Econ 522 – Lecture 6 (Sept 18 2008)
First homework is online, due Thurs October 2 at the very start of lecture.
Tuesday, we discussed the question of what can be privately owned, and listed four ways
for people to claim property rights over information:
 patents
 copyrights
 trademarks
 trade secrets
We talked about patents, which protect ideas and innovations by granting the inventor a
temporary legal monopoly to use their idea.
Copyrights are property rights over “original expressions” – writing, music, or other
artistic creations. Creations like this tend to fit the definition of a public good:
 nonrivalrous – one more person reading a book, or listening to a song, or using a
piece of software, doesn’t impose any costs on the creator or on other users
 nonexcludable – this isn’t quite as literally true; but technology has made it very
cheap, often free, to copy and share music or software, so in some instances it’s
very difficult to prevent people from accessing it. (This has become more
dramatically true in the last decade – once something is available digitally, it’s
very hard to limit access to it.)
So it is natural to think of creations like these in terms of public goods. As with any
public good, if they are privately supplied, we would expect them to be undersupplied –
that is, without any specific sort of reward system, creators could not capture the full
social benefit of their creations, and so the free market would likely produce an
inefficiently low level of “original expressions.”
However, there are several possible ways to remedy this problem:

Have the government subsidize it, that is, have it publicly supplied. This happens
with scientific research, since scientific knowledge can also be thought of as a
public good; and it happens with art.

Another is for these activities to be paid for with charitable donations. This is
implicitly what happens with shareware – you download it for free, but are asked
to pay for it voluntarily if you use it. (Of course there’s the usual freerider
problem.) And a lot of art is supported by private foundations and donations.

Finally, the creator of a song, or of a computer program, can be given legal rights
to it, which make it illegal for others to disseminate it, so that in order to use it
legally, people have to buy it from the creator (or from someone else who pays
fees to the creator)
This last one is the case of copyright – exclusive legal rights to written material.
Copyright law is less rigid than patent law – patents serve as injunctions against any
unauthorized use of the idea, while certain exceptions are recognized for copyrights. For
example, the Posner article I distributed the first day of class is copyrighted, but I wasn’t
breaking the law by handing out copies of it – educational use is recognized as “fair use”
of copyrighted material, and is therefore exempt. Similarly, small selections from a book
can legally be quoted in reviews, or used in satires, and pieces of songs can be sampled in
other songs.
On the other hand, copyrights last much longer than patents – the lifetime of a copyright
has been extended several times. Copyrights currently expire 70 years after the death of
the creator.
Unlike patents, you don’t have to apply for a copyright – it automatically applies to
anything you’ve written or created.
Copyrights are generally more narrow than patents – they cover the specific text, not the
general idea, although the line is sometimes a bit vague. In 2001, Alice Randall
published the book “The Wind Done Gone,” which was meant as a retelling of “Gone
With The Wind” from the point of view of a slave on Scarlett’s plantation. The estate of
Margaret Mitchell sued the book’s publisher; an injunction was initially issued, halting
publication, but was later overturned; in the end, a settlement was reached.
In this case, though, even if the book did violate the copyright, it’s hard to see any
financial damage to Mitchell’s estate. That is, it’s hard to imagine there are many people
who would see an “unauthorized parody” as a substitute for the original; hard to imagine
a lot of people who planned to buy a copy of Gone With The Wind, then read the parody
and felt they no longer needed to.
In my own opinion, copyright holders sometimes defend their copyright aggressively as a
reflex, without giving much thought to whether the activity they’re opposing actually
hurts their interests. Lots of book publishers were opposed to Google Print (now called
Google Book Search), which would allow people to search the text of books, but would
only return the relevant paragraph, not the whole work. Again, it’s hard to imagine that
searching for a phrase or an idea, and finding it contained in a book you didn’t know
about, would make you less likely to buy that book; yet the publishers felt some
instinctive need to oppose the idea. (Google Print is now mostly limited to books in the
public domain, that is, works whose copyrights have expired or which are not protected
by copyright for other reasons.)
A similar argument could be made about the well-publicized RIAA lawsuits against
music downloaders. (There is little doubt that unlicensed copying of music does violate
copyright; there is less clarity that treating potential customers as criminals is the best
long-term strategy for the music and movie industries.)
