Econ 522 Economics of LawLogisticsSlide 2Fugitive propertyTwo principles for establishing ownershipFirst Possession versus Tied OwnershipSlide 7This brings us to the following tradeoff:A nice historical example: the Homestead Act of 1862Friedman on the Homestead Act of 1862Slide 11When should resources become privately owned?Slide 13How do you prove ownership of something?Slide 15How do you give up (or lose) property rights?Slide 17Slide 18Slide 18Remedies (review)Types of damagesTemporary versus permanent damagesEfficient nuisance remediesBoomer v Atlantic Cement Co (NY Ct of Appeals, 1970)Slide 25Slide 25Private NecessitySlide 28Another limitation: determining what happens to your stuff after you dieSlide 30Slide 31Slide 32Another limitation: InalienabilityAnother limitation: UnbundlingExample of unbundling: Pennsylvania and coalUnbundlingTwo other ways in which property rights are limitedSlide 37TakingsSlide 40Slide 41Slide 42Slide 43Slide 44Slide 45Poletown Neighborhood Council v DetroitSlide 47Econ 522Economics of LawDan QuintSpring 2011Lecture 82Second homework due next Thursday (Feb 24)First midterm in two weeks (March 2)Logistics3How do you establish, verify, or give up property rights?4Hammonds v. Central Kentucky Natural Gas Co.Central Kentucky leased tracts of land above natural gas depositsBut geological dome lay partly under Hammonds’ landHammonds sued, claiming some of the gas they were extracting was his(Anybody see “There Will Be Blood”?)Fugitive property5First Possessionfugitive property belongs to nobody until someone extracts it, establishing ownershipCentral Kentucky would own all the gas, since they were first to actually possess itTied Ownershipownership of fugitive property is tied to something else which is easier to establish – in this case, surface of the landHammonds would own some of the gas, since it was located under his landprinciple of accession – a new thing is owned by the owner of the proximate or prominent propertyTwo principles for establishing ownership6First Possessionsimpler to apply – easy to determine who possessed property firstincentive to invest too much to early in order to establish ownershipexample: $100 of gas, two companies drilling fast or slowdrilling slowly costs $5, drilling fast costs $25drill same speed each gets half the gas, one drills fast 75/25First Possession versus Tied Ownership45, 45 20, 5050, 20 25, 25Slow FastSlowFastFirm 2Firm 17First Possessionsimpler to apply – easy to determine who possessed property firstincentive to invest too much to early in order to establish ownershipTied Ownershipencourages efficient use of the resourcebut, difficulty of establishing and verifying ownership rightsFirst Possession versus Tied Ownership45, 45 45, 2525, 45 25, 25Slow FastSlowFastFirm 2Firm 18Rules that link ownership to possession have theadvantage of being easy to administer,and the disadvantage of providing incentives foruneconomic investment in possessory acts.Rules that allow ownership without possession havethe advantage of avoiding preemptive investmentand the disadvantage of being costly to administer.This brings us to the following tradeoff:9Meant to encourage settlement of the Western U.S.Citizens could acquire 160 acres of land for free, providedhead of a family or 21 years old“for the purpose of actual cultivation, and not… for the use or benefit of someone else”had to live on the claim for 6 months and make “suitable” improvementsBasically a first possession rule for land – by living on the land, you gained ownership of itFriedman: caused people to spend inefficiently much to gain ownership of the landA nice historical example: the Homestead Act of 186210“The year is 1862; the piece of land we are considering is… too far from railroads, feed stores, and other people to be cultivated at a profit.…The efficient rule would be to start farming the land the first year that doing so becomes profitable, say 1890. But if you set out to homestead the land in 1890, you will get an unpleasant surprise: someone else is already there.…If you want to get the land you will have to come early. By farming it at a loss for a few years you can acquire the right to farm it thereafter at a profit.Friedman on the Homestead Act of 186211How early will you have to come?Assume the value of the land in 1890 is going to be $20,000, representing the present value of the profit that can be made by farming it from then on. Further assume that the loss from farming it earlier than that is $1,000 a year.If you try to homestead it in 1880, you again find the land already taken. Someone who homesteads in 1880 pays $10,000 in losses for $20,000 in real estate – not as good as getting it for free, but still an attractive deal.…The land will be claimed about 1870, just early enough so that the losses in the early years balance the later gains.It follows that the effect of the Homestead Act was to wipe out, in costs of premature farming, a large part of the land value of the United States.”Friedman on the Homestead Act of 186212First Possession and Tied Ownership are doctrines for how ownership rights are determinedNext question: when should a resource become privately owned?Cost of private ownership: owners must take steps to make the resource excludable – boundary maintenanceCost of public ownership: congestion and overuseAn economically rational society will privatize a resource at the point in time where boundary maintenance costs less than the waste from overuse of the resource.When should resources become privately owned?13First Possession and Tied Ownership are doctrines for how ownership rights are determinedNext question: when should a resource become privately owned?Cost of private ownership: owners must take steps to make the resource excludable – boundary maintenanceCost of public ownership: congestion and overuseAn economically rational society will privatize a resource at the point in time where boundary maintenance costs less than the waste from overuse of the resource.(either because congestion got worse…or because boundary maintenance became cheaper)When should resources become privately owned?14Branding cattleVehicle ID numberson carsStates grant deeds for property, and keepregistry of legal ownerHow do you prove ownership of
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