DOC PREVIEW
UW-Madison ECON 522 - Lecture 4 Notes

This preview shows page 1-2-16-17-18-33-34 out of 34 pages.

Save
View full document
View full document
Premium Document
Do you want full access? Go Premium and unlock all 34 pages.
Access to all documents
Download any document
Ad free experience
View full document
Premium Document
Do you want full access? Go Premium and unlock all 34 pages.
Access to all documents
Download any document
Ad free experience
View full document
Premium Document
Do you want full access? Go Premium and unlock all 34 pages.
Access to all documents
Download any document
Ad free experience
View full document
Premium Document
Do you want full access? Go Premium and unlock all 34 pages.
Access to all documents
Download any document
Ad free experience
View full document
Premium Document
Do you want full access? Go Premium and unlock all 34 pages.
Access to all documents
Download any document
Ad free experience
View full document
Premium Document
Do you want full access? Go Premium and unlock all 34 pages.
Access to all documents
Download any document
Ad free experience
View full document
Premium Document
Do you want full access? Go Premium and unlock all 34 pages.
Access to all documents
Download any document
Ad free experience
Premium Document
Do you want full access? Go Premium and unlock all 34 pages.
Access to all documents
Download any document
Ad free experience

Unformatted text preview:

Econ 522 Economics of LawOutlineSlide 2From last week: the Coase TheoremExample: rancher and farmerSome vocabulary about bargainingSlide 7Let’s go back to the rancher and farmerRelating Coase to general equilibrium/ first welfare theoremSlide 9Slide 10We motivated property law by looking at a game between two neighboring farmersHarold Demsetz (1967), “Toward a Theory of Property Rights”Slide 14Slide 15So…Slide 16Slide 18Quoting Coase…We can see the Coase Theorem as either a positive or negative resultSlide 20What are transaction costs?Bargaining costs come in many formsSlide 24Slide 25Slide 26Slide 27Sources of transaction costsSlide 28What we know so far…Two normative approaches to property lawSlide 32Which approach should we use?Coming up…Econ 522Economics of LawDan QuintFall 2009Lecture 42Last lecture, we…introduced static games, the matrix representation of payoffs, and how to find equilibriamotivated the need for property law (“anarchy is inefficient”)introduced the Coase TheoremToday…more on Coasewhat are transaction costs, and what happens when they are present?Demsetz on when (and why) property rights developOutline3Coase4Coase Theorem: In the absence of transaction costs,if property rights are well-defined and tradeable,voluntary negotiations will lead to efficiency.The initial allocation of property rights therefore does not matter for achieving efficiency……although it does matter for distribution……and it may matter for efficiency if there are transaction costsFrom last week: the Coase Theorem5Three possibilities:Rancher builds fence around herd… $400Farmer builds fence around crops… $200Do nothing, live with damageIf expected damage = $100…If expected damage = $500…Coase: “One of the beauties of a smoothly operating pricing system… the fall in the value of production due to the harmful effect would be a cost for both parties.”Example: rancher and farmer6Example from before:Your car is worth $3,000 to you, and $4,000 to me; I have $10,000$10,000 is my threat pointthe payoff I can get on my own, by refusing to cooperate with youalso called reservation utility, or outside option$3,000 is your threat pointAny outcome we both agree to must make us both at least as well-off as our threat pointSome vocabulary about bargaining7Suppose I buy the car for some price Pmy payoff is 4,000 + 10,000 – P = 14,000 – Pyour payoff is Pcombined payoffs are 14,000 – P + P = 14,000$1,000 are the gains from tradeno trade  combined payoffs of $13,000I buy car  combined payoffs of $14,000if we cooperate, our combined payoffs increase by $1,000If gains from trade were divided equally…we’d each get 500 more than threat pointmy payoff is 10,500, yours is 3,500, which means P = $3,500(Coase doesn’t say gains will be divided equally)Some vocabulary about bargaining8Cows do $500 damage; fence around herd costs $400; fence