(Commenting on the lengthening of copyright life, Cooter and Ulen comment that
technology has made it easier to avoid paying copyright royalties, and that the
lengthening of copyright therefore “allows creators a longer time to recoup their just
royalties.” I wince at the use of the word “just”. They seem to be implying that
intellectual property protection is somehow the natural state of the world, or a moral
imperative, that these rights are somehow inherent and deserved. People forget
sometimes that the protection of intellectual property is artificial, a man-made legal
creation. Copyright holders lobby for strengthening copyright law because that’s in their
own financial interest, just like patentholders lobby for stronger patent protection because
it’s in their interest. There may be many good reasons for an author to have certain
exclusive rights to their own work, but these rights are a calculated invention, not a
natural or moral entitlement.
Separate from that, one could wonder whether the royalties received between, say, year
40 and year 70 after your own death really enter into one’s calculations when deciding
how much time to invest in writing a book or a song; so if we see copyrights, like patents,
as existing mainly to give an incentive for creation, it may be hard to argue there’s an
added benefit in having them last this long.)
Probably less controversial than patents and copyrights are trademarks. This is protection
for distinctive commercial symbols such as McDonald’s golden arches and Nike’s
swoosh. Trademark protection prevents competitors from putting the same mark on their
products; thus, it helps establish who a product is made by, allowing consumers to rely on
a firm’s or a product’s reputation for quality. (To put it another way, when competing
products are indistinguishable from each other, or when producers deliberately make it
unclear whose product is whose, producers don’t have much incentive to make better
products, since they won’t be rewarded with higher sales. By certifying the identity of a
particular brand of product, trademarks give firms more of an incentive to create higherquality goods; and they give consumers less uncertainty about the goods they’re buying.)
Unlike other forms of intellectual property, trademarks last forever, unless they are
abandoned. Makes some sense – there doesn’t seem to be the same tradeoff of long-term
incentives versus short-term inefficiency.
Generic names cannot be trademarked – for example, nobody can trademark the word
“camera”, and sue anyone else who advertises a product called a camera. Sometimes,
this goes in the other direction: occasionally, a brand-name product is so successful that
their name becomes synonymous with the product. “Kleenex,” “Xerox,” “Scotch tape,”
and “Band-Aid” are all commonly used to refer to generic products. The name “Aspirin”
was once the name of acetacylicilic acid sold by the Sterling Drug Company; in 1921, a
federal court ruled that the name had become the common word for the drug, and other
companies were allowed to start using the term “aspirin.” (Bayer currently holds a
trademark on the word “aspirin” in Mexico and Canada, where nobody else can sell a
product with that name.) The book also talks about a program by Coca-Cola, which
employs 25 “investigators” who order Coke all over the place and analyze what they’re
given, in an effort to ensure that people don’t start using the term to refer to any generic
soda and destroy the trademark.
The final type of legal protection for information is the protection of trade secrets. A
trade secret is any information "used in one's business" that gives its owner "an
opportunity to obtain an advantage over competitors who do not know or use it." For
instance, the exact formula for Coca-Cola is supposedly a closely-guarded trade secret.
In order to charge someone with misappropriating a trade secret, I have to show three
things:
 One, that it is a valid trade secret, that is, that it is commercially valuable, and that
it was not already commonly known throughout the industry.
 Two, that they acquired it illegally. Buying my product and reverse-engineering
how I built it is not illegal. However, breaking into my lab and stealing my notes
is.
 Three, that I took reasonable steps to protect it.
Trade secrets behave like property – they can be transferred or sold. The protection does
not expire, as long as the secret remains a secret. Trade secret protection is limited,
however. Suppose my firm hires an engineer to work on a secret project, and I have him
sign a non-disclosure agreement, agreeing not to disclose my secrets. After a while, he
quits, and begins working for my competitor. If he reveals my secrets to them, I can sue
him for breach of contract; but if my competitor did not know about the contract, I have
no recourse against them, and now they have my secret.
(Nondisclosure agreements tend to be difficult to enforce. Particularly in Silicon Valley,
where people change jobs very frequently, trade secret protection is not felt to be
particularly effective. Kozmo/Urbanfetch)
The book points out that organizations – churches, clubs, cooperatives, charities, and so
on – tend not to be owned; but some corporations are owned, and can be bought and sold
like property. They come up with the general principle that corporations whose goal is to
earn profits should generally be owned, as they will be more highly valued by owners
who can use them to generate higher profits; and so through voluntary negotiations (or
hostile takeovers), they will tend to end up in the hands of whoever can run them most
profitably. On the other hand, corporations with goals other than maximizing profits
should be governed but not owned. They also point out that thin markets for corporations
allow for them to pursue goals other than profits, but liquid markets do not.
