Chapter 2 defines efficiency. The efficiency criterion here is cost-benefit analysis, where cost is institution cost (including information and transaction costs) and benefit is what is called “allocative efficiency” in the literature. My efficiency criterion builds on 60 years of law-and-economics research in property law, but I believe that this is the first time that efficiency has been formulated in this way. Chapter 2 positions efficiency as a first-order value, while welfare is a second-order value that includes efficiency and other first-order values such as distribution of wealth. In addition, Chapter 2 introduces the concepts of ex ante viewpoint and the property rule versus the liability rule, both of which will be drawn on in later chapters.