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Econ 522Economics of Law
Dan Quint
Spring 2011
Lecture 8
2
Second homework due next Thursday (Feb 24)
First midterm in two weeks (March 2)
Logistics
3
How do you establish, verify, or give up property rights?
4
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
5
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
6
First Possession simpler to apply – easy to determine who possessed property first incentive to invest too much to early in order to establish ownership
example: $100 of gas, two companies drilling fast or slow drilling slowly costs $5, drilling fast costs $25 drill same speed each gets half the gas, one drills fast 75/25
First Possession versus Tied Ownership
45, 45 20, 50
50, 20 25, 25
Slow Fast
Slow
Fast
Firm 2
Firm
1
7
First Possession simpler to apply – easy to determine who possessed property first incentive to invest too much to early in order to establish ownership
Tied Ownership encourages efficient use of the resource but, difficulty of establishing and verifying ownership rights
First Possession versus Tied Ownership
45, 45 45, 25
25, 45 25, 25
Slow Fast
Slow
Fast
Firm 2
Firm
1
8
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:
9
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
10
“The year is 1862; the piece of land we are considering is… too far from railroads, feed stores, and other people to be cultivated at a profit.
…The efficient rule would be to start farming the land the first year that doing so becomes profitable, say 1890. But if you set out to homestead the land in 1890, you will get an unpleasant surprise: someone else is already there.
…If you want to get the land you will have to come early. By farming it at a loss for a few years you can acquire the right to farm it thereafter at a profit.
Friedman on the Homestead Act of 1862
11
How early will you have to come?
Assume the value of the land in 1890 is going to be $20,000, representing the present value of the profit that can be made by farming it from then on. Further assume that the loss from farming it earlier than that is $1,000 a year.
If you try to homestead it in 1880, you again find the land already taken. Someone who homesteads in 1880 pays $10,000 in losses for $20,000 in real estate – not as good as getting it for free, but still an attractive deal.
…The land will be claimed about 1870, just early enough so that the losses in the early years balance the later gains.
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.”
Friedman on the Homestead Act of 1862
12
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?
13
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?
14
Branding cattle
Vehicle ID numberson cars
States grant deeds for property, and keepregistry of legal owner
How do you prove ownership of something?
15
Branding cattle
Vehicle ID numberson cars
States grant deeds forproperty, and keepregistry of legal owner
No such system for apples Too many apples – high cost of maintaining a registry Apples inexpensive – not much of a problem
How do you prove ownership of something?
16
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?
17
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 Pro: clear up uncertainty over time; allow land to be put to use Con: owners must incur monitoring costs to protect property
How do you give up (or lose) property rights?
18
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 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
How do you give up (or lose) property rights?
19
Remedies
20
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)
21
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
22
Temporary damages Require victim to keep returning to court if harm continues Create an incentive to reduce harm in the future
Permanent damages One-time, permanent fix No incentive to reduce harm as technology makes it easier
Temporary versus permanent damages
23
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
24
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)
25
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)
26
Limitations and Exceptions toProperty Rights
27
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
28
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
29
Owners today control who inherits their property Wasn’t always the case
Limitations on who inherits lead to… Circumvention costs
Another limitation: determining what happens to your stuff after you die
30
Owners today control who inherits their property Wasn’t always the case
Limitations on who inherits lead to… Circumvention costs Depletion costs
Another limitation: determining what happens to your stuff after you die
31
Owners today control who inherits their property 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
Another limitation: determining what happens to your stuff after you die
32
Owners today control who inherits their property 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”
Another limitation: determining what happens to your stuff after you die
33
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…
Another limitation: Inalienability
children atomic weapons human rights
34
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…
Another limitation: Unbundling
35
Land ownership consisted of three separable pieces (“estates”)
Surface estate
Support estate
Mineral estate
Example of unbundling: Pennsylvania and coal
36
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
37
The government can take your property “Eminent domain”
And the government can tell you what to do with it Regulation
We’ll discuss these on Monday
Two other ways in which property rights are limited
38
Takings(doubt we’ll get to here)
39
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
40
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
41
Why allow takings?
Takings
42
Why allow takings?
Why these limitations? why require compensation?
Takings
43
Why allow takings?
Why these limitations? why require compensation?
Takings
$3 MM $1 MM$9 MM
$10 MM
44
Why allow takings?
Why these limitations? why require compensation? why only for public use?
Takings
45
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
46
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) Similar case, Kelo v. City of New London (2005 US Sup Ct)
Poletown Neighborhood Council v Detroit
47
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) Similar case, Kelo v. City of New London (2005 US Sup Ct)
Poletown Neighborhood Council v Detroit