Show the deadweight loss on units of food that are worth less to the consumer than they cost to produce.
D. Ronald Coase: "The Problem of Social Cost" (finish)
Key lessons:
(1) When transactions costs are zero, the Coase theorem applies and
bargaining can work better than a Pigouvian solution.
It won't matter for efficiency how property rights are assigned, the Nike rule applies: "just do it."
Example of simple rules:
"Polluter pays"
"Deep pocket pays"
(2) When transactions costs are nonzero, efficiency can depend on how rights are assigned
With transactions costs, "the initial delimitation of legal rights does have an effect on the efficiency with which the economic system operates. One arrangement of rights may bring about a greater value of production than any other. But unless this is the arrangement of rights established by the legal system, the costs of reaching the same result by altering and combining rights through the market may be so great that this optimal arrangement of rights, and the greater value of production which it would bring, may never be achieved." (Coase 8)
According to Coase, the law provides one option for handling high transaction cost situations
"[I]f market transactions were costless, all that matters (questions of equity apart) is that the rights of the various parties should be well-defined and the results of legal actions easy to forecast. But as we have seen, the situation is quite different when market transactions are so costly as to make it difficult to change the arrangement of rights established by the law. In such cases, the courts directly influence economic activity. It would therefore seem desirable that the courts should understand the economic consequences of their decisions and should, insofar as this is possible without creating too much uncertainty about the legal position itself, take these consequences into account when making their decisions. Even when it is possible to change the legal delimitation of rights through market transactions, it is obviously desirable to reduce the need for such transactions and thus reduce the employment of resources in carrying them out." (Coase 10)
What should be the guiding principle for the courts?"[T]he law should define property in a way that minimizes costs associated with...incompatible uses.... "The first step is to try to define rights in such a way that, if right A is of most value to someone who also holds right B, they come in the same bundle.... "[Do] it in such a way as to minimize the transaction costs associated with fixing, via private contracts, any mistakes in the original assignment." (Coase 43-44)
Courts should aim toGeneral Coase perspective: Aim for the best achievable outcome in a less-than-perfect world
"A ... feature of the usual treatment of the problems discussed in this article is that the analysis proceeds in terms of a comparison between a state of laissez faire and some kind of ideal world.... A better approach would seem to be to start our analysis with a situation approximating that which actually exists, to examine the effects of a proposed policy change, and to attempt to decide whether the new situation would be, in total, better or worse than the original one. In this way, conclusions for policy would have some relevance to the actual situation." (Coase 22)
Any final questions/comments?
II. Property
Progress
so far:
--Economics can play a useful role in analyzing the law and
legal decisions
--Results from our focus on incentives and efficiency
--The Coase theorem highlights the role law can apply in
promoting efficiency: by assigning property rights and facilitating transactions
Now we turn to the first of the specific areas of the common law that will allow us to put our economic tools to work--property law
--reset teams handout
Property law creates and defines property rights Property right = a bundle of
entitlements to exclusively control valuable resources
"good against the world" (F125)
can be removed only "by a voluntary
transaction ... [at a price] agreed upon by the seller." (LEA193)
Alternative rights:
contract right: "good against the person who signed the
contract." (F125)
Ex: Selling a car with restrictions
liability right: can be removed for
"an objectively determined value" (LEA194)
Ex: auto collision
inalienable right: "transfer is not permitted between a
willing buyer and a willing seller." (LEA194)
Ex: Declaration of Independence: "We hold
these truths to be self-evident, that all men are created equal, that they are endowed by
their Creator with certain inalienable Rights, that among these are Life, Liberty and the
pursuit of Happiness"
A. The economics of property rights
1. Benefits of property rights
? What would be different if there were no property
rights?
(1) less use of force -- theft + defense of possessions
(2) more production and
investment -- secure payoffs
"gives you a reason to make" things. (F115)
"Societies create property as a legal right to
encourage production, discourage theft, and reduce the costs of protecting goods."
(CU84)
"[L]egal protection of property rights
creates incentives to exploit resources efficiently." (P32)
Property rights (1) completely internalize localized
events, (2) reduces instances in which people have to be watched and makes watching
easier; and (3) increases motivation to police boundaries and do other monitoring.
(LEA180-1)
? What if property rights were communal instead of
private?