around crops costs $200Let’s go back to the rancher and farmer-200-200Combined Payoffs100-200Farmer’s Payoff-3000Rancher’s Payoff (IF…)2000Gains From Trade0-200Farmer’s Threat Point-4000Rancher’s Threat PointFarmer’s RightsRancher’s Rights9General equilibriumgiven prices, consumers maximize utilitygiven prices, firms maximize profitsprices are such that all markets clearFirst Welfare Theorem: general equilibrium is efficientBut not when there are externalities, or “missing markets”Allowing the consumer to negotiate with the firm is like introducing a “missing market” in air rightsRelating Coase to general equilibrium/first welfare theorem1011Demsetz1212We motivated property law by looking at a game between two neighboring farmers10 – c, 10 – c -5 – c, 12 – P12 – P, -5 – c -P, -PFarm StealFarmStealPlayer 2Player 110, 10 -5, 1212, -5 0, 0Farm StealFarmStealPlayer 2Player 1MODIFIED GAMEORIGINAL GAMEChanging the game had two effects:Allowed us to “cooperate” by not stealingIntroduced a cost c of administering a property rights system13“A primary function of property rights is that of guiding incentives to achieve a greater internalization of externalities”“[ In order for an externality to persist, ] The cost of a transaction in the rights between the parties… must exceed the gains from internalization.”“Property rights develop to internalize externalities when the gains from internalization become larger than the cost of internalization.”Harold Demsetz (1967), “Toward a Theory of Property Rights”14“Property rights develop to internalize externalities when the gains from internalization become larger than the cost of internalization.”Private ownership of land among Native AmericansCost of administering private ownership: mediumBefore fur trade…externality was small, so gains from internalization were smallgains < costs  no private ownership of landHarold Demsetz (1967), “Toward a Theory of Property Rights”15“Property rights develop to internalize externalities when the gains from internalization become larger than the cost of internalization.”Private ownership of land among Native AmericansCost of administering private ownership: mediumBefore fur trade…externality was small, so gains from internalization were smallgains < costs  no private ownership of landAs fur trading developed…externality grew, so gains from internalization grewgains > costs  private property rights developedHarold Demsetz (1967), “Toward a Theory of Property Rights”16Coase: if property rights are complete and tradeable, we’ll always get efficiencyDemsetz: yes, but this comes at a costProperty rights will expand when the benefits outweigh the costseither because the benefits rise……or because the costs fallOf course, Coase wasn’t completely ignoring costs…So…17Transaction Costs18Coase: “in the absence of transaction costs, if property rights are well-defined and tradeable, voluntary negotiations will lead to efficiency.”This suggests that if there are transaction costs, voluntary negotiations may not lead to efficiencyCar example (yet again)If transactions are costly, we may not tradeAnd if we do trade, we incur that costSo…19“If market transactions were costless, all that matters (questions of equity apart)


View Full Document

UW-Madison ECON 522 - Lecture 4 Notes

Documents in this Course
Lecture 4

Lecture 4

46 pages

Lecture 5

Lecture 5

31 pages

Lecture 7

Lecture 7

39 pages

Lecture 9

Lecture 9

24 pages

Lecture 7

Lecture 7

13 pages

Lecture 6

Lecture 6

14 pages

Logistics

Logistics

35 pages

Logistics

Logistics

41 pages

Logistics

Logistics

36 pages

Lecture 8

Lecture 8

21 pages

Lecture 8

Lecture 8

47 pages

Lecture 9

Lecture 9

49 pages

Lecture 6

Lecture 6

46 pages

Logistics

Logistics

49 pages

Load more
Download Lecture 4 Notes
Our administrator received your request to download this document. We will send you the file to your email shortly.
Loading Unlocking...
Login

Join to view Lecture 4 Notes and access 3M+ class-specific study document.

or
We will never post anything without your permission.
Don't have an account?
Sign Up

Join to view Lecture 4 Notes 2 2 and access 3M+ class-specific study document.

or

By creating an account you agree to our Privacy Policy and Terms Of Use

Already a member?