Econ 522Economics of Law

Dan Quint

Fall 2009

Lecture 7

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No office hours next Wed Sept 30

No lecture next Thurs Oct 1

Extra OH Mon afternoon Oct 5, 1:30-3:30 p.m.

HW1 due Tues Oct 6, 11:00 a.m. SHARP

Extra OH Mon afternoon Oct 12, 1:30-3:30 p.m.

Midterm 1 Tues Oct 13, in class

Logistics

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Today: more applications of property law

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More on: what can be privately owned?

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Most organizations are not owned by anyone churches, clubs, cooperatives, charities, etc.

But many corporations are owned can be bought and sold like property

General principle: Organizations whose primary purpose is to earn profits

should be owned Organizations whose primary purpose is something else

should not

Ownership leads to a principal-agent problem

Organizations

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Open Access Anyone free to use the resource Leads to overutilization (Tragedy of the Commons) Example: oyster beds

Unanimous Consent Opposite of open access – multiple owners must all agree to any use of

the resource Leads to underutilization Example: empty storefronts in post-Communist Moscow

Political Control/Regulation

Multiple forms of public ownership

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Dividing the mountain pasture among individual owners would require fencing it, which is prohibitively expensive.

Instead, the highland pasture is held in common, with each village owning different pastures that are separated by natural features such as lakes and mountain peaks.

If each person in the village could place as many sheep as he or she wanted in the common pasture, the meadows might be destroyed and eroded by overuse.

Third form of public ownership: political control/regulation

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In fact, the common pastures in the mountains of Iceland have not been overused and destroyed, because the villages have effective systems of governance.

They have adopted rules to protect and preserve the common pasture. The sheep are grazed in common pasture in the mountains during the summer and then returned to individual farms in the valleys during the winter.

The total number of sheep allowed in the mountain pasture during the summer is adjusted to its carrying capacity.

Each member of the village receives a share of the total in proportion to the amount of farmland where he or she raises hay to feed the sheep in the winter.

Third form of public ownership: political control/regulation

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How are property rights established/verified?

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Hammonds v. Central Kentucky Natural Gas Co. Central Kentucky leased

tracts of land above natural gas deposits

But geological dome lay partly under Hammonds’ land

Hammonds sued, claiming some of the gas they were extracting was his

(Anybody see “There Will Be Blood”?)

Fugitive property

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First Possession fugitive property belongs to nobody until someone extracts it, establishing

ownership Central Kentucky would own all the gas, since they were first to actually

possess it

Tied Ownership ownership of fugitive property is tied to something else which is easier to

establish – in this case, surface of the land Hammonds would own some of the gas, since it was located under his

land principle of accession – a new thing is owned by the owner of the

proximate or prominent property

Two principles for establishing ownership

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First Possession generally simpler to apply – easy to determine who possessed

property first but, incentive to invest too much to early in order to establish

ownership

First Possession versus Tied Ownership

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First Possession generally simpler to apply – easy to determine who possessed

property first but, incentive to invest too much to early in order to establish

ownership

Tied Ownership encourages efficient use of the resource (no need to extract

quickly) but, difficulty of establishing and verifying ownership rights

First Possession versus Tied Ownership

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Rules that link ownership to possession have the

advantage of being easy to administer,

and the disadvantage of providing incentives for

uneconomic investment in possessory acts.

Rules that allow ownership without possession have

the advantage of avoiding preemptive investment

and the disadvantage of being costly to administer.

This brings us to the following tradeoff:

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Meant to encourage settlement of the Western U.S.

Citizens could acquire 160 acres of land for free, provided head 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” improvements

Basically a first possession rule for land – by living on the land, you gained ownership of it

Friedman: caused people to spend inefficiently much to gain ownership of the land

A nice historical example: the Homestead Act of 1862

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Meant to encourage settlement of the Western U.S.

Citizens could acquire 160 acres of land for free, provided head 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” improvements

Basically a first possession rule for land – by living on the land, you gained ownership of it

Friedman: caused people to spend inefficiently much to gain ownership of the land

A nice historical example: the Homestead Act of 1862

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Stack Island in the Mississippi belonged to someone.

Over a period of many years the river’s current eroded the upstream end of Stack Island and deposited sediment at the downstream end, with the result that Stack Island gradually drifted downstream.

Some distance below Stack Island the west bank of the river belonged to someone else, along with all islands in the section of river east of his property.

After a very long time, one of them was Stack Island.

Who owned it?

Friedman, Law’s Order, p. 117

Another cool example of fugitive property

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First Possession and Tied Ownership are doctrines for how ownership rights are determined

Next question: when should a resource become privately owned? Cost of private ownership: owners must take steps to make the

resource excludable – boundary maintenance Cost of public ownership: congestion and overuse An 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?

