Econ 522 Economics of Law Dan Quint Fall 2013 Lecture 9

Econ 522Economics of Law

Dan Quint

Fall 2013

Lecture 9

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Introduced dynamic games, sequential rationality, subgame-perfect equilibrium

Saw problem of innovation when ideas could be appropriated or copied ex post

Introduced patents and copyrights as ways to solvethe problem

Monday

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Should record labels sue music downloaders?

Discussion question

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patents

copyrights

trademarks

trade secrets

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Trademarks

Reduce confusion over who made a product

Allow companies to build reputation for quality

Don’t expire, unless abandoned

Generic names can’t be trademarked

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Trademarks – example

WSJ article 9/17/2010: “Lars Johnson Has Goats On His Roof and a Stable of Lawyers To Prove It”

Restaurant in Sister Bay WI putgoats on roof to attract customers

“The restaurant is one of the top-grossing in Wisconsin, and I’m sure the goats have helped.”

Suing restaurant in Georgia

“Defendant has willfully continuedto offer food services from buildings with goats on the roof”

http://online.wsj.com/article/SB10001424052748704285104575492650336813506.html

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Trademark dilution

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patents

copyrights

trademarks

trade secrets

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Protection against misappropriation

But plaintiff must show… Valid trade secret Acquired illegally Reasonable steps taken to protect it

Trade Secrets

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patents

copyrights

trademarks

trade secrets

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Establishing, verifying, and losing property rights

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We already saw two doctrines for how ownership rights are determined – First Possession and Tied Ownership

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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We already saw two doctrines for how ownership rights are determined – First Possession and Tied Ownership

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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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 do you give up (or lose) property rights?

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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 Pro: clear up uncertainty over time; allow land to be put to use Con: owners must incur monitoring costs to protect property


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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 Pro: clear up uncertainty over time; allow land to be put to use Con: owners must incur monitoring costs to protect property

Estray statutes – laws governing lost and found property


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Limitations and Exceptions toProperty 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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Property: “a bundle of rights”

Can you unbundle them? Separate them, sell some and keep others

Usually, no Prohibition on perpetuities I can’t separate the right to own/live on my land from the right to sell

it or turn it into a golf course

But in some instances, yes…

Unbundling

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Land ownership consisted of three separable pieces (“estates”)

Surface estate

Support estate

Mineral estate

Example of unbundling: Pennsylvania and coal

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Free unbundling of property rights generally not allowed Civil law more restrictive than common law

For efficiency… In general, efficiency favors more complete property rights People would only choose to unbundle property when that

increases its value, so we should allow it? But unbundling might increase transaction costs Increases uncertainty about rights May increase number of parties involved in future transactions

Unbundling

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An example (sort of) of unbundling

source: http://articles.nydailynews.com/2009-08-24/news/17934480_1_ebay-auction-crypt-marilyn-monroe

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More onRemedies

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Maximum liberty: owner can do whatever he/she wants, as long as it doesn’t interfere with another’s property When it does interfere, externality, or nuisance

Affects small number: private externality, or private bad Transaction costs low injunctions preferable

Affects large number: public externality, or public bad Transaction costs high damages preferable

Remedies (review)

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Compensatory Damages intended to “make the victim whole” compensate for actual harm done make victim as well off as before

Can be… Temporary – compensate for harms that have already occurred Permanent – also cover present value of anticipated future harm

Types of damages

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Temporary damages Only cover harm that’s already happened Require victim to keep returning to court if harm continues Create an incentive to reduce harm in the future

Permanent damages Include value of anticipated future harm One-time, permanent fix No incentive to reduce harm as technology makes it easier

Temporary versus permanent damages

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If a nuisance affects a small number of people (private nuisance), an injunction is more efficient

If a nuisance affects a large number of people (public nuisance), damages are more efficient If damages are easy to measure and innovation occurs rapidly, temporary

damages are more efficient If damages are difficult/costly to measure and innovation occurs slowly,

permanent damages are more efficient

What’s done in practice for public nuisances? temporary damages and injunction against future harm but…

Efficient nuisance remedies

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Atlantic owned large cement plant near Albany dirt, smoke, vibration neighbors sued plant was found to be a nuisance, court awarded damages neighbors appealed, requesting an injunction

Court ruled that… yes, this was a valid nuisance case and yes, nuisances are generally remedied with injunctions but harm of closing the plant was so much bigger than level of

damage done that court would not issue an injunction ordered permanent damages, paid “as servitude to the land”

Boomer v Atlantic Cement Co(NY Ct of Appeals, 1970)

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Atlantic owned large cement plant near Albany dirt, smoke, vibration neighbors sued plant was found to be a nuisance, court awarded damages neighbors appealed, requesting an injunction

Court ruled that… yes, this was a valid nuisance case and yes, nuisances are generally remedied with injunctions but harm of closing the plant was so much bigger than level of

damage done that court would not issue an injunction ordered permanent damages, paid “as servitude to the land”

Boomer v Atlantic Cement Co(NY Ct of Appeals, 1970)

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Government can limit how you use your property Regulation

The government can take your property “Eminent domain”

Next: two important limitations on property rights imposed by government

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Eminent Domain

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One role of government: provide public goods When public goods are privately provided undersupply Defense, roads and infrastructure, public parks, art, science… To do this, government needs land

(which might already belong to someone else)

In most countries, government has right of eminent domain Right to seize private property when the owner doesn’t want to sell This type of seizure also called a taking

Takings

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U.S. Constitution, Fifth Amendment: “…nor shall private property be taken for public use, without just compensation.”