When a corporation is owned, this introduces what’s called a principal-agent problem.
The owners of a firm generally want it earn the highest profits possible; but the people
making the day-to-day decisions of how the firm is run, the management of the firm, may
have other goals in mind. This is a standard problem in contract theory, which we’ll see
more on.
More on corporations in the book.
We return to the question of public and private ownership of resources. Three possible
forms of public ownership:
 Open access, where everyone can use the resource
 Political control, where use is somehow regulated
 Unanimous consent, where everyone must agree in order for anyone to be allowed
access
Book discusses oyster beds as an example of open access and the usual tragedy-of-thecommons problem. Early in their lives, oysters tend to permanently attach themselves to
underwater rocks or other surfaces, which makes it possible to assign property rights to
them. They discuss the fact that along the Atlantic and Gulf Coast, some states treat
oyster beds as common property with open access – everyone has rights to use them –
while other states treat oyster beds as private property, with the state leasing these rights
to companies. They cite a paper showing that when oyster beds are common property,
they become depleted, as measured by a greatly reduced output of oysters per man-hour
of fishing – the classic tragedy of the commons problem that we’ve already discussed.
Unanimous consent gives multiple owners veto power over any use of the resource.
While open access resources will tend to be overutilized, resources governed by
unanimous consent will tend to be underutilized. They give the example of vacant shops
in Moscow after the fall of Communism: due to the overlapping property rights
established under Communism, too many people had the power to veto anyone’s use of
the space, and so no one was able to put the space to use.
The third option for public resources is political regulation. They give an example of
pasture land in parts of Iceland, which is held in common, but regulated:
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. 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.
The usual problem of overuse of public resources is that there is no (or very little) private
cost to using them. That is, if all grazing land were public, there would be almost no
private cost to having more sheep, so everyone would raise too many. Here, however,
the system is such that there is a private cost – you can only graze more sheep in the
common pasture if you have more farmland and more space for sheep in the winter – so
overuse is less of a problem. (Plus, an overall limit is imposed.)
Of course, there are administrative costs to this type of regulation – someone must
enforce it. But in some instances, such regulation may be less costly than the transaction
costs required for private ownership – in this case, building a lot of fences to separate
different shepherds’ shares of the pastureland.
Next, how are property rights established and verified?
Begin with an example of “fugitive property”. Fugitive property is property that moves
around or has indefinite boundaries, like foxes or whales. The book gives the example of
natural gas, illustrated in the case Hammonds v. Central Kentucky Natural Gas Company
(1934). The Central Kentucky Natural Gas Company leased tracts of land above deposits
of natural gas; but the geological dome of natural gas lay partly under the land they were
leasing, and partly under someone else’s land. When the company began extracting the
gas, Hammonds, one of the other landowners, sued, claiming that some of the gas they
were extracting came from under her land.
There are two different principles for how to establish ownership of fugitive property:


first possession – fugitive property does not belong to anybody until someone
extracts it, establishing ownership
tied ownership – ownership of fugitive property is tied to something else which is
easier to establish – in this case, the owner of the surface under which the natural
gas resides
Under first possession, Central Kentucky Natural Gas Company was entitled to whatever
gas it extracted; under tied ownership, they were only entitled to the gas under their own
land, and Hammond’s claim was valid. (Tied ownership would also suggest that a
landowner has rights to the foxes on his own land. Tied ownership might suggest that if
you’re at a baseball game and a foul ball lands on your seat, you have automatic rights to
it, while first possession suggests that whoever grabs the ball owns it.)
First possession has the advantage of generally being very simple (and therefore cheap)
to apply. Determining who first possessed property is usually straightforward. However,
first possession also has a downside: it creates an incentive to invest too much too early,
in order to establish ownership of a scarce resource. That is, firms might expend too
many resources trying to establish first possession of a resource, leading to inefficiency.
