and Incentives of Retrospective Decision-making, 75 B.U.L. REV. 941 (1995); Colin S. Diver, The Optimal Precision of Administrative Rules, 93 YALE L. J. 65 (1983); Isaac Ehrlich & Richard A. Posner, An Economic Analysis of Legal Rulemaking, 3 J. LEGAL STUD. 257 (1974); Gillian K. Hadfield, Weighing the Value of Vagueness: An Economic Perspective on Precision in the Law, 82 CAL. L. REV. 541 (1994); Louis Kaplow, Rules Versus Standards: An Economic Analysis, 42 DUKE L. J. 557 (1992); Kathleen Sullivan, The Supreme Court, 1991 Term - Foreword: The Justices of Rules and Standards, 106 HARV. L. REV. 24 (1992).

[83] Sullivan, supra note 81, at 67.

[84] Kaplow, supra note 81.

[85] Id. at 621.

[86] Id.

[87] It is important to recognize, as Kaplow does, that standards may gradually be transformed into rules through the doctrine of stare decisis: rules may evolve from standards. Thus, in the tradeoff context, once a case is litigated with respect to the regulatory measure at issue, the standard is transformed to a rule: the regulatory measure is either valid or invalid for all subsequent cases involving all other private actors. Finally, Kaplow considers the costs, in terms of predictability and learning the law, of delay in promulgating specific rules, either legislatively or through precedent. He shows how the accuracy benefits that may be derived from delay and additional experience may be overwhelmed by such costs. Id. at 622-23.

[88] This term is used to refer to the self-application or ease of implementation of law: to its formal rule-type character, leaving no discretion to judges. See Duncan Kennedy, Form and Substance in Private Law Adjudication, 89 HARV. L. REV. 1685, 1687-89 (1976), citing R. VON IHERING, DER GEIST DES ROMISCHEN RECHT 50-55, 84 (1883).

[89] This is a common story. See, e.g., id.; Glen O. Robinson, Comment: Simplicity versus Complexity in the Law, in ECONOMIC LIBERTIES AND THE JUDICIARY 249, 253-54 (James A. Dorn & Henry G. Manne eds., 1987) (describing how per se rules in antitrust do not necessarily reduce the need for litigation). See also Joel P. Trachtman, Conflict of Laws and Accuracy in the Allocation of Government Responsibility, 26 VAND. J. TRANSNAT'L L. 975, 1000-1001 (1994) (describing how the formalist vested rights theory in conflicts of law did not produce the predictability that it promised, due to judicial creation of "escape devices").

[90] Hadfield, supra note 81, at 547.

[91] But see the social choice critique of collective decision-making.

[92] Reeves, Inc. v. Stake, 447 U.S. 439 (1980).

[93] CTS Corp. v. Dynamics Corp. of America, 481 U.S. 69, 95 (Scalia, J., concurring) (1986). See Sullivan, supra note 81, at 84 (Scalia would "deconstitutionalize issues and remit to politics"). See also Eric J. Segall, Justice Scalia, Critical Legal Studies, and the Rule of Law, 62 GEO. WASH. L. REV. 991, 1012 (1994).

[94] The "Hand Formula" was articulated in United States v. Carroll Towing Co., 159 F.2d 169, 173 (2d Cir. 1947). According to this approach, duty is "a function of three variables: (1) the probability [of harm]; (2) the gravity of the resulting injury; [and] (3) the burden of adequate precautions." See W. PAGE KEETON, DAN B. DOBBS, ROBERT E. KEETON & DAVID G. OWEN, PROSSER AND KEETON ON THE LAW OF TORTS 173 (5th ed. 1984): "It thus is fundamental that the standard of conduct which is the basis of the law of negligence is usually determined upon a risk-benefit form of analysis. . . ." For a recent critique of the Hand Formula in law and economics terms, see, e.g., Gregory C. Keating, Reasonableness and Rationality in Negligence Theory, 48 STAN. L. REV. 311, 328-41 (1996). Keating describes the importance of the Hand Formula as follows: "without its molding influence, the law of duty and breach threatens to dissolve into a formless laundry list of the factors that define due care and the qualities that describe the careful person." Id. at 311 (citations omitted).

