Efficient Allocation
Suppose the security system costs $100,000. If ChoicePoint bought and used it, overall everyone—ChoicePoint and the victims of the crimes—would save $400,000 (the $500,000 in losses avoided minus the $100,000). Thus, from the point of view of society as a whole, $400,000 is saved. This is important if because the saved $400,000 can be put to other uses instead of given to criminals or spent in recovering from the crimes.
However, it ChoicePoint is solely concerned with maximizing profit, it will not buy the system. One solution is to make ChoicePoint legally liable for the losses to others caused by unauthorized access to its system. ChoicePoint may then buy and use the system to avoid legal liability.
Imposing legally liability efficiently allocates the losses to ChoicePoint. It allocates the loss by making ChoicePoint liable for it. The allocation is efficient because making ChoicePoint liable is the best way to reduce the costs associated with crimes resulting from unauthorized access to ChoicePoint’s information.