In the natural gas example, if ownership of the gas were tied to ownership of the surface,
there would be no hurry to extract the gas; provided it got rights to all the land above the
deposit, the firm could extract the gas in the most efficient way. However, with first
possession, imagine there were two firms interested in extracting the gas. This would
create a race between them, since the gas was a scarce resource that belonged to whoever
possessed it first; this would lead to both firms to try to extract it inefficiently quickly,
using means that are more expensive than necessary. Efficiency demands utilizing a
resource in a way that leads to the highest value of production; but in this case, first
possession leads to investments that are not efficient from a production point of view, in
order to establish a claim to a scarce resource.
(The book also gives an example of fencing in “waste” land. Fencing it in may increase
the productivity from grazing cattle on the land; but this gain in productivity may be
smaller than the cost of building the fence. But if fencing it in establishes ownership, and
if people expect land to become scarce and to increase in value in the future, it may be
worthwhile to fence it in now, in order to establish possession of it for later.
To put it another way, efficiency concerns the production of wealth, not the transfer of it.
Under a rule of first possession, firms may expend resources to get wealth – in this case,
a scarce resource – transferred to them, which is inefficient.)
The Homestead Act of 1862 was meant to encourage people to settle the Western part of
the U.S. The act allowed citizens to acquire up to 160 acres of public land; but it required
them to fulfill certain requirements to establish ownership (title) to the land:
 the claimant had to be the head of a family or 21 year old
 the claim had to be “for the purpose of actual cultivation, and not, either directly
or indirectly, for the use or benefit of” someone else
 the claimant had to live on the claim for 6 months and make “suitable”
improvements before title was granted
These requirements were meant to prevent a mad rush to acquire land and do nothing
with it; however, these requirements were not enforced particularly well.
Back to the principle of tied ownership of fugitive property. The common and civil law
often tie ownership using the principle of accession: the principle that a new thing is
owned by the owner of the “proximate or prominent” property, that is, the nearest (or
most obvious) thing to link ownership to. For example, a newborn calf belongs to the
owner of its mother; when a river shifts and creates new land, the owner of the river bank
owns that new land; and the owner of a brand name tends to have the default right to the
corresponding Internet address.
As long as the ownership of the property to which the rights are tied is already
established, tied ownership creates the incentive for efficient use of the resource. As we
said before, if the ownership of the natural gas is not in question, the firm can extract it
by the most efficient means possible, since it does not need to race to possess it.
Similarly, if salmon are the property of the owners of the stream where they spawn, the
owners would not deplete the salmon by overfishing.
However, as we saw in the Hammonds case, tied ownership faces the difficulty of
establishing and verifying ownership rights – it is impossible to figure out “which” part
of the natural gas being extracted was under Central Kentucky’s land and which part was
under Hammond’s. This brings us to the following tradeoff:
“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, whereas rules that allow ownership without possession have the advantage of
avoiding preemptive investment and the disadvantage of being costly to administer.”
So the problem with a first-possession rule is it leads to an investment in possessory acts,
which do not create any value, just transfer it. An example from the Friedman book,
Law’s Order, discussing the Homestead Act (p 120).
(We can also see this principle at work in the two possible outcomes of the fox-hunt case,
Pierson v Post. Awarding the fox to Pierson, the interloper, links ownership to
possession, which is the simpler rule; but it gives him an incentive to jump in at the end
of the hunt, which is inefficient. Awarding the fox to Post, the hunter, allows ownership
without possession; it avoids this problem, but is more difficult to administer, since there
is less of a “bright line” to mark when ownership is established and the claim of
ownership is harder to prove.)
Another cool example of fugitive property comes from Friedman:
“Stack Island in the Mississippi belonged to someone. Over a period of many years the
river’s current eroded the upstream end of Stack Island and deposited sediment at the
downstream end, with the result that Stack Island gradually drifted downstream.
Some distance below Stack Island the west bank of the river belonged to someone else,
along with all islands in the section of river east of his property. After a very long time,
one of them was Stack Island. Who owned it?”
In that case, the court found a way around deciding who the rightful owner was, by
deciding the case on a sort of technicality that we’ll discuss shortly. But it’s certainly an
interesting problem. Friedman quotes John McPhee, who quotes Carroll Brewster, who
describes land law in the Sudan:
“You cannot understand a Nile land case without understanding how the river behaves.