Common property --> shirking
and monitoring expenses
"The key utilitarian advantage of private
land tenure, in comparison to collective ownership, is that it is far simpler to monitor
boundary crossings than to appraise the behavior of individuals who are privileged to be
where they are. The Hutterites, kibbuzniks, and others who have succeeded in collectively
governing intensive land activities have endured only by developing internal social
controls far more pervasive and intrusive than those required where land is
parcelized." (LEA192)
Ex: "Agricultural output was much higher and more stable in Bermuda than in Jamestown, until, seven years after its founding, Jamestown turned to individual ownership." (LEA192)
(3) allocative efficiency: aims to ensure "that the person to whom something is most valuable" gets it. (F115)
Ex: Organizations: depends since many are not owned or sellable, but corporations
are property. (CU137)
"[T]he market for corporations maximizes the nation's wealth by
transferring ownership to the people who can run corporations most profitably." (CU138)
"In general, blocking mergers to thicken product markets thins the
market for corporations." (CU139)
Ex: Japan: requirement that the board of directors of a target company unanimously approve the take-over.
"The puzzle for the noneconomist is why anything is private property. The puzzle for the economist is why anything is not." (F115)
2. Costs of property rights (Costs)
Why everything isn't property.
(1) Assigning property rights
--(1.1) "[P]roblems arise with the initial creation of property rights, the process that determines who owns what." (F119)
--(1.2) Defining boundaries:
"one of the unstated assumptions of ordinary
property law--that boundaries stay where they are." (F118)
Shifting boundaries: "When natural forces gradually shift a river
and cause the adjacent land to recede or to advance by the build-up of new soil, there has
been an accretion. With accretion, the owner of the adjacent land gains or loses land as
the water boundary gradually shifts. If there is a sudden change in the course of a river
(as after a flood), the process is called avulsion, not accretion, and the boundaries do
not change. See 3 American Law of Property §15.27 (1952)" (Dukeminier and Krier,
Property, pp. 629-30, fn 11.)
Example: the Nile, where boundaries shift and islands move.
(F118)
Example: Fish: Why fish are not property--despite the obvious depletion problem.
We could make fishing grounds, streams, etc. property--which solves the
problem if fish stay put. called "fugitive
resources"
(2) Enforcing property rights
Example: Dogs:
"If it isn't true, it ought to be." (F119)
10-11K BC: "a primitive tribe that farms its land in
common"--monitoring a problem. (F118)
Difficulty of enforcing borders. But enforcing property rights against
trespass can be even more costly. The cost of private property includes the cost of
guarding it--there is no point in my planting wheat if my neighbor is going to come by at
night and harvest it for himself.
Then came the "domestication of the dog." Dogs, being
territorial can learn to identify their master's property and bark at trespassers. Perhaps
that was what tilted the balance in favor of private property.
If so, we may owe most of human civilization to dogs.
(3) Transferring property rights
Private property sometimes not worth having because of the "cost of the transactions necessary to move it from one person to another." (F117)
Ex1: Owning English, a very quiet story. Privatizing would
--> more rapid innovation and less overuse of words, but would --> excessively high
transactions costs. (F115-116)
Ex2: Hunting large animals across small plots--Foxhunting conflicts
in England.
Ex3: Why there are all you can eat salad bars, spaghetti bars, but rarely steak
| Because the deadweight cost
of selling something for zero is larger the larger the cost of the something. See figure. Show the deadweight loss on units of food that are worth less to the consumer than they cost to produce. |
|
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(4) Rent seeking
Ex: Homestead Act of 1862
160 acres @ $1.25 per acre =>
$200 total cost
"for the purpose of actual settlement and
cultivation, and not, either directly or indirectly, for the use or benefit of any other
person or persons whomsoever."
file affidavit
be head of family or 21 years plus
Reside for 6 months and make
"suitable" improvements. (CU146)
"such as successfully growing fruit trees" (F121)
Results:
early farming, at a loss, to claim future profits.
"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." (since some
are better at homesteading, not all of the value dissipated.) (F121)
Dollhouses (CU146)
So why didn't government auction off the land? It tried, but squatters
scared off bidders and got land at minimum bid. (F121)
Terry Anderson and P.J. Hill, "Privatizing
the Commons: An Improvement?" Southern Economic Journal, Vol. 50, No. 2 (October
1983),pp. 438-450. (F122n)
History of Public Land Law Development by Paul Gates, with a chapter by
Robert W. Swenson, Washington D.C., USGPO 1968. (F122n)
Defense externality: From US perspective, homesteading did defend
boundaries and secure land for the US, but at expense of other settlers, such as native
Americans.
Douglas W. Allen, "Homesteading and Property
Rights: Or 'How the West Was Really Won'," JLE 34:1-24. (1991). (F122n)
Example 2 of rent seeking: Property rights to players in
professional sports
Top athletes generate a lot of
economic rent: income in excess of opportunity cost
Flood v. Kuhn fundamentally illustrates a struggle over who
gets the rent
To do: select preferred paper for each (1) team; (2) wing; (3) the class