Econ 522 – Lecture 5 (Feb 3 2009)So far in property law…- we’ve seen Coase, who argued that the initial allocation of property rights shouldn’t matter for efficiency, as long as they’re tradeable and there are not transaction costs- we’ve seen Demsetz, who argued that more complete property rights always comeat a cost, and that property rights will expand as the gain outweighs this costo Demsetz gives the example of private hunting rights on family land, whichdeveloped among Native Americans at the time the commercial fur trade was emerging- we discussed sources of transaction costs – that is, things that could get in the wayof Coase’s conclusion that private negotiations will always lead to efficiencyo search costso enforcement costso several sources of bargaining costs asymmetric information uncertainty over the other party’s threat point large numbers of parties to a transaction, which can lead to holdoutby sellers or freeriding by buyers hostility- Coase’s conclusion – that we’ll always bargain our way to efficiency when there are no transaction costs, but that when there are transaction costs, we might not – led us to two different normative approaches to the law:o structure the law to minimize transaction costs (“lubricate” bargaining)o structure the law to minimize harm caused by failures in private agreements (or roughly, allocate rights efficiently to begin with)- and we wrapped up with Cooter and Ulen’s rule for when each approach is appropriate:o when transaction costs are low and information costs are high, structure the law to minimize transaction costso when transaction costs are high and information costs are low, structure the law to allocate property rights to whoever values them the most- while these seem like reasonable principles, it’s not immediately apparent how you would actually implement them- which brings us to today’s first topic: an important paper from 1972 by Guido Calabresi and Douglas Melamed, titled, “Property Rules, Liability Rules, and Inalienability: One View of the Cathedral”- 1 -- the topic of the Calabresi and Melamed paper is how property rights are enforced,that is, what remedies are used when rights are violated- Calabresi and Melamed state that their goal is to treat both property and liability law under a common framework, rather than keeping them as distinct topics- we’ve already been doing thiso when we think about the rancher-farmer question, we can pose it in terms of liability – is the rancher liable for the damage his herd does?o or we can pose it in terms of property – does the farmer’s right to his property include the right to be free from trespassing cows? or does the rancher’s right to his herd include the right to not be punished when they stray?- Calabresi and Melamed consider both cases to be cases of “entitlements”o is the farmer entitled to land without trespassing animals, or is the rancher entitled to be free from herd-damage liability?o Similarly, are you entitled to have a noisy party, or am I entitled to get a good night’s sleep?Calabresi and Melamed discuss three possible enforcement rules for protecting an entitlement.1. Property Rules, or Injunctive Relief- This is when you are legally barred from violating my entitlement without my prior agreement- This is the usual rule for protecting private property – if it’s mine, you simply can’t take it unless I give it to you- And if you do choose to take it, you’ve committed a crime – you don’t just owe me the value of what you took, you may go to jail, you may face other severe consequences- (the idea of a property rule is that the punishment is so severe, you’ll never chooseto violate my right without my permission)- An injunction is basically a court order clarifying someone’s rights and specifically barring someone from violating them- For example, if a factory is polluting and the neighbors object and take it to court, the court might issue an injunction, which would bar the factory from further pollution- The factory could still negotiate with the neighbors and reach some bargain wherethe neighbors agree not to enforce the injunction, but this would be completely at the discretion of the neighbors- 2 -2. Liability Rules, or Damages- These is when you can violate my entitlement without my agreement, but must compensate me afterward for whatever damages I incur- under a liability or damages rule, the factory could go on polluting, and the neighbors would sue them for damages- the court would then have to calculate an objective value of the damage done- the neighbors can argue that the damage incurred was high, but they are only awarded what is considered fair value, not what they argue they would have held out for in the beginning- This is the type of rule behind eminent domain, which we’ll talk about in a bito if the government wants to build a school, or an army base, or a town dump, on land that I own, they can force me to sell my lando and they can force me to sell at what is considered fair market value, not to hold out for whatever amount I want based on my sentimental attachment to the house I grew up in or anything else- Liability rules obviously work better than property rules in settings where prior negotiation is impossibleo Clearly, I have an entitlement to not be hit by someone’s car when I’m walking, but it’s hard to imagine them approaching me beforehand and bargaining for the right to hit me.- Another difference: damages are backward-looking – they compensate for harm already done, while injunctions and property rules are forward-looking – they specifically forbid future harms from occurring.- A property rule will always be more favorable toward the injuree (the person whose entitlement is to be violated), and a liability rule will always be more favorable toward the injurer- This is because the punishment for violating an injunction without the other side’spermission is much harsher than damages – it may involve criminal trespass or violating a court order- So when the two sides bargain, the injurer will have a much lower threat point when facing an injunction, so the injuree will end up with a higher payoff if they do choose to cooperate- (We’ll see an example.)- 3 -- We know from Coase that in a world without transaction costs, either rule should be sufficient to allow private bargaining to lead to efficiency- However, since the two rules give
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