As it rises and falls in its annual cycle, fertile land in the riverbed is arable for seven or
eight months, then disappears again beneath the water. One year a particular tract may
fail to reappear, and the owner loses his land. Five years later land appears again in that
same place. Does the old owner still have rights to it? If he is dead, who does have
rights to it? Perhaps an island has vanished under the flood. It reappears a quarter of a
mile downstream in slightly different form. Does the owner of the lost island own the
new one? . . . The banks of the Nile also occasionally tend to swing back and forth, and,
according to the custom that prevails in most places, as the riverbanks move, so does
riverbank land. Everyone’s property swings with the river. Even people whose land is
some distance from the water are affected when the channel takes a turn in their direction.
Properties near and far move like connected pieces of armor, in concert with the
unpredictable water.” (p. 118 of Law’s Order, quoting John McPhee, A Roomful of
Hovings, p 162-163.)
The next question is, when should unowned resources become owned?
The rule of first possession typically applies when property is commonly owned and
accessible to all. For example, everyone has common access to the ocean; fish generally
belong to whoever catches them. As a consequence, many fish and marine mammals
have been overhunted, nearly to extinction. Similarly, common hunting land is often
overhunted, common pasture land overgrazed, and public forests overharvested.
The claim in the book is that many of these resources are so overutilized that the overall
marginal product of labor and capital are negative – that is, that the long-term yield from
these resources would be higher if less effort were put into exploiting them. This is
clearly the case with animals that are near extinction. (This can persist because each
fishing boat, hunting party or logging company only considers their private return, not the
externality they impose on others.) They define this as being beyond the “maximum
sustainable yield,” that is, the level of effort that maximizes long-term production.
Clearly, once the natural demand for a resource is above the maximum sustainable yield,
open-access is not a great ownership rule. Preventing overuse can be done in multiple
ways.
One way is tied ownership. In the Icelandic farming communities, summer grazing rights
in the common pasture were tied to private land on which you would graze your cattle in
the winter. Another solution is to privatize the resource, that is, to transition it from
public to private ownership. The cost of privatization, of course, is that now owners must
take steps to make the resource excludable, which may be costly. These costs are
referred to as “boundary maintenance.” In the case of pastureland, this may involve
putting up fences to keep out other peoples’ cattle. The cost of continued public
ownership, on the other hand, is congestion and overuse. Thus,
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.
(This can happen either because congestion becomes a greater cost, or because
technology makes boundary maintenance cheaper. In the Demsetz example of Native
American land rights, the cost of congestion became higher as the fur trade led to
overhunting. On the other hand, the invention of barbed wire lowered the cost of
boundary maintenance, and would be expected to have encouraged privatization of land
rights in the American West.)
Another question is, what can be done to prove ownership of goods? Branding one’s
cattle discouraged theft by making it easier to prove the cattle was taken from you. The
same idea holds with vehicle identification numbers on cars. In some instances, the
government may provide a registry of ownership. Trademarks are registered to avoid
overlap; states grant paper titles for cars and deeds for property, to clearly establish (and
register) the legal owner.
Why is this necessary? Suppose you decide to buy a farm. You drive around the
countryside and find a plot you like, approach the farmer, and agree on a price. You pay
the man and move onto the property. A month later, a man arrives claiming to own the
property you are living on, saying he’s come to evict the tenant who had been renting the
house you’re now living in. What happens?
The book contains a funny story about how sales of property were supposedly (maybe
apocryphally) “recorded” in England in the Middle Ages. The seller would hand the
buyer a bit of dirt and a twig from the land, in a ceremony officially passing on
ownership; then they would take a child who had witnessed the transfer, and “beat him so
severely that he would remember that day for the rest of his life,” in order to create a
permanent record of the transaction.
In the U.S., each of the 50 states has some system for recording the legal owner of land; a
change in ownership is recorded in a registry of deeds, and the records are open to the
public, so that I can ensure I’m buying a house from its rightful owner.
With smaller objects, there is no such registry. If you sell me an apple, I have no way of
knowing for sure whether you are the rightful owner of the apple. This is because the
costs of maintaining such a registry would be much greater than the problem it attempted
to solve, the difficulty in trade due to uncertainty in ownership. For large items like
houses and cars, the cost to commerce of uncertain ownership is large, and the number of
items small enough to make a formal registry feasible. For smaller items, the opposite is
true, so you mostly have to take a seller at his word.
So now suppose (in the example from the book) that you got a great deal on a used TV
from a guy in a parking lot outside a bar. A few days later, the police arrive with a
person who claims to own your TV. Do you get to keep it, or is it returned to its original
owner? That is, if person B steals an item from A, sells it to an innocent buyer C and
disappears, does A still have a claim to the good?
