Professional Documents
Culture Documents
Economics of Law
Dan Quint
Spring 2011
Lecture 4
So far, we have…
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Once we have private property rights, we’ll
have conflicts between mine and yours
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Up next: how should we design property
rights to achieve efficiency?
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One early, “classic” property law case
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One early, “classic” property law case
Court ruled for Pierson (the one who killed the fox)
“If the first seeing, starting, or pursuing such animals… should
afford the basis of actions against others for intercepting and killing
them, it would prove a fertile source of quarrels and litigation”
(Also: just because an action is “uncourteous or unkind” does not
make it illegal)
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Same tradeoff we saw earlier:
easier to implement
(stronger incentive to pursue
animals that may be hard to
fewer disputes catch)
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How should property rights be allocated?
Coase’s surprising answer: it doesn’t matter
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Example of Coase: you have a car worth
$3,000 to you, $4,000 to me
Obviously, efficient for me to own it…
…but we don’t need the law to give me the car
If I start out owning the car:
no reason for you to buy it, I end up with it efficient
If you start out owning the car:
clear incentive for me to buy it, I end up with it efficient
Regardless of who owns the car at first, we get to the efficient outcome
I’d rather start out with the car – so I don’t have to pay you for it
You’d rather start out with it – so you end up with more money
Efficiency doesn’t care about distribution – how much money we each end up
with – just who ends up with the car at the end.
And that doesn’t depend on who starts with it.
The key: lack of transaction costs
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Another example: you want to have a party
in the house next door to mine
If it’s efficient for you to have the party…
Your benefit from having the party is greater than my benefit from a good
night’s sleep
If you start out with the right to have the party, no problem
If I start out with the right to quiet, you can pay me for the right to have the party
If it’s efficient for you not to have the party…
Good night sleep is worth more to me
If I have right to silence, no problem
If you have right to party, I can pay you not to have it
The point: either way, we achieve efficiency
If it’s efficient to have the party, you have the party
If it’s efficient not to, you don’t
Regardless of who started off with the right
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The conditions for this to hold
…and tradable…
We need to be allowed to sell/transfer/reallocate rights if we want
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The Coase Theorem
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Coase’s example: a rancher and a farmer
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Rancher’s versus farmer’s rights
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Open range versus closed range
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Coase: either law will lead to efficiency
If it’s cheaper for the farmer to protect his crops than for the rancher
to control his herd…
Under open range law, that’s what he’ll do
Under closed range law, rancher can pay farmer to build fence
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Rancher and farmer: numerical example
Three possibilities:
Rancher builds fence around herd… costs $400
Farmer builds fence around crops… costs $200
Do nothing, live with damage… costs nothing
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Other examples from Coase
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Quoting from Coase (p. 13):
In the case of the cattle and the crops, it is true that there
would be no crop damage without the cattle. It is equally true
that there would be no crop damage without the crops.
The doctor’s work would not have been disturbed if the
confectioner had not worked his machinery; but the
machinery would have disturbed no one if the doctor had not
set up his consulting room in that particular place…
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Quoting from Coase (p. 13):
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What does Coase mean by “a cost for both
parties”?
“Opportunity cost”
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So, summing up…
(But if there are transaction costs, then the initial allocation can
matter for efficiency…
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Bargaining
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Some vocabulary about bargaining
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Some vocabulary about bargaining
$1,000 are the gains from trade (or gains from cooperation)
no trade combined payoffs of $13,000
I buy car combined payoffs of $14,000
if we cooperate, our combined payoffs increase by $1,000
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Some vocabulary about bargaining
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Let’s go back to the rancher and farmer
General equilibrium
given prices, consumers maximize utility
given prices, firms maximize profits
prices are such that all markets clear
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Relating Coase to general equilibrium/
first welfare theorem
General equilibrium
given prices, consumers maximize utility
given prices, firms maximize profits
prices are such that all markets clear
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Getting back
to foxes…
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Doesn’t Coase make Pierson v Post
irrelevant?
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Transaction costs
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Quoting Coase…
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We can see the Coase Theorem as either a
positive or negative result
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Many externalities can be thought of as
missing property rights
So one solution…
Make property rights complete enough to cover “everything,” and
tradable, and use the law to minimize transaction costs…
…Then Coase kicks in and we get efficiency! (Booya!)
So why not do this? COSTS!
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Demsetz
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We motivated property law by looking at a
game between two neighboring farmers
Player 2 Player 2
Farm Steal Farm Steal
Player 1
Steal 12, -5 0, 0 Steal 12 – P, -5 – c -P, -P
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Harold Demsetz (1967), “Toward a Theory
of Property Rights”
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Harold Demsetz (1967), “Toward a Theory
of Property Rights”
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Friedman tells a similar story: “we owe
civilization to the dogs”
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Friedman tells a similar story: “we owe
civilization to the dogs”
[Now] you will have to spend your nights making sure they are
not working hard harvesting your fields. All things considered,
you conclude that communal farming is the least bad solution.
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Friedman tells a similar story: “we owe
civilization to the dogs”
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So…
Demsetz:
yes, but this comes at a cost
property rights will expand when the benefits outweigh the costs
either because the benefits rise…
…or because the costs fall
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