Government can only seize private property for public use

And only with just compensation Consistently interpreted to mean fair market value – what the owner

would likely have been able to sell the property for

Takings

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Why allow takings?

Takings

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Why allow takings?

Why these limitations? why require compensation?

Takings

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Why allow takings?

Why these limitations? why require compensation?

Takings

$3 MM $1 MM$9 MM

$10 MM

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Why allow takings?

Why these limitations? why require compensation? why only for public use?

Takings

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Why allow takings?

Why these limitations? why require compensation? why only for public use?

The government should only take private property (with compensation) to provide a public good when transaction costs preclude purchasing the necessary property through voluntary negotiations

Takings

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1981: GM was threatening to close Detroit plant Would cost city 6,000 jobs, millions in tax revenue

City used eminent domain to condemn entire neighborhood 1,000 homeowners and 100 businesses forced to sell land then used for upgraded plant for GM city claimed employment and tax revenues were public goods,

which justified use of eminent domain

Mich Sup Ct: “Alleviating unemployment and revitalizing the economic base of the community” valid public purposes; “the benefit to a private interest is merely incidental” Overturned in 2004 ruling (Wayne v Hathcock)

Poletown Neighborhood Council v Detroit

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Posner (Economic Analysis of Law) describes: …Pfizer had decided to build a large research facility next to a 90-

acre stretch of downtown and waterfront property in New London.

The city hoped that Pfizer’s presence would attract other businesses to the neighborhood.

The plaintiffs owned residential properties located on portions of the 90-acre tract…

It might have been impossible to develop those areas… had the areas remained spotted with houses.

The city… solved the problem by condemning the houses.

It said, “the area was sufficiently distressed to justify a program of economic rejuvenation.”

Attorney arguing case: “If jobs and taxes can be a justification for taking someone’s

home or business, then no property in America is safe.”

More recent case: Kelo v. City of New London (2005 US Supreme Court)

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Bruce Ratner owned the Nets from 2004-2011 Bought for $300 MM, sold for less (80% for $200 MM) This “loss” held up by David Stern as evidence NBA owners were

losing money, players needed to make concessions

Recent Malcolm Gladwell article on Grantland Ratner didn’t want the Nets – he wanted

development rights to a 22-acre site in Brooklyn Buying it all up would be difficult Seizure a la Kelo would be possible, but

politically unpopular If plans included a basketball stadium, becomes

clear-cut case for eminent domain Even if Ratner took a “loss” on the team, he got

what he wanted out of the deal

Recent exampleof eminent domain

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Regulation(probably won’t get to)

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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 “Anti-commons” caused by existing intellectual property

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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Open access would lead to overfishing, deplete fishing stock

Government of Iceland decides how much fish should be caught in total each year

People own permits which are right to catch a fixed fraction of each year’s total

Permits are property – can be bought, sold, etc.

Similar to how Iceland maintains fishing stock

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Regulation

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1800s: PA Coal purchased mineral and support estates, Mahon owned surface

1921: Kohler Act prohibited “mining of anthracite coal in such a way as to cause the subsidence of, among other things, any structure used as a human habitation.”

PA Coal sued government, claiming the regulation was same as seizing their land (without compensation)

“…While property may be regulated to a certain extent, if regulation goes too far it will be recognized as a taking.”

Regulation: Pennsylvania Coal v. Mahon

surface estate

support estate

mineral estate

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surface estate

support estate

mineral estate

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surface estate

support estate

mineral estate

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surface estate

support estate

mineral estate

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Support compensation for regulatory takings Shifting burden of regulation from owners of affected property to all

taxpayers Equivalent to selling everyone insurance against harmful regulation If such insurance were available, people would buy it But it’s not available, for usual reasons insurance markets may fail

adverse selection moral hazard

So government should provide it instead… …by paying compensation for regulatory takings

Blume and Rubinfeld, “Compensation for Takings: An Economic Analysis”

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Support compensation for regulatory takings Shifting burden of regulation from owners of affected property to all

taxpayers Equivalent to selling everyone insurance against harmful regulation If such insurance were available, people would buy it But it’s not available, for usual reasons insurance markets may fail

adverse selection moral hazard

So government should provide it instead… …by paying compensation for regulatory takings

Blume and Rubinfeld, “Compensation for Takings: An Economic Analysis”

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Zoning laws Distinguish industrial areas from residential areas

Zoning

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Nollan v California Coastal Commission (US Sup Ct, 1987) Nollans owned coastal property Asked for permit to expand building, which would diminish view Commission: donate a public walking path, and you get permit Supreme Court: such a deal only legal if there is clear connection –

a nexus – between the harm being done and the remedy

Zoning

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Nollan v California Coastal Commission (US Sup Ct, 1987) Nollans owned coastal property Asked for permit to expand building, which would diminish view Commission: donate a public walking path, and you get permit Supreme Court: such a deal only legal if there is clear connection –

a nexus – between the harm being done and the remedy

Zoning

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What are benefits and costs of… having property rights at all? expanding property rights to cover more things? introducing an exception/limitation to property rights?

When will benefits outweigh the costs?

Property law: the big-picture question

End of material on first midterm

Up next: contract law

Documents

Econ 522 Economics of Law Dan Quint Fall 2013 Lecture 9