Econ 522
Economics of Law
Dan Quint
Fall 2013
Lecture 9
Monday
 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 solve
the problem
1
Discussion question
 Should record labels sue music downloaders?
2
patents
copyrights
trademarks
trade secrets
3
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
4
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 put
goats on roof to attract customers

“The restaurant is one of the topgrossing in Wisconsin, and I’m
sure the goats have helped.”

Suing restaurant in Georgia

“Defendant has willfully continued
to offer food services from
buildings with goats on the roof”
http://online.wsj.com/article/SB10001424052748704285104575492650336813506.html
5
Trademark dilution
6
patents
copyrights
trademarks
trade secrets
7
Trade Secrets
 Protection against misappropriation
 But plaintiff must show…



Valid trade secret
Acquired illegally
Reasonable steps taken to protect it
8
patents
copyrights
trademarks
trade secrets
9
Establishing, verifying, and
losing property rights
10
When should resources become privately
owned?
 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.
11
When should resources become privately
owned?
 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)
12
How do you give up (or lose) property
rights?
 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
13
How do you give up (or lose) property
rights?
 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
14
How do you give up (or lose) property
rights?
 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
15
Limitations and Exceptions to
Property Rights
16
Private Necessity
 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 17
Private Necessity
 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 18
Unbundling
 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…
19
Example of unbundling: Pennsylvania and
coal
 Land ownership consisted of
three separable pieces
(“estates”)

Surface estate

Support estate

Mineral estate
20
Unbundling
 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
21
An example (sort of) of unbundling
source: http://articles.nydailynews.com/2009-08-24/news/17934480_1_ebay-auction-crypt-marilyn-monroe
22
More on
Remedies
23
Remedies (review)
 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
24
Types of damages
 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
25
Temporary versus permanent damages
 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
26
Efficient nuisance remedies
 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…
27
Boomer v Atlantic Cement Co
(NY Ct of Appeals, 1970)
 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”
28
Boomer v Atlantic Cement Co
(NY Ct of Appeals, 1970)
 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”
29
Next: two important limitations on property
rights imposed by government
 Government can limit how you use your property

Regulation
 The government can take your property

“Eminent domain”
30
Eminent Domain
31
Takings
 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
32
Takings
 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
33
Takings
 Why allow takings?
34
Takings
 Why allow takings?
 Why these limitations?

why require compensation?
35
Takings
 Why allow takings?
 Why these limitations?

why require compensation?
$10 MM
$9 MM
$3 MM
$1 MM
36
Takings
 Why allow takings?
 Why these limitations?


why require compensation?
why only for public use?
37
Takings
 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
38
Poletown Neighborhood Council v Detroit
 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)
39
More recent case: Kelo v. City of New London
(2005 US Supreme Court)
 Posner (Economic Analysis of Law) describes:

…Pfizer had decided to build a large research facility next to a 90acre 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.”
40
Recent example
of eminent domain
 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
41
Regulation
(probably won’t get to)
42
Multiple forms of public ownership
 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
43
Third form of public ownership: political
control/regulation
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.
44
Third form of public ownership: political
control/regulation
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.
45
Similar to how Iceland maintains fishing stock
 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.
46
Regulation
47
Regulation: Pennsylvania Coal v. Mahon
 1800s: PA Coal purchased mineral and
support estates, Mahon owned surface
 1921: Kohler Act prohibited “mining of
surface estate
anthracite coal in such a way as to cause
the subsidence of, among other things,
support estate
any structure used as a human
habitation.”
mineral estate
 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.”
48
Regulation: Pennsylvania Coal v. Mahon
 1800s: PA Coal purchased mineral and
support estates, Mahon owned surface
 1921: Kohler Act prohibited “mining of
surface estate
anthracite coal in such a way as to cause
the subsidence of, among other things,
support estate
any structure used as a human
habitation.”
mineral estate
 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.”
49
Regulation: Pennsylvania Coal v. Mahon
 1800s: PA Coal purchased mineral and
support estates, Mahon owned surface
 1921: Kohler Act prohibited “mining of
surface estate
anthracite coal in such a way as to cause
the subsidence of, among other things,
support estate
any structure used as a human
habitation.”
mineral estate
 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.”
50
Regulation: Pennsylvania Coal v. Mahon
 1800s: PA Coal purchased mineral and
support estates, Mahon owned surface
 1921: Kohler Act prohibited “mining of
surface estate
anthracite coal in such a way as to cause
the subsidence of, among other things,
support estate
any structure used as a human
habitation.”
mineral estate
 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.”
51
Blume and Rubinfeld, “Compensation for
Takings: An Economic Analysis”
 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
52
Blume and Rubinfeld, “Compensation for
Takings: An Economic Analysis”
 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
53
Zoning
 Zoning laws

Distinguish industrial areas from residential areas
54
Zoning
 Zoning laws

Distinguish industrial areas from residential areas
 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
55
Zoning
 Zoning laws

Distinguish industrial areas from residential areas
 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
56
Property law: the big-picture question
 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?
End of material on first midterm
 Up next: contract law
57