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First Possession and Tied Ownership are doctrines for how ownership rights are determined

Next question: when should a resource become privately owned? Cost of private ownership: owners must take steps to make the resource

excludable – boundary maintenance Cost of public ownership: congestion and overuse An 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?

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Branding cattle

Vehicle ID numbers on cars

States grant deeds for property, and keep registry of legal owner

What can be done to prove ownership of something?

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Branding cattle

Vehicle ID numbers on cars

States grant deeds for property, and keep registry of legal owner

No such system for apples Too many apples – high cost of maintaining a registry Apples inexpensive – not much of a problem

What can be done to prove ownership of something?

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If B steals something from A, sells it to an innocent buyer C and disappears, does A still have a claim to the good?

U.S: “You can only transfer property rights you have” C thought he was buying a TV, but instead, he was buying nothing But there are exceptions: money, buying from legitimate dealers

Can a thief give good title?

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If B steals something from A, sells it to an innocent buyer C and disappears, does A still have a claim to the good?

U.S: “You can only transfer property rights you have” C thought he was buying a TV, but instead, he was buying nothing But there are exceptions: money, buying from legitimate dealers

Most of Europe: if C acted in good faith, he keeps the object

Spain – hybrid rule American rule applies to goods stolen from a house and sold to merchant European rule applies to goods stolen from a merchant

Can a thief give good title?

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Adverse Possession (“squatter’s rights”) If you occupy someone else’s property for long enough, you

become the legal owner, provided: 1. the occupation was adverse to the owner’s interests, and 2. the owner did not object or take legal action

How might you give up (or lose) property rights?

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Adverse Possession (“squatter’s rights”) If you occupy someone else’s property for long enough, you

become the legal owner, provided: 1. the occupation was adverse to the owner’s interests, and 2. the owner did not object or take legal action

How might you give up (or lose) property rights?

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Adverse Possession (“squatter’s rights”) If you occupy someone else’s property for long enough, you

become the legal owner, provided: 1. the occupation was adverse to the owner’s interests, and 2. the owner did not object or take legal action

Estray statutes – laws governing lost and found property

How might you give up (or lose) property rights?

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What can/can’t owners do with their property?

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Wasn’t always the case

Limitations on who inherits lead to… Circumvention costs

One thing owners can do: determine who inherits their property after they die

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Wasn’t always the case

Limitations on who inherits lead to… Circumvention costs Depletion costs

One thing owners can do: determine who inherits their property after they die

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Wasn’t always the case

Limitations on who inherits lead to… Circumvention costs Depletion costs

Restrictions I place on how they can use it Impossible circumvention and depletion costs Allowed difficult to maintain efficiency in changing circumstances

One thing owners can do: determine who inherits their property after they die

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Wasn’t always the case

Limitations on who inherits lead to… Circumvention costs Depletion costs

Restrictions I place on how they can use it Impossible circumvention and depletion costs Allowed difficult to maintain efficiency in changing circumstances “Restraints on alienation” Common law generally prohibits perpetuities Restrictions limited to “lives-in-being plus 21 years”

One thing owners can do: determine who inherits their property after they die

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Limitations/exceptions to property rights

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Property rights generally protected by injunctive relief, BUT…

Ploof v. Putnam (Sup. Ct. of Vermont, 1908) Ploof sailing with family on Lake Champlain, storm came up Tied up to pier on island owned by Putnam Putnam’s employee cut the boat loose, Ploof sued Court sided with Ploof: private necessity is an exception to the

general rule of trespass

In an emergency, OK to violate someone else’s property rights; still must reimburse them for any damage done

Private Necessity

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Property rights generally protected by injunctive relief, BUT…

Ploof v. Putnam (Sup. Ct. of Vermont, 1908) Ploof sailing with family on Lake Champlain, storm came up Tied up to pier on island owned by Putnam Putnam’s employee cut the boat loose, Ploof sued Court sided with Ploof: private necessity is an exception to the

general rule of trespass

In an emergency, OK to violate someone else’s property rights; still must reimburse them for any damage done

Private Necessity

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Three ways to protect an entitlement: as property (through injunction) by liability rule (through damages) through inalienability

Lots of things that can’t be bought/sold: organs sex heroin

Arguments in favor of inalienability…

Inalienability

children atomic weapons human rights

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Next Tuesday: more exceptions to property law more on remedies governmental takings (eminent domain)

If you want to read ahead: Blume and Rubinfeld article

Have a good weekend!

That’s all for today