I972] PROTECTING ENTITLEMENTS stood extremely broadly as involving both perfect knowledge and the absence of any impediments or costs of negotiating. Negoti ation costs include, for example, the cost of excluding would-be freeloaders from the fruits of market bargains. 3 In such a fric- ionless society transactions would occur until no one could b made better off as a result of further transactions without making someone else worse off. This, we would suggest, is a necessary, deed a tautological, result of the definitions of Pareto optimality and of transaction costs which we have given Such a result would not mean however that the same alloca tion of resources would exist regardless of the initial set of en titlements. Taney's willingness to pay for the right to make noise may depend on how rich he is; Marshall's willingness to pay for silence may depend on his wealth. In a society which entitles Taney to make noise and which forces Marshall to buy silence from Taney, Taney is wealthier and Marshall poorer than each would be in a society which had the converse set of entitlements Depending on how Marshalls desire for silence and Taney's for noise vary with their wealth, an entitlement to noise will result in egotiations which will lead to a different quantum of noise than would an entitlement to silence. This variation in the quantity 13 The freeloader is the person who refuses to be inoculated against smallpe because, given the fact that almost everyone else is inoculated, the risk of smallpox to him is less than the risk of harm from the inoculation. He is the person who refuses to pay for a common park, though he wants it, because he believes that others will put in enough money to make the park available to him. See Cost 137 n 4. The costs of excluding the freeloader from the benefits for which he re- fused to pay may well be considerable as the two above examples should suggest. This is especially so since these costs may include the inefficiency of pricing a good ike the park once it exists, above its marginal cost in order to force the freeloader to-disclose-his true desire to use it-thus enabling us to charge him part of the cost of establishing it initially. It is the capacity of the market to induce disclosure of individual preferences which makes it theoretically possible for the market to bring about exchanges lead- ing to Pareto optimality. But the freeloader situation is just one of many where no such disclosure is achieved by the market. If we assume perfect knowledge, defined more broadly than is normally done to include knowledge of individual preferences, then such situations pose no problem. This definition of perfect knowl edge, though perhaps implicit in the concept of no transaction costs, would not only make reaching Pareto optimality easy through the market, it would make it equally easy to establish a similar result by collective fiat. For a further discussion of what is implied by a broad definition of no trans action costs, see note 59 infra. For a discussion of other devices which may induce individuals to disclose their preferences, see note 38 infra See Mishan, Pareto optimality and the Law, I9 OxFORD EcoN. PAPERS 255 (I967). Unless Taney's and Marshall's desires for noise and silence are totally unaffected by their wealth, that is, their desires are totally income inelastic, a change in their wealth will alter the value each places on noise and silence and nce will alter the outcome of their negotiations. HeinOnline 85 Harv. L Rev. 1095 1971-1972PROTECTING ENTITLEMENTS stood extremely broadly as involving both perfect knowledge and the absence of any impediments or costs of negotiating. Negoti￾ation costs include, for example, the cost of excluding would-be freeloaders from the fruits of market bargains. 3 In such a fric￾tionless society, transactions would occur until no one could be made better off as a result of further transactions without making someone else worse off. This, we would suggest, is a necessary, indeed a tautological, result of the definitions of Pareto optimality and of transaction costs which we have given. Such a result would not mean, however, that the same alloca￾tion of resources would exist regardless of the initial set of en￾titlements. Taney's willingness to pay for the right to make noise may depend on how rich he is; Marshall's willingness to pay for silence may depend on his wealth. In a society which entitles Taney to make noise and which forces Marshall to buy silence from Taney, Taney is wealthier and Marshall poorer than each would be in a society which had the converse set of entitlements. Depending on how Marshall's desire for silence and Taney's for noise vary with their wealth, an entitlement to noise will result in negotiations which will lead to a different quantum of noise than would an entitlement to silence. 4 This variation in the quantity "a The freeloader is the person who refuses to be inoculated against smallpox because, given the fact that almost everyone else is inoculated, the risk of smallpox to him is less than the risk of harm from the inoculation. He is the person who refuses to pay for a common park, though he wants it, because he believes that others will put in enough money to make the park available to him. See COSTS 137 n.4. The costs of excluding the freeloader from the benefits for which he re￾fused to pay may well be considerable as the two above examples should suggest. This is especially so since these costs may include the inefficiency of pricing a good, like the park once it exists, above its marginal cost in order to force the freeloader to disclose his true desire to use it -thus enabling us to charge him part of the cost of establishing it initially. It is the capacity of the market to induce disclosure of individual preferences which makes it theoretically possible for the market to bring about exchanges lead￾ing to Pareto optimality. But the freeloader situation is just one of many where no such disclosure is achieved by the market. If we assume perfect knowledge, defined more broadly than is normally done to include knowledge of individual preferences, then such situations pose no problem. This definition of perfect knowl￾edge, though perhaps implicit in the concept of no transaction costs, would not only make reaching Pareto optimality easy through the market, it would make it equally easy to establish a similar result by collective fiat. For a further discussion of what is implied by a broad definition of no trans￾action costs, see note 59 infra. For a discussion of other devices which may induce individuals to disclose their preferences, see note 38 infra. 4 See Mishan, Pareto Optimality and the Law, 19 OXFORD EcoN. PAPERS 255 (1967). Unless Taney's and Marshall's desires for noise and silence are totally unaffected by their wealth, that is, their desires are totally income inelastic, a change in their wealth will alter the value each places on noise and silence and hence will alter the outcome of their negotiations. 1972] 1095 HeinOnline -- 85 Harv. L. Rev. 1095 1971-1972