Econ 522 – Lecture 4 (Sept 18 2007)Midterm will be on Tuesday, October 30 (day before Thanksgiving)Today: Property LawWhy do we need property law at all? In a sense, this is simply a question of why we prefer a “civil society” of any sort to anarchy. Suppose there are two neighboring farmers, who can do one of two things: farm their own land a lot, or farm a little and stealcrops from their neighbor a lot.Stealing may be less efficient than planting my own crops – I have to carry the crops from your land to mine, I may drop some along the way; I have to steal at night, so you won’t see me, so I have to move slower. But if I steal your crops, I don’t have to put in all the effort of planting and watering – I let you do the work and I steal at the end, just before you harvest.Consider the game with no legal protections for private property:Farmer 2Farm StealFarmer 1 Farm 10, 10 -5, 15Steal 15, -5 0,0Just like the prisoner’s dilemma – both farmers stealing from each other instead of growing more crops is the only equilibrium, even though that outcome is Pareto-dominated.Suppose there were lots of farmers facing this same problem, and they came up with the following solution. Institute some notion of property rights, and some sort of governmentthat could punish people who steal others’ crops. Obviously, setting up this system wouldcost something. Now the game becomesFarmer 2Farm StealFarmer 1 Farm 10-c, 10-c -5-c,15-PSteal 15-P, -5-c -P,-PIf the punishment is sufficiently large, and the cost to each farmer is sufficiently small, this would establish (Farm,Farm) as an equilibrium, leading to much better results than before.The main idea here is that anarchy is inefficient – I spend time and effort stealing from you, or defending my own property from thieves, instead of doing productive work. Establishing property rights, and legal recourse for when they are violated, is one way to get around this problem.One early, “classic” court ruling on property law: Pierson v. Post- Decided in 1805 by the New York Supreme Court- Post had organized a fox hunt, and was in pursuit of a fox- Pierson appeared “out of nowhere,” killed the fox, and took off with it- Post sued to get the fox back, saying that since he was chasing it, he owned it- Lower court sided with Post; Pierson appealed the decision to the NY Sup Ct- (Post and Pierson were apparently both wealthy, and pursued the case on principalor out of spite – both spent far more than the value of the fox in pursuing the claim)- The fundamental question: when do you own an animal?- I mention it here not because we care that much about when you establish possession of a wild animal, but because the court – both the majority and the dissenting opinion – were explicit about considering the economic effects their ruling would lead to- Court ruled for Pierson – among other things, they say that: “If the first seeing, starting or pursuing such animals . . . . should afford the basis of actions against others for intercepting and killing them, it would prove a fertile source of quarrelsand litigation.” That is, if the first to chase an animal owned it, there would be endless disputes and court cases; and so they favored a more “bright line” rule of ownership which would lead to fewer disagreements- (They also point out that just because an action is “uncourteous or unkind” does not make it illegal)- Dissenting opinion, however: a fox is a “wild and noxious beast,” and killing them is “meritorious and of public benefit” – Post should own the fox, in order to create incentive for fox huntingSo, tradeoff:Fast fish/loose fishPierson gets the foxIron-holds-the-whalePost gets the foxSimpler ruleEasier to implementFewer disagreementMore efficient incentives(stronger incentive to pursue animals that may be harder to catch)Cooter and Ulen define property as “a bundle of legal rights over resources that the owner is free to exercise and whose exercise is protected from interference by others.” Of course, property rights aren’t absolute. In the appendix to chapter 4, they give examples of different conceptions of property rights. Without getting into the philosophybehind a property rights system, it’s clear that a conception of property rights must answer four fundamental questions:- What things can be privately owned? Clearly not everything – nobody owns the ocean, can’t own another person, etc. Cultural artifacts. Ancient Jewish law –ownership over sold land was not permanent, it reverted to its ancestral owner after 50 years.- What can (and can’t) an owner do with his property? Again, not everything – can’t use your own property in a way that creates a nuisance to others. Many of the examples when we discuss Coase will have to do with limiting what a person can do with his property. I own my kidneys, but I can’t sell one. If I own a building that has historical significance, I can’t necessarily destroy it or change it in certain ways.- How are property rights established? In the whaling example, or the fox hunt example – what does it take to establish ownership? And on the flip side, when can property rights be revoked? Eminent domain – the government’s right to seize private property. In many cases when government wanted to encourage migration into new areas, free land, conditional on you farming it or developing it.Negligent landlords.- What remedies are given when property rights are violated? Rights (my rights to use my property in certain ways) and prohibitions (other people can’t interfere) have no meaning unless they are enforced. So how do I get compensated if my property rights are violated?Obviously, one of the fundamental things you can do with private property is to trade or sell it to someone else. Since we’re largely interested with efficiency – in part, whether property ends up in the hands of whoever values it the most – we’ll first talk a bit about…Bargaining TheoryWe’ll start with the example in Cooter and Ulen. Suppose I have a car, and “the pleasure of owning and driving the car” is worth $3000 to me. You have $5000, you like my car, and you decide the pleasure of owning and driving my car would be worth $4000 to you.Clearly, me holding onto the car is not Pareto-efficient. There are lots of Pareto-improvements possible: each of them involves me giving you the car, and you giving me some amount of money,
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