UW-Madison ECON 522 - Lecture 15 (21 pages)

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Lecture 15



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Lecture 15

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Pages:
21
School:
University of Wisconsin, Madison
Course:
Econ 522 - Economics of Law
Economics of Law Documents
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Econ 522 Lecture 15 March 24 2009 Welcome back Reminder homework on contract law due next Tuesday Who would like to move second midterm from Tues April 7 to Thurs April 9 Let s begin with a little review We started this class by defining the notion of efficiency Basically the idea of maximizing the total surplus realized by everyone in society o Efficiency requires that scarce resources be owned by whoever values them the most o And that any action should be if its total social benefit exceeds its total social cost We made the claim that we re interested in designing a legal system that leads to efficient outcomes What makes this hard o Once we set up the rules we don t expect individuals to act based on what s efficient o We expect individuals to do whatever is in their own best interest So the goal is to set up the rules in such a way that people acting in their own best interest will naturally lead to efficiency Coase gives us one way to do this o Efficiency requires things to be owned by whoever values them the most o Suppose we set up a legal system where things can be bought and sold o If I value something more than you I can buy it from you o As long as property rights are clearly defined and tradeable and there are no transaction costs people have an incentive to trade until each resource is owned by whoever values it most o This argument doesn t depend on who starts with what so Coase tells us that the initial allocation of rights doesn t matter for efficiency only for distribution On the other hand when there are transaction costs impediments to private bargaining we may not get to efficiency this way This led us to two different normative views of the legal system o One that the legal system should aim to minimize transaction costs lubricate private exchange the normative Coase since if we make transaction costs low enough efficiency will follow 1 o Or two that the legal system should aim to allocate rights efficiently the normative Hobbes so that less is lost when private exchange fails 2 We then looked in more detail at four questions a property system needs to address 1 What things can be privately owned One of the motivations for property rights was that without them common resources would be overused We distinguished between public and private goods General principle private goods should be privately owned While public goods should be publicly owned provided regulated We pointed out that society has an incentive to privatize a resource when the costs of boundary maintenance are smaller than losses due to overuse of common resources o Demsetz fur trade made furs more valuable and caused overhunting o Loss due to overuse went up leading Native Americans to develop private land rights o Another neat theory is mentioned in the Friedman book we owe civilization to the dogs o When dogs were domesticated they could be trained to recognize their owner s land and guard it and so private ownership of farmland became feasible because the cost of boundary maintenance went down Property rights over information patents to create incentive to innovate copyrights to encourage the supply of a public good Different types of public ownership common access vs regulation vs unanimous consent 2 What can or can t an owner do with their property General principle maximum liberty o You can do whatever you want with your property as long as it doesn t infringe on anyone else s rights or property Nuisances public and private nuisances Other limitations on property rights and economic rationale for each o Rules against perpetuities an owner can t restrict heirs indefinitely but can for one generation o Emergency exception to rules against trespass o Inalienability some entitlements can t be sold or even given away o Unbundling can t always unbundle property rights But in some instances you can for example with land in Pennsylvania and with conservation easements in some locations 3 3 How are property rights established Fugitive property paradigms of first possession and tied ownership o first possession tends to be simpler to implement o but causes resources to be wasted in trying to gain possession o example of this Friedman on Homestead Act saying that the resources wasted in starting to farm before it was efficient basically wasted much of the value of the land p 120 in Law s Order First possession versus tied ownership is one example of the general tradeoff between simple bright line rules versus more complex rules that might be more costly to implement but create better incentives o Pierson v Post o Fast Fish Loose Fish versus Iron Holds The Whale Verifying legal ownership property deeds and car titles acquiring title Losing property rights adverse possession estray rules Government s rights to claim private property eminent domain takings limitations public use just compensation regulatory takings abuse of takings 4 What remedies are available when property rights are violated injunctions vs damages o injunctions simpler cheaper to implement create bright line property rights to encourage bargaining o damages more efficient when transaction costs are high bargaining unlikely to succeed temporary versus permanent damages o temporary damages more efficient when damages are easy to calculate and technology is changing o permanent damages are more efficient when damages are hard to calculate and technology is stable and we called all that property law 4 Part of what makes property law straightforward is that trade tends to be simultaneous I give you an apple you give me 1 However in some situations efficient trade can t be done simultaneously o It might be efficient for me to build you an airplane o But it would be very complicated costly for you to pay me each day for that day s work Contract law gives us a way to transact when one of us has to depend on a promise by the other We motivated contract law by looking at the agency game o if you can t trust me to return your money we miss out on a valuable investment opportunity Contracts give a way for a promise to be legally binding allowing us to cooperate in instances where we could not have otherwise The first purpose of contract law to enable cooperation We introduced the Bargain Theory of contracts o A promise is binding if it was given as part of a bargain o This requires three elements offer acceptance and consideration Unlike the Bargain Theory efficiency requires enforcing a promise if both the promisor and the promisee wanted it


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