Law and Economics-Charles W. Upton

What Rights Should be Protected

What Rights Should be Protected

How do we define rights

• A natural question is how to define property rights. Some examples.

What Rights Should be Protected

How do we define rights

• A natural question is how to define property rights. Some examples.– Subsurface rights to oil and gas rights. How

much land must the landowner have in order to tap into the oil rights?

What Rights Should be Protected

How do we define rights

• A natural question is how to define property rights. Some examples.– Subsurface rights to oil and gas rights. How

much land must the landowner have in order to tap into the oil rights?

– Wild animals. Who has title to wild animals? And indeed to domestic animals?

What Rights Should be Protected

How do we define rights

• A natural question is how to define property rights. Some examples.– Subsurface rights to oil and gas rights. How much land

must the landowner have in order to tap into the oil rights?

– Wild animals. Who has title to wild animals? And indeed to domestic animals?

– Rights to use a stream. Just what rights does a person have to use a stream flowing through his or her land?

What Rights Should be Protected

Two Rules

• First possession. The first one to own property is entitled to use it.

• Tied ownership. Ownership of a given resource determines ownership of another resource.

What Rights Should be Protected

Two Rules

• First possession. The first one to own property is entitled to use it.

• Tied ownership. Ownership of a given resource determines ownership of another resource.

• Lets apply them to some cases.

What Rights Should be Protected

The Oil Well

• I sink an oil well my land and begin to pump oil.

What Rights Should be Protected

The Oil Well

• I sink an oil well my land and begin to pump oil.

• Since an oil field is relatively porous, some of the oil I pump will have originally lain below my neighbor’s property.

What Rights Should be Protected

The Oil Well

• I sink an oil well my land and begin to pump oil.

• Since an oil field is relatively porous, some of the oil I pump will have originally lain below my neighbor’s property.

• Who owns that oil?

What Rights Should be Protected

The Oil Well

• I sink an oil well my land and begin to pump oil.

• Since an oil field is relatively porous, some of the oil I pump will have originally lain below my neighbor’s property.

• Who owns that oil?

• If we adopt the right of first possession, I do.

What Rights Should be Protected

The Oil Well

• I sink an oil well my land and begin to pump oil.

• Since an oil field is relatively porous, some of the oil I pump will have originally lain below my neighbor’s property.

• Who owns that oil?

• If we adopt the right of first possession, I do.

• Landowners have an incentive to pump fast, which is Hicks-Kaldor inefficient.

What Rights Should be Protected

The Oil Well

• I sink an oil well my land and begin to pump oil.

• Since an oil field is relatively porous, some of the oil I pump will have originally lain below my neighbor’s property.

• Who owns that oil?

• If we adopt the right of first possession, I do.

• Landowners have an incentive to pump fast, which is Hicks-Kaldor inefficient.

• More gets spent on wells.

• The process of rapid extraction is wasteful

What Rights Should be Protected

This is what we ought to do

MR

What Rights Should be Protected

This is what we ought to do

MR

We can restrict the number of wells by limiting wells to so many per acre, with the landowners profiting in proportion to the land owned.

What Rights Should be Protected

This is what we ought to do

MR

We can restrict the number of wells by limiting wells to so many per acre, with the landowners profiting in proportion to the land owned.

If we must get permission of all the landowners, in (say) 40 acres, we can run into high transactions cost.

What Rights Should be Protected

The Wild Animal

• In the case of a wild animal, the rule of first possession would give title to the first possessor.

What Rights Should be Protected

The Wild Animal

• In the case of a wild animal, the rule of first possession would give title to the first possessor.

• A rule of tied ownership might give title to the person on whose land the animal was born (or conceived).

What Rights Should be Protected

The Wild Animal

• Neither is perfectly satisfactory.– Consider a school of fish. If we allow first

possession, then everyone will act to deplete the fish.

What Rights Should be Protected

The Wild Animal

• Neither is perfectly satisfactory.– Consider a school of fish. If we allow first

possession, then everyone will act to deplete the fish

– This problem sometimes referred to as the tragedy of the commons.

What Rights Should be Protected

The Wild Animal

• Neither is perfectly satisfactory.

– And if the animal belongs to the landowner where the animal is conceived or born, questions of proof abound.

What Rights Should be Protected

The Wild Animal

• We treat many animals as public goods. Thus you need a hunting or fishing license.

What Rights Should be Protected

A New Invention

• The rule of first possession would be that the first one to get the invention owns it.

What Rights Should be Protected

A New Invention

• The rule of first possession would be that the first one to get the invention owns it.

• In the case of tied ownership, the invention might fall to some other property. – Thus, if I invent a new improved version of

Windows, the title might fall to Microsoft.

What Rights Should be Protected

A New Invention

• The rule of first possession would be that the first one to get the invention owns it.

• In the case of tied ownership, the invention might fall to some other property. – Thus, if I invent a new improved version of

Windows, the title might fall to Microsoft.

• Either rule has problems.

• A rule of first possession often means an expensive (i.e., Hicks-Kaldor inefficient) race to be the first.

What Rights Should be Protected

A New Invention

• The rule of first possession would be that the first one to get the invention owns it.

• In the case of tied ownership, the invention might fall to some other property. – Thus, if I invent a new improved version of

Windows, the title might fall to Microsoft.

• Either rule has problems.

• A rule of first possession often means an expensive (i.e.., Hicks-Kaldor inefficient) race to be the first.

• But since a new improved version of Windows will belong to Microsoft, I have no incentive to develop one.

What Rights Should be Protected

Riparian vs. Aquarian Rights

• In the East, water is relatively plentiful, so the landowners rights are defined to protect downstream users.– I can swim– I cannot build a dam– I cannot pollute

What Rights Should be Protected

Riparian vs. Aquarian Rights

• In the East, water is relatively plentiful, so the landowners rights are defined to protect downstream users.

• In the West, water is scarce so rights define the rights of people to withdraw water from the stream

What Rights Should be Protected

End

©2004 Charles W. Upton