[95] Regan, supra note 74, at 1131. See also note 100, infra.

[96] See Trachtman, supra note 19.

[97] See Trachtman, supra note 70.

[98] Regan, supra note 74, at 1165. Regan himself is not completely comfortable with this proposition, suggesting that "interstate comity should prevent a state from passing a law which it knows will impose large costs out-of-state and which secures only a trivial local benefit." Id. at 1167. This is a thread that, if pulled, would unravel the rest of Regan's argument, for what is comity but a kind of meta-law, and what is this formulation but a proportionality test? Regan stipulates suggestively but delphically that this comity "should not be judicially enforced in the present context." Id.

[99] As shown below, anti-discrimination rules are unstable, and shade into NP, LTRAT, BT and perhaps CBA in a way that renders untenable the argument that "simple" anti-discrimination is sufficient.

[100] See Trachtman, supra note 19.

[101] The conventional argument based on judicial competence is framed as follows:

The judiciary has less access to relevant information than does Congress, which can marshall its committee and agency resources to hold hearings and engage in debate before deciding the matter at hand. While this can be said of any decision of the judiciary, it is of particular import in dormant commerce clause cases because the decision made under the dormant commerce clause is essentially a legislative determination.

Martin H. Redish & Shane V. Nugent, The Dormant Commerce Clause and the Constitutional Balance of Federalism, 1987 DUKE L.J. 569, 594 (1987). While the first quoted sentence is no doubt true, its relevance is rebutted by the first clause of the second quoted sentence. More importantly, the second clause of the second quoted sentence does no more than beg the relevant question.

[102] See, e.g., Trachtman, supra note 70.

[103] But see Louis Henkin, Infallibility Under Law: Constitutional Balancing, 78 COLUM. L. REV. 1022, 1041 (1978), arguing that in the commerce clause context, courts "weigh, not constitutional values which have been specially committed to their care, but economic, social, and political data, and they make projections that are normally committed to legislatures and that have presumably been weighed by a state legislature beforehand."

[104] Id., at 1041 (citations omitted).

[105] See Kalypso Nicola>dis, Comment, in ALAN O. SYKES, PRODUCT STANDARDS FOR INTERNATIONALLY INTEGRATED GOODS MARKETS 143-46 (1995). See also Koen Lenaerts, Two Hundred Years of U.S. Constitution and Thirty Years of EEC Treaty--Outlook for a Comparison, in TWO HUNDRED YEARS OF U.S. CONSTITUTION AND THIRTY YEARS OF EEC TREATY: OUTLOOK FOR A COMPARISON 17 (Koen Lenaerts, ed., 1988). Lenaerts views the 30 years from 1957 to 1987 as the EU's "confederal" period, during which unanimity was required for action, resulting in less than satisfactory progress.

[106] Prof. Henkin points out that "[e]arly intervention by the courts, of course, permitted Congress to avoid addressing problems and issues, and may have deterred Congress also from assigning them to regulatory agencies. In fact, the courts have become a kind of regulatory agency applying doctrine that they create and develop, but that is ultimately under congressional control." Henkin, supra note 102, at 1041.

[107] Redish & Nugent, supra note 100, at 594. "Given their origin as negative judicial inferences from a constitutional grant of power to Congress, the Supreme Court's doctrinal limitations on state interference are always subject to congressional revision." Tribe, supra note 40, at 403 (citations omitted). See Whitfield v. Ohio, 297 U.S. 431, 440 (1936); In re Rahrer, 140 U.S. 545, 561 (1891).

[108] That is, Congress may authorize the states to take action that would otherwise be pre-empted. Western & Southern Life Ins. Co. v. State Board of Equalization, 451 U.S. 658 (1981); Prudential Insurance Co. v. Benjamin, 328 U.S. 408 (1946). See Levmore, supra note 49, at 567 (arguing that the Court should base its review of state statutes on the commerce clause, rather than other, less reversible, grounds).

[109] See Tribe, supra note 40, at 404.