The rule varies in different places. In the U.S., you can only transfer property rights that
you legitimately have. So a person without title (without lawful ownership) cannot
transfer title to a buyer. In this case, even though you thought you were buying the TV,
you were buying nothing, and the original owner still owns the TV. If you can find the
seller, you are entitled to your money back.
There are exceptions, however. If a thief steals money and uses it to buy your TV, the
original owner of the money cannot get it back from you. So while a thief cannot give
good title to most stolen goods, he can convey good title to money. Another exception is
that if you buy a TV from a legitimate TV dealer and it turns out to be stolen, it is still
yours; the original owner can only take it up with the dealer.
In much of Europe, the rule is more favorable to the buyer; as long as you acted “in good
faith,” that is, you genuinely believed the seller owned the object, it is yours to keep; the
original owner would have to try to recover your money from the thief.
The book again tries to derive a general rule by comparing two costs:
Let CO be the cost to an owner of protecting himself against theft by, for example,
engraving his social security number on the side of his TV.
Let CB be the cost to a buyer of verifying that he is dealing with the rightful owner of a
good.
Then if CO is generally less than CB, it is more efficient for a good-faith buyer to acquire
good title
But if CO is generally higher than CB, it is more efficient for the original owner to retain
title in these situations
In Spain, a hybrid rule applies. The “American Rule” – a thief cannot convey title, so if
you bought a stolen good, you’re out of luck – applies to goods stolen from a house and
sold to a merchant. This rule discourages merchants from buying stolen goods, in turn
discouraging theft by making it less profitable. On the other hand, the “European Rule”
that a good-faith buyer receives good title applies to goods stolen from a merchant.
We already asked the question, how do you establish property rights over something?
Also worth asking is, how do you give up (or lose) property rights over something?
One way that this can occur is Adverse Possession. Suppose that you own a vacant plot
of land next to my house, and decide to build yourself a house there. By mistake, you
build it so that it intrudes into my land by a couple of feet. Now suppose that I don’t
notice for a long time, but that, 15 years later, I decide to replant my garden, examine the
property line, and realize you have trespassed on my property. Do I still have the right to
force you off my property? Or by being there for long enough, have you established a
legal right to that bit of land?
Adverse possession is so named because trespasser’s possession of the land is adverse to
the owner’s own interests. In such a case, if you occupy the property for a long enough
time (specified by law), you gain legal rights to it; provided the occupation is adverse to
the owner’s interests, and he does not object or take legal action. That is, if an owner
“sleeps on his rights” and allows you to trespass, he eventually gives up his ownership.
The advantage of this is that, over time, it clears up any uncertainty about ownership,
allowing property to be traded more easily and therefore efficiently allocated. For
example, suppose you want to buy a house that was built in 1910 and sold in 1925, again
in 1937, and again in 1963. When you research the title, there seems to be some
confusion about whether the 1937 sale was legal. However, if the current tenant has
lived there since 1963 without legal challenge, he has gained legal right to the land; and
so you can buy it from him without worry.
So one defense of adverse possession is that it resolves uncertainty. Another defense is
that it prevents valuable resources from being left idle for too long, by specifying a way
for a more productive user to gain title to the resource.
Of course, adverse possession also has a cost – property owners must actively monitor
their land against possible trespass. When you built your house that cut slightly into my
property, I could not say to myself, “I’m not using that bit of land now, so I’ll let it go,
and raise a stink later if I decide I want to use it.” Thus, I incur monitoring costs, and
trespassers are less likely to get away with it since I’m watching more closely.
Another potential way to give up property rights to something is to lose it. You’re
walking down the street and find a diamond ring; is it yours, or do you have to try to find
the rightful owner? The relevant legal area is estray statutes.
A typical estray rule specifies a procedure for a finder to establish ownership of lost or
abandoned property. If the property is above a certain value, the finder may have to go to
court and document where and how he found the object. The court may then place an ad
in the newspaper. After a certain amount of time, if the owner has not claimed the
property, it belongs to the finder. A finder who does not go through this process is
subject to a fine.
Estray rules discourage theft, by eliminating one excuse a thief could give when caught
with stolen property (“i found it”). They also increase information spread about lost
property, reducing the search costs of owners who lose things. To the extent that the
original owner is likely to value the object most, this is likely efficient.
Next week, we’ll finish up property law. First homework is online, due October 2.