Econ 522 Economics of LawRemindersLast week, applications/examples of property law…Today: two important limitations on property rights imposed by governmentSlide 4TakingsSlide 7Slide 8Slide 9Slide 10Slide 11Slide 12Poletown Neighborhood Council v DetroitSlide 14Slide 14Multiple forms of public ownershipThird form of public ownership: political control/regulationSlide 18Similar to how Iceland maintains fishing stockRegulationRegulation: Pennsylvania Coal v. MahonSlide 22Slide 23Slide 24Blume and Rubinfeld, “Compensation for Takings: An Economic Analysis”Slide 26More on regulationSlide 28Slide 29Property law: the big-picture questionWhy do we need contracts?Slide 32Example: the agency (trust) game(One solution: reputation)Another solution: legally binding promisesSo… what types of promises should be enforced by the law?Slide 36The bargain theory of contractsWhat is consideration?Slide 40The bargain theory does not distinguish between fair and unfair bargainsUnder the bargain theory, what is the remedy?Problems with the bargain theorySlide 44Slide 44What promises should be enforced?Slide 47Slide 48So now we know…Econ 522Economics of LawDan QuintSpring 2011Lecture 92Second homework due ThursdayFirst midterm next Wednesday (March 2)Reminders3What things can be privately owned?Intellectual Property – patents, copyrights, trademarks, trade secretsWhat can/can’t an owner do with his/her property?Restraints on alienation, unbundling, inalienabilityHow are property rights established?First Possession versus Tied OwnershipAdverse PossessionWhat remedies are given?Injunctions vs damages; temporary vs permanent damagesPrivate necessity (emergency) as exception to property protectionLast week, applications/examples of property law…4Government can limit how you use your propertyRegulationThe government can take your property“Eminent domain”Today: two important limitations on property rights imposed by government5Takings6Public goods privately provided undersupplyOne role of government: provide public goodsDefense, roads and infrastructure, public parks, art, science…To do this, government may need land…which might already belong to someone elseIn most countries, government has right of eminent domainRight to seize private property when the owner doesn’t want to sellThis type of seizure also called a takingTakings7U.S. Constitution, Fifth Amendment:“…nor shall private property be taken for public use, without just compensation.”Government can only seize private property for public useAnd only with just compensationConsistently interpreted to mean fair market value – what the owner would likely have been able to sell the property forTakings8Why allow takings?Takings9Why allow takings?Why these limitations?why require compensation?Takings10Why allow takings?Why these limitations?why require compensation?Takings$3 MM $1 MM$9 MM$10 MM11Why allow takings?Why these limitations?why require compensation?why only for public use?Takings12Why allow takings?Why these limitations?why require compensation?why only for public use?The government should only take private property (with compensation) to provide a public good when transaction costs preclude purchasing the necessary property through voluntary negotiationsTakings131981: GM was threatening to close Detroit plantWould cost city 6,000 jobs, millions in tax revenueCity used eminent domain to condemn entire neighborhood1,000 homeowners and 100 businesses forced to sellland then used for upgraded plant for GMcity claimed employment and tax revenues were public goods, which justified use of eminent domainMich Sup Ct: “Alleviating unemployment and revitalizing the economic base of the community” valid public purposes; “the benefit to a private interest is merely incidental”Overturned in 2004 ruling (Wayne v Hathcock)Similar case, Kelo v. City of New London (2005 US Sup Ct)Poletown Neighborhood Council v Detroit141981: GM was threatening to close Detroit plantWould cost city 6,000 jobs, millions in tax revenueCity used eminent domain to condemn entire neighborhood1,000 homeowners and 100 businesses forced to sellland then used for upgraded plant for GMcity claimed employment and tax revenues were public goods, which justified use of eminent domainMich Sup Ct: “Alleviating unemployment and revitalizing the economic base of the community” valid public purposes; “the benefit to a private interest is merely incidental”Overturned in 2004 ruling (Wayne v Hathcock)Similar case, Kelo v. City of New London (2005 US Sup Ct)Poletown Neighborhood Council v Detroit15Regulation16Open AccessAnyone free to use the resourceLeads to overutilization (Tragedy of the Commons)Example: oyster bedsUnanimous ConsentOpposite of open access – multiple owners must all agree to any use of the resourceLeads to underutilizationExample: empty storefronts in post-Communist MoscowPolitical Control/RegulationMultiple forms of public ownership17Dividing the mountain pasture among individual owners would require fencing it, which is prohibitively expensive.Instead, the highland pasture is held in common, with each village owning different pastures that are separated by natural features such as lakes and mountain peaks.If each person in the village could place as many sheep as he or she wanted in the common pasture, the meadows might be destroyed and eroded by overuse.Third form of public ownership: political control/regulation18In fact, the common pastures in the mountains of Iceland have not been overused and destroyed, because the villages have effective systems of governance.They have adopted rules to protect and preserve the common pasture. The sheep are grazed in common pasture in the mountains during the summer and then returned to individual farms in the valleys during the winter.The total number of sheep allowed in the mountain pasture during the summer is adjusted to its carrying capacity.Each member of the village receives a share of the total in proportion to the amount of farmland where he or she raises hay to feed the sheep in the winter.Third form of public ownership: political control/regulation19Open access would lead to overfishing, deplete fishing stockGovernment of Iceland decides how much fish should
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