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Law and Economics-Charles W. Upton
Why Property Rights
Why Property Rights
Farmer Corn Grown
Corn Stolen
Corn Lost Net
A 50 40 -10 80 B 150 10 -40 120
Total 200 50 -50 200
Why do we want property rights?
Why Property Rights
Farmer Corn Grown
Corn Stolen
Corn Lost Net
A 50 40 -10 80 B 150 10 -40 120
Total 200 50 -50 200
Why Property Rights
Farmer Corn Grown
Corn Stolen
Corn Lost Net
A 50 40 -10 80 B 150 10 -40 120
Total 200 50 -50 200
Why Property Rights
Farmer Corn Grown
Corn Stolen
Corn Lost Net
A 50 40 -10 80 B 150 10 -40 120
Total 200 50 -50 200
A zero-sum game
Why Property Rights
Farmer Corn Grown
Corn Stolen
Corn Lost Net
A 50 40 -10 80 B 150 10 -40 120
Total 200 50 -50 200
Though this table doesn’t show it, real
resources are devoted to stealing and preventing theft
Why Property Rights
Farmer Corn Grown
Corn Stolen
Corn Lost Net
A 100 100 B 300 300
Total 400 400
Suppose theft can be prevented and people become 100% more
productive
Why Property Rights
Farmer Corn Grown
Corn Stolen
Corn Lost Net
A 100 100 B 300 300
Total 400 400
Suppose theft can be prevented and people become 100% more
productive
A system of laws which prevent
theft will be Hicks-Kaldor
Optimal
Why Property Rights
Farmer Corn Grown
Corn Stolen
Corn Lost Net
A 75 75(80) B 225 225(120)
Total 300 300(200)
Of course that works only if everyone gains.
Suppose the productivity gain is only 50%
Why Property Rights
Farmer Corn Grown
Corn Stolen
Corn Lost Net
A 75 75(80) B 225 225(120)
Total 300 300(200)
Of course that works only if everyone gains.
Suppose the productivity gain is only 50%
There will often be someone who does better by theft than by “honest work”. The government
exists to compel those few to go along.
Why Property Rights
Farmer Corn Grown
Corn Stolen
Corn Lost Net
A 75 75(80) B 225 225(120)
Total 300 300(200)
Of course that works only if everyone gains.
Suppose the productivity gain is only 50%
There will often be someone who does better by theft than by “honest work”. The government
exists to compel those few to go along.
The cost of government, especially corrupt government, may exceed the
benefits of property rights.
Why Property Rights
Farmer Corn Grown
Corn Stolen
Corn Lost Net
A 75 75(80) B 225 225(120)
Total 300 300(200)
Of course that works only if everyone gains.
Suppose the productivity gain is only 50%
There will always be someone who does better by theft than by “honest work”. The government
exists to compel those few to go along.
Establishing property rights will not be Pareto Optimum, though it may be
Hicks-Kaldor Optimum.
Why Property Rights
Farmer Corn Grown
Corn Stolen
Corn Lost Net
A 75 75(80) B 225 225(120)
Total 300 300(200)
Of course that works only if everyone gains.
Suppose the productivity gain is only 50%
There will always be someone who does better by theft than by “honest work”. The government
exists to compel those few to go along.
Establishing property rights will not be Pareto Optimum, though it may be
Hicks-Kaldor Optimum.
• Why not make side payments to the losers so they have an incentive to “buy in” to the system?
• May cut the cost of government.
Why Property Rights
Farmer B Don’t
Accept Government
Accept Government
Don’t Accept
Government
πB=120
πA=80
πB=225
πA=50
Farmer A Accept
Government πB=150
πA=75
πB=225
πA=75
Lets put this in game theory termsAssume a 50% gain in productivity
Why Property Rights
Farmer B Don’t
Accept Government
Accept Government
Don’t Accept
Government
πB=120
πA=80
πB=225
πA=50
Farmer A Accept
Government πB=150
πA=75
πB=225
πA=75
Lets put this in game theory termsAssume a 50% gain in productivityThis is a payoff
matrix showing the gains to the two
parties depending on their
“strategies”
Why Property Rights
Farmer Both Thieves
A is Sole Thief
B is Sole Thief
Both Honest
Workers A 50 50 75 75 B 150 225 150 225
Total 200 275 225 300
Note:Table assumes no gains from theft, just a waste of time
Why Property Rights
Farmer Both Thieves
A is Sole Thief
B is Sole Thief
Both Honest
Workers A 50 50 75 75 B 150 225 150 225
Total 200 275 225 300
Note:Table assumes no gains from theft, just a waste of time
Why Property Rights
Farmer Both Thieves
A is Sole Thief
B is Sole Thief
Both Honest
Workers A 50 50 75 75 B 150 225 150 225
Total 200 275 225 300
Note:Table assumes if only one thief, no gains from theft, just a waste of time
Why Property Rights
Farmer B Don’t
Accept Government
Accept Government
Don’t Accept
Government
πB=150
πA=50
πB=225
πA=50
Farmer A Accept
Government πB=150
πA=75
πB=225
πA=75
Lets put this in game theory termsAssume a 50% gain in productivity
If neither one accepts
or both accept.
Why Property Rights
Farmer B Don’t
Accept Government
Accept Government
Don’t Accept
Government
πB=150
πA=50
πB=225
πA=50
Farmer A Accept
Government πB=150
πA=75
πB=225
πA=75
Lets put this in game theory termsAssume a 50% gain in productivity
If one but not both accepts. The government
prevents theft, but the non participant
does not stop trying.
Why Property Rights
Farmer B Don’t
Accept Government
Accept Government
Don’t Accept
Government
πB=150
πA=50
πB=225
πA=50
Farmer A Accept
Government πB=150
πA=75
πB=225
πA=75
Here is the Nash Equilibrium
Why Property Rights
Farmer B Don’t
Accept Government
Accept Government
Don’t Accept
Government
πB=150
πA=50
πB=225
πA=50
Farmer A Accept
Government πB=150
πA=75
πB=225
πA=75
Here is the Nash Equilibrium
That is, neither party
has an incentive to
change
Why Property Rights
Farmer B Don’t
Accept Government
Accept Government
Don’t Accept
Government
πB=150
πA=50
πB=225
πA=50
Farmer A Accept
Government πB=150
πA=75
πB=225
πA=75
Here is the Nash Equilibrium
Lets see why
Why Property Rights
Farmer B Don’t
Accept Government
Accept Government
Don’t Accept
Government
πB=150
πA=50
πB=225
πA=50
Farmer A Accept
Government πB=150
πA=75
πB=225
πA=75
Here is the Nash Equilibrium
Lets see why
Why Property Rights
Other Cases
• Could one party pay the cost of the government and force the other party into submission?
Why Property Rights
Other Issues
• Could one party pay the cost of the government and force the other party into submission? – In any reasonable society, a thief is arrested,
tried, convicted and punished. Taxpayers pay the cost.
Why Property Rights
Other Issues
• Could one party pay the cost of the government and force the other party into submission?
• What guarantees that the government will act in the interests of farmers A and B and not become corrupt?
Why Property Rights
Other Issues
• Could one party pay the cost of the government and force the other party into submission?
• What guarantees that the government will act in the interests of farmers A and B and not become corrupt? – That issue would take us well beyond this
course.
Why Property Rights
End
©2004 Charles W. Upton
