QUESTIONS THAT PROPERTY LAW MUST ANSWER
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How are property rights to be initially assigned? Or How does one acquire ownership of something? What are the consequences of the nature of ownership – private, public or un-owned? May one property-owner maximizing her own utility offend her neighbor thus lowering his utility? When does an event constitute a “nuisance”?
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QUESTIONS THAT PROPERTY LAW MUST ANSWER
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What may property owners legitimately do with their property? What is the extent of the Government’s legal ability to constrain a private owner’s use of her property? What are the remedies for the violation of property rights?
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THE LEGAL CONCEPT OF PROPERTY
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Property is a bundle of rights. • The law stipulates: • What people may and may not do with resources that they own; • The extent to which they may: • possess,
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THE LEGAL CONCEPT OF PROPERTY
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use, develop, improve, transform, consume, deplete,
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THE LEGAL CONCEPT OF PROPERTY
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destroy, sell, donate, bequeath, transfer, mortgage, lease, loan, or exclude others from their property.
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PELZMAN: PROPERTY LAW
THE BARGAIN
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BARGAINING THEORY
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Hypo of selling a used car in the State of Maryland. How can we use Game Theory?
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COASE THEOREM
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THE COASE THEOREM
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Coase argued that, from an economic perspective, the goal of the legal system should be to establish a pattern of rights such that economic efficiency is attained. The legal system affects transactions costs and the goal of such a system is to minimize harm or costs, broadly conceived.
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THE COASE THEOREM
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The ‘efficiency hypothesis The first is that, regardless of how rights are initially assigned, the resulting allocation of resources will be efficient.
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THE COASE THEOREM
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The ‘invariance hypothesis’. The second claim, which is not reflected in all statements of the Theorem, is that the final allocation of resources will be invariant under alternative assignments of rights.
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THE COASE THEOREM
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The ‘strong’ version, encompasses both the efficiency and the invariance propositions. The ‘weak’ version, encompasses the efficiency proposition alone.
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THE COASE THEOREM
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Two basic frameworks can be identified: • the ‘quasi-competitive’ framework, within which all relevant markets are assumed to be perfectly competitive and agents operate more or less along competitive lines in externality negotiations, and
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THE COASE THEOREM
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the ‘game-theoretic’ framework, within which there exists the potential for strategic behavior among affected parties.
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SIMPLY HYPO – ZERO LR RENT
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Take an externality example. Suppose that both the polluter and the victim are in a zero-profit, long-run equilibrium position.
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NON-COOPERATIVE GAME THEORY
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If parties have full information about each other’s utility (or profit or production and cost) functions, the Coase Theorem will hold in a non-cooperative setting. Implication One: The Baseline Problem Implication Two: Extortion
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EXAMPLE OF THE COASE THEOREM
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Consider the now famous example – • A cattle rancher - Jenny; and • A farmer - Moe; They are neighbors without fences. Moe grows corn on part of his land and leaves the balance uncultivated; Jenny raises cattle and they run free all over her land.
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EXTERNALITIES
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Efficiency usually means that we allocate the rights to the party who values it the most. When the parties bargain successfully, the legal allocation of rights does not matter to efficiency. Given successful bargaining, the use of resources is efficient, regardless of the legal rule.
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NORMATIVE HOBBES THEOREM
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A major criticism to Coase comes from Thomas Hobbs who thought that people would seldom be rational enough to agree upon a division of the cooperative surplus, even when there were no serious impediments to bargaining. Under this philosophy you always need a third party (stronger) to stop the quarrel.
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PROTECTING PROPERTY RIGHTS
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Damages & Injunctions • The principal legal remedy is the payment of compensatory money damages by the defendant to the plaintiff – “make the plaintiff whole.” • Equitable relief – consists of an order by the court directing the defendant to perform an act or refrain from acting in a particular manner. This order is frequently in the form of an injunction which is said to “enjoin” the defendant to do or to refrain from doing a specific act.
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PELZMAN: PROPERTY LAW
PROTECTING PROPERTY RIGHTS
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Note – legal relief is ex-post and equitable relief is preemptive. Damages are the usual remedy in the law of contracts and torts; Injunction is the usual remedy in the law of property.
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ELECTRIC COMPANY EXTERNALITY
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Facts: • E (Electric Company) emits smoke which dirties the wash at L (Laundry). • E can abate the externality by installing scrubbers on its stacks; • L can reduce the damage by installing filters on its ventilation system.
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PROFITS BEFORE LEGAL ACTION
Electric Company No Scrubbers Scrubbers 500 Laundry No Filter 100 1000 300 500 Filter 200 1000 200
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LITIGATION OPTIONS
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There are 3 alternative rules that could apply in the event of trial----Polluter’s Right: E is free to pollute; Pollutee’s Right to Damage: L is entitled to compensatory damages from E; Pollutee's Right to Injunction: L is entitled to an injunction forbidding E to pollute.
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PROFITS FROM BARGAINING – SUMMARY TABLE
Noncooperation E L 1000 200 800 300 500 300 Surplus Cooperation E 1000 850 700 L 200 350 500
Rule 1 Rule 2 Rule 3
0 100 400
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CALABRESI & MELAMED
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Why is injunction an efficient remedy for breach of a property right?
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CALABRESI & MELAMED
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How should we protect the entitlement? Calabresi and Melamed list three methods that society uses to protect an entitlement: • property rules, • liability rules, or • rules of inalienability.
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CALABRESI & MELAMED
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A rule of inalienability states that an entitlement exists, but that it cannot be sold or bargained away under any circumstances.
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CALABRESI & MELAMED
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A "property" rule, according to Calabresi and Melamed, protects an entitlement by requiring that would-be users or licensees of the entitlement reach a voluntary bargain with the owner.
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CALABRESI & MELAMED
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A liability rule, in contrast, protects an entitlement by allowing the owner to sue for damages after an unauthorized use, but it does not require that a voluntary bargain first be struck.
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CALABRESI & MELAMED
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Low Transaction Costs Lead to Property Rules High Transaction Costs Lead to Liability Rules Copyright Law Includes Property Rules and Liability Rules
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