[110] As to the EU, see Renaud Dehousse, Integration v. Regulation? On the Dynamics of Regulation in the European Community, 30 J. COMMON MKT. STUD. 383 (1992); Koen Lenaerts, Constitutionalism and the Many Faces of Federalism, 38 AM. J. COMP. L. 205 (1990). For an interesting dialogue on this issue, see Theodor Schilling, The Autonomy of the Community Legal Order: An Analysis of Possible Foundations, 37 HARV. INT'L L. J. 389 (1996), and the response in J.H.H. Weiler & Ulrich R. Haltern, The Autonomy of the Legal Order--Through the Looking Glass, 37 HARV. INT'L L.J. 411 (1996). As to the U.S., see the discussion of cumulative effects on interstate commerce in Tribe, supra note 40, at 310-311.

[111] See, e.g., Garcia v. San Antonio Metropolitan Transit Authority, 469 U.S. 528 (1985) ("In short, the Framers chose to rely on a federal system in which special restraints on federal power over the States inhered principally in the workings of the National Government itself, rather than in discrete limitations on the objects of federal authority"); Lenaerts, supra note 109, at 220 (1990) ("There simply is no nucleus of sovereignty that the Member States can invoke, as such, against the Community"). In New York v. United States, 112 S.Ct. 2408 (1992) and United States v. Lopez, 115 S.Ct. 1624 (1995), the Supreme Court has shown at least some willingness judicially to circumscribe federal power.

[112] The only real legislation that the WTO can engage in is through treaty formation or amendments. See arts. IX and X of the WTO Agreement, supra note 10.

[113] See Joseph Weiler, The Transformation of Europe, 100 YALE L.J. 2403 (1991).

[114] See Regan, supra note 74, at 1114-1115, n.55. But see Kitch, supra note 34.

[115] See Michael T. Maloney, Robert E. McCormick & Robert D. Tollison, Economic Regulation, Competitive Governments, and Specialized Resources, 27 J. L. & ECON. 329, 330 (1984) ("Economic regulation will be less costly for vote- maximizing regulators to supply where the primary costs of cartelization are borne by consumers in foreign jurisdictions.")

[116] See J.R. Hicks, The Valuation of the Social Income, 7 ECONOMICA 105, 110 (1940); Nicholas Kaldor, Welfare Propositions of Economics and Interpersonal Comparisons of Utility, 49 ECON. J. 549, 550 (1939). See also RICHARD A. POSNER, ECONOMIC ANALYSIS OF LAW 13-14 (1992).

[117] See Keating, supra note 93, at 333.

[118] See ROBERT AXELROD, THE EVOLUTION OF COOPERATION (1984) (demonstrating that under repeated play circumstances, the prisoner's dilemma may be resolved by "tit for tat" strategies that signal and reward cooperation, and punish defection). Axelrod's work has been extensively critiqued.


[120] PPE, and cost-benefit analysis, are criticized by critical legal studies scholars as being indeterminate for two main reasons. First, wealth effects result in preferences that vary depending on the distributive effects of the legal rule at issue, rendering preference-based policy-making circular. Second, the value of regulation to individuals varies depending on whether they are asked to pay to avoid a harm or asked how much they would accept to incur a harm: the offer and asking price disparity. See, e.g., MARK KELMAN, A GUIDE TO CRITICAL LEGAL STUDIES 142-150 (1987). On the willingness to pay versus willingness to accept pricing problem, see, e.g., Elizabeth Hoffman & Matthew L. Spitzer, Willingness to Pay vs. Willingness to Accept: Legal and Economic Implications, 71 WASH. U. L.Q. 59 (1993).

[121] For an analytical survey of the normative critiques, see Jane B. Baron & Jeffrey L. Dunoff, Against Market Rationality: Moral Critiques of Economic Analysis in Legal Theory, 17 CARDOZO L. REV. 431 (1996).

[122] Steven Kelman, Cost-Benefit Analysis--An Ethical Critique, REGULATION, January 1981, 33 at 34-35. See also Donald C. Hubin, The Moral Justification of Benefit/Cost Analysis, 10 ECON. & PHIL. 169 (1994).

