Econ 522 Economics of LawLast week, we…Once we have private property rights, we’ll have conflicts between mine and yoursUp next: how should we design property rights to achieve efficiency?Slide 4One early, “classic” property law caseSlide 7Same tradeoff we saw earlier:Slide 8How should property rights be allocated?Example of Coase: you have a car worth $3,000 to you, $4,000 to meAnother example: you want to have a party in the house next door to mineThe conditions for this to holdThe Coase TheoremCoase’s example: a rancher and a farmerRancher’s versus farmer’s rightsOpen range versus closed rangeCoase: either law will lead to efficiencyRancher and farmer: numerical exampleOther examples from CoaseQuoting from Coase (p. 13):Slide 22What does Coase mean by “a cost for both parties”?So, summing up…Slide 24Some vocabulary about bargainingSlide 27Slide 28Let’s go back to the rancher and farmerRelating Coase to general equilibrium/ first welfare theoremSlide 31Slide 31Why doesn’t Coase make Pierson v Post irrelevant?Transaction costsQuoting Coase…We can see the Coase Theorem as either a positive or negative resultWednesday: transaction costsSlide 37We motivated property law by looking at a game between two neighboring farmersHarold Demsetz (1967), “Toward a Theory of Property Rights”Slide 41Slide 42Friedman tells a similar story: “we owe civilization to the dogs”Slide 44Slide 45So…Econ 522Economics of LawDan QuintFall 2011Lecture 42…defined some important toolsdefined efficiency, and gave reasons for why we might want the law to be designed to be efficientshowed how externalities (among other things) lead to inefficiencyintroduced static games, the matrix representation of payoffs, and how to find equilibria…showed two ways in which a lack of clear property rights can lead to severe inefficienciesoverfishing examplefarming/stealing gameLast week, we…3My neighbor likes tall treescan he plant a tree on his property if it shades my pool, or blocks my view?You want to have a partydo you have the right to make noise in your house?or do I have the right to a good night’s sleep in my house?I own a small power plant located on a riverdo I have a right to use water from the river for cooling?do I have a right to pollute as much as I want?Once we have private property rights, we’ll have conflicts between mine and yours44Cooter and Ulen: property is“A bundle of legal rights over resources that the owner is free to exercise and whose exercise is protected from interference by others”Doesn’t tell us how property law should be designedNeed to answer four fundamental questions:What things can be privately owned?What can (and can’t) an owner do with his property?How are property rights established?What remedies are given when property rights are violated?Today: wild animals and CoaseUp next: how should we design property rights to achieve efficiency?5Foxes66Pierson v. Post (NY Supreme Court, 1805)Lodowick Post organized a fox hunt, was chasinga foxJesse Pierson appeared “out of nowhere,” killedthe fox and took itPost sued to get the fox backLower court sided with Post; Pierson appealed to NY Supreme CourtQuestion: when do you own an animal?One early, “classic” property law case77Court ruled for Pierson (the one who killed the fox)“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 quarrels and litigation”(Also: just because an action is “uncourteous or unkind” does not make it illegal)Dissenting opinion: a fox is a “wild and noxious beast,” and killing foxes is “meritorious and of public benefit”Post should own the fox, in order to encourage fox huntingOne early, “classic” property law case88Pierson gets the foxsimpler rule (finders keepers)easier to implementfewer disputesSame tradeoff we saw earlier:Post gets the foxmore efficient incentives(stronger incentive to pursue animals that may be hard to catch)Just like Fast Fish/Loose Fish vs Iron Holds The WhaleFast Fish/Loose Fish is the simpler rule, leads to fewer disputesIron Holds the Whale is more complicated, but is necessary with whales where hunting them the old-fashioned way is too dangerous9Coase10More specifically, under certain conditions, it doesn’t matter for efficiency(Although it does matter for distribution)Coase Theorem: in the absence of transaction costs, if property rights are well-defined and tradable, then voluntary negotiations will lead to efficiencyIt doesn’t matter how rights are allocated initially……because if they’re allocated inefficiently, they can be sold/traded until they’re allocated efficientlyHow should property rights be allocated?Coase’s surprising answer: it doesn’t matter11Obviously, efficient for me to own it……but we don’t need the law to give me the carIf I start out owning the car:no reason for you to buy it, I end up with it efficientIf you start out owning the car:clear incentive for me to buy it, I end up with it efficientRegardless of who owns the car at first, we get to the efficient outcomeI’d rather start out with the car – so I don’t have to pay you for itYou’d rather start out with it – so you end up with more moneyEfficiency doesn’t care about distribution – how much money we each end up with – just who ends up with the car at the end.And that doesn’t depend on who starts with it.The key: lack of transaction costsExample of Coase: you have a car worth $3,000 to you, $4,000 to me12If it’s efficient for you to have the party…Your benefit from having the party is greater than my benefit from a good night’s sleepIf you start out with the right to have the party, no problemIf I start out with the right to quiet, you can pay me for the right to have the partyIf it’s efficient for you not to have the party…Good night sleep is worth more to meIf I have right to silence, no problemIf you have right to party, I can pay you not to have itThe point: either way, we achieve efficiencyIf it’s efficient to have the party, you have the partyIf it’s efficient not to, you don’tRegardless of who started off with the rightAnother example: you want
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