Thinking About Legal Relations: The Candy Maker/Doctor Example

In working through the idea of human interdependence as the building block for conducting institutional analysis, I frequently return to a couple common examples used in other related literature. I share some of these somewhat-baked thoughts here, as they relate to previous posts about interdependence and using Hohfeld in econ analysis (here and here).  

One of these is the example of the doctor and the candy maker given by Coase (1960). He described two people operating in offices side-by-side: a doctor, looking for a stable, quiet environment in which to treat patients, and a candy maker, utilizing the space for his or her craft, accompanied by the noisy machinery necessary to do so.  Coase uses the case to demonstrate externalities in his larger discussion of transaction costs, or the cost of any kind of bargaining or solution-finding on the part of the doctor. Many writing about this example have been focused on the external effect of the machines, or the noise created. The subsequent questions center around who should bear the cost (through policy-- written or otherwise) of any noise-remediating activity, or the cost of exiting the situation all together (should doctor or candy maker be compensated in some way or forced to pack up and move elsewhere).* 

These are interesting questions. But the focus on the noise, or this ‘external’ effect of the machines is not whole. It is true that when a candy maker goes about his work with the help of his noisy machines, he causes a problem for the doctor next door. If the machines were not there, the doctor would have peace. Yet if the doctor was not there, the machines are no problem. Ceasing the “harm” the candy maker is doing to the doctor would harm the candy maker.  Allowing it to continue harms the doctor.  The root of the issue is that the doctor and the candy maker are interdependent, each wishing to utilize that same “noise space” differently, not that there is an “external” effect of the machines. Subsequent questions of who bears what costs largely boil down to the legal (and social) relations currently present between the two agents, the managers or owners of the business park, and the relevant institutions that impact such business arrangements. 

We could just as easily shift the focus, or the "blame", to the physical shared wall between doctor and candy maker, perhaps deemed to be defective. What externality, if any, would the noisy machines impose if the building had better sound proofing?  Such a physical modification would (theoretically- I have no idea how loud this actual machine is) address the issue, and potentially be a cost borne by management of the building. Of course, this would come down to whose responsibility it was to provide working space for both parties, and under what conditions per the contracts signed. This example could have easily played out between the doctor (who complains) and business park management, or the candy maker (who was complained to) and management or both, with the goal of forcing the manager to provide the sound proofing necessary for each to go about their business (or perhaps comparable space for one or the other a few doors down, etc.).  Management might even be liable to the doctor for damages, and the candy maker not implicated in any way. This is just one possible scenario, and it comes down to the specific legal relations of the interdependent parties in the particular case. 

The reality of transaction costs is still present here, of course, but the conversation around externalities changes, becoming much less useful. Who's presence is an "externality" to whom clearly depends on how we interpret the rules and contracts at play, and is never one-sided. Using a language of legal relations, like Hohfeld's, is one way to begin making this explicit in analysis.

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*The original example could be described in hohfeld-commons terms:  Under the status quo institutions, the candy maker and the doctor both have the right to use their space for their work, and the other party has the duty to not interfere. If we assume that the terms of the lease in this problem didn’t say anything about how much noise could be made (though this is unlikely to be true in reality), this implicitly gives the candy maker the right to continue to make the noise, and puts the burden of addressing or challenging the right on the doctor. But the rules could just as easily be different, shifting burden/cost in many ways.