[123] See Robert D. Cooter, The Best Right Laws: Value Foundations of the Economic Analysis of Law, 64 NOTRE DAME L. REV. 817 (1989) (arguing that cost-benefit analysis is a methodology for moderating among varying conceptions of the right). CBA may be said to be based on the moral outlook that individuals' preferences are worthy of recognition, and indeed are the exclusive basis for decision-making, in the sense that CBA views costs and benefits in terms of individual preferences. See Herbert Hovenkamp, The Limits of Preference-Based Legal Policy, 89 NW. U. L. REV. 4 (1994).

[124] See IRVING L. JANIS & LEON MANN, DECISION MAKING: A PSYCHOLOGICAL ANALYSIS OF CONFLICT, CHOICE, AND COMMITMENT, chap. 6 (1977). But see Paul Milgrom, Is Sympathy an Economic Value? Philosophy, Economics, and the Contingent Valuation Method, in CONTINGENT VALUATION: A CRITICAL ASSESSMENT (Jerry A. Hausman, ed. 1993).

[125] Jagdish Bhagwati, Trade and the Environment: False Conflict?, in TRADE AND THE ENVIRONMENT: LAW, ECONOMICS, AND POLICY 159, 167 (Durwood Zaelke, et. al, eds. 1993).

[126] See Hubin, supra note 121.

[127] See id. at 180.

[128] See Peter A. Diamond & Jerry A. Hausman, On Contingent Valuation Measurement of Nonuse Values, in CONTINGENT VALUATION: A CRITICAL ASSESSMENT 21-23 (Jerry A. Hausman, ed. 1993) (exploring the distinction between willingness to pay and willingness to accept). See also Hoffman & Spitzer, supra note 122.

[129] Hahn & Hird, supra note 18, at 242.

[130] See, e.g., Baron & Dunoff, supra note 120; Tushnet, supra note 59, at 144-45.

[131] See Cass R. Sunstein, Incommensurability and Valuation in Law, 92 MICH. L. REV. 779 (1994).

[132] See note 12, supra.

[133] Kelman, supra note 121, at 40. In fact, Kelman's analysis itself has much in common with cost-benefit analysis: he argues that CBA is not justifiable because of the difficulties of monetization and the potential error costs it engenders.

[134] Keating, supra note 93, at 311, n.83, citing Armen A. Alchian, Cost, in 3 INTERNATIONAL ENCYCLOPEDIA OF THE SOCIAL SCIENCES 404, 405 (David L. Sills ed., 1968).

[135] Indirect market methods "exploit the relationships between environmental quality and various marketed goods." Cropper & Oates, supra note 60, at 677.

[136] Contingent valuation involves direct survey questioning regarding valuation of environment. See, e.g., ROBERT C. MITCHELL & RICHARD T. CARSON, USING SURVEYS TO VALUE PUBLIC GOODS: THE CONTINGENT VALUATION METHOD 65 (1989); CONTINGENT VALUATION: A CRITICAL ASSESSMENT (Jerry A. Hausman ed., 1993); W. Michael Hannemann, Valuing the Environment Through Contingent Valuation, 8 J. ECON. PERSP. 19 (1994); Note, "Ask a Silly Question . . .": Contingent Valuation of Natural Resource Damages, 105 HARV. L. REV. 1981 (1992).

[137] This might be something like a system of tradeable pollution permits. See Cropper & Oates, supra note 60, at 682-92. The U.S. has recently proposed use of tradeable pollution permits in the international context. See Leyla Boulton, For Sale: A License to Pollute, Fin. Times, May 6, 1996, at 17.

[138] See Bruno S. Frey & Beat Gygi, International Organizations from the Constitutional Point of View, in THE POLITICAL ECONOMY OF INTERNATIONAL ORGANIZATIONS at 64 (Roland Vaubel and Thomas D. Willett, eds.) (1991). See also Brennan & Buchanan, supra note 118.

[139] Hovenkamp, supra note 122, at 15.

[140] See, e.g., INTERPERSONAL COMPARISONS OF WELL-BEING (Jon Elster & John E. Roemer eds., 1991).

[141] See, e.g., KENNETH J. ARROW, SOCIAL CHOICE AND INDIVIDUAL VALUE (1963). For a criticism of this perspective, see Herbert Hovenkamp, Arrow's Theorem: Ordinalism and Republican Government, 75 IOWA L. REV. 949 (1990).

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