Show the deadweight loss on units of food that are worth less to the consumer than they cost to produce.
II. Law and economic analysis
B. Foundations for the economic analysis of the common law
3. Policy options
? What options does Coase discuss for handling high transaction cost situations?
(1) the law
"[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 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 to
(i) assign property rights to highest-valued user and/or liability to
lowest-cost avoider of damages, and
(ii) lower transaction costs
"The Coase Theorem suggests that the law can
encourage bargaining by lowering transaction costs." (CU 96)
(2) the firm Example: a shopping mall.
Whether it makes more sense to solve problems by putting both actors
into one firm depends on the trade-off between management costs of the merged firm and the
alternative market costs.
A shopping mall is actually a compromise.
One firm owns the mall--but it rents out the space to independently
owned stores.
The complete single firm solution is not a mall but a department
store--and theyseem to be losing out to malls.
Ex: eco-tourism in Africa
(3) government regulation (Ex: "command and control" (Externalities))This includes the option of Pigouvian taxes and subsidies
Has costs, and errors, and so may give worse results than the other solutions
(4) do nothing
Some problems cost more to cure than the cure is worth.
? How does Coase justify doing nothing?
"There is, of course, a further alternative,
which is to do nothing about the problem at all. And given that the costs involved in
solving the problem by regulations issued by the governmental administrative machine will
often be heavy (particularly if the costs are interpreted to include all the consequences
which follow from the government engaging in this kind of activity), it will no doubt be
commonly the case that the gain which would come from regulating the actions which give
rise to the harmful effects will be less than the costs involved in government
regulation." (Coase 10)
(Note: does not rule out private norms)
That is how we deal with lots of externalities:
Positive ones like beautiful buildings, and
Negative ones like people wearing ugly clothes.
General 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)
III. Property
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?
No property rights -->
Too much use of force -- theft + defense of possessions
Too little production and
investment -- lack of secure payoffs
"Societies create property as a legal right to encourage production, discourage theft, and reduce the costs of protecting goods." (CU84)
? 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)
Property rights -->
(1) allocative efficiency: aims to ensure
"that the person to whom something is most valuable" gets it. (F115)
(2) productive efficiency: "gives you a reason to make" things. (F115)
"[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)
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)
Ex: Organizations: 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.
(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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