Econ 522 – Lecture 7 (Feb 10 2009)
Logistics
 first homework due a week from Thursday
 working together on homework
 office hours Wednesday start late (2 p.m.)
Last Thursday, we discussed some examples of what can be privately owned –
information (through patents, copyrights, trademarks, trade secrets)
A couple more points about this question.
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The book points out that most 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 purpose is to
earn profits should generally be owned
o They will be more highly valued by owners who can use them to generate
higher profits
o 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
When a corporation is owned, this introduces what’s called a principal-agent
problem
o The owners of a firm generally want it earn the highest profits possible
o 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
o This is a standard problem in contract theory, which we’ll see more on.
More on corporations in the book.
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For things that are not privately owned, there is still the question of exactly how they
should be provided/managed. Three possible forms of public ownership:
 Open access, where everyone is free to use the resource
 Political control, where its use is somehow regulated
 Unanimous consent, where everyone must agree in order for anyone to be
allowed access
The tragedy of the commons problem we mentioned earlier applies to open access –
when private goods are free to everyone, they will be overexploited
 Oyster beds are a nice example of this
 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
 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
 The textbook mentions 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
 The book gives 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.
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The other option for public resources is political regulation. An example of this is
pasture land in parts of Iceland, which is held in common, but regulated. Quoting from
the textbook:
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.
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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 does impose 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
(In addition, the system imposes an overall limit)
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
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Next, how are property rights established and verified?
One interesting application of this: fugitive property
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Fugitive property is property that moves around or has indefinite boundaries
o like foxes or whales
Another example: natural gas
Hammonds v. Central Kentucky Natural Gas Company (1934)
o The Central Kentucky Natural Gas Company leased tracts of land above
deposits of natural gas
o But the geological dome of natural gas lay partly under the land they were
leasing, and partly under someone else’s land
o 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.
(Anybody see the movie “There Will Be Blood”?)
There are two different principles for how to establish ownership of fugitive property:
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first possession – fugitive property does not belong to anybody until someone
extracts it, establishing ownership
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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
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Under first possession, Central Kentucky Natural Gas Company would be entitled
to whatever gas it extracted
Under tied ownership, they would only be entitled to the gas under their own land,
and Hammond’s claim would be valid
o Tied ownership would also suggest that a landowner has rights to the
foxes on his own land.
o 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
o While first possession suggests that whoever grabs the ball owns it.
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First possession has the advantage of generally being very simple (and therefore
cheap) to apply
o Determining who first possessed property is usually straightforward
However, first possession also has a downside
o It creates an incentive to invest too much too early, in order to establish
ownership of a scarce resource
o 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
o 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
o This would create a race between them, since the gas was a scarce
resource that belonged to whoever possessed it first
o This would lead to both firms to try to extract it inefficiently quickly,
using means that are more expensive than necessary
o Efficiency demands utilizing a resource in a way that leads to the highest
value of production
o 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.
When tied ownership is used, both the common and civil law often tie ownership
using the principle of accession
o 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
o for example, a newborn calf belongs to the owner of its mother
o when a river shifts and creates new land, the owner of the river bank owns
that new land
o and the owner of a brand name tends to have the default right to the
corresponding Internet address
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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 have no incentive to deplete the salmon by overfishing.
However, as we saw in the Hammonds case, tied ownership faces the difficulty of
establishing and verifying ownership rights
o 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.
Rules that allow ownership without possession have the advantage of avoiding
preemptive investment and the disadvantage of being costly to administer.
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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
o The same tradeoff was at work in the fox-hunt case, Pierson v Post
o Awarding the fox to Pierson, the interloper, links ownership to possession,
which is the simpler rule
o But it gives him an incentive to jump in at the end of the hunt, which is
inefficient
o Awarding the fox to Post, the hunter, allows ownership without possession
o It avoids the incentive 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
o Similarly, recall that sperm whales are too fast and strong to hunt with
harpoons tied to the ship
o So if first possession (like fast fish/loose fish) were applied to sperm
whales, every time a whale was injured and trailing drogues, you’d have a
bunch of ships chasing after it, competing to be the first to secure it –
clearly inefficient
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A nice historical example of this can be traced to the Homestead Act of 1862
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The Homestead Act was meant to encourage people to settle the Western part of
the U.S.
It allowed citizens to acquire up to 160 acres of public land, provided
o the claimant was the head of a family or 21 year old
o the claim was “for the purpose of actual cultivation, and not, either
directly or indirectly, for the use or benefit of” someone else
o 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
Because the Homestead Act was effectively a first possession rule – you could
claim the land by living on it – Friedman points out that the Homestead Act
caused people spend inefficiently much to claim land that would later become
valuable
Quoting from Law’s Order (p 120):
“The year is 1862; the piece of land we are considering is beyond the margin of
settlement, too far from railroads, feed stores, and other people to be cultivated at a profit.
As time passes and settlement expands, that situation changes. The efficient rule would
be to start farming the land the first year that doing so becomes profitable, say 1890.
But if you set out to homestead the land in 1890, you will get an unpleasant surprise;
someone else is already there. Homesteading land that is already profitable to farm is an
attractive proposition, since you not only make money in the process, you also end up
with valuable real estate. When valuable rights are being given away for free, there is no
shortage of takers. If you want to get the land you will have to come early. By farming it
at a loss for a few years you can acquire the right to farm it thereafter at a profit.
How early will you have to come? To make things simple, assume the value of the land
in 1890 is going to be $20,000, representing the present value of the profit that can be
made by farming it from then on. Further assume that the loss from farming it earlier
than that is $1,000 a year. If you try to homestead it in 1880, you again find the land
already taken. Someone who homesteads in 1880 pays $10,000 dollars in losses for
$20,000 in real estate – not as good as getting it for free, but still an attractive deal.
Working through the logic of the argument, we conclude that the land will be claimed
about 1870, just early enough so that the losses in the early years balance the later gains.
It follows that the effect of the Homestead Act was to wipe out, in costs of premature
farming, a large part of the land value of the United States.”
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Friedman also offers another cool example of fugitive property:
“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?”
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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.)
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First possession and tied ownership are two different doctrines for how ownership
rights are established
The next question is, when should unowned resources become owned?
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Typically, when property is commonly owned and accessible to all, the rule of
first possession holds
For example, everyone has common access to the ocean; so fish generally belong
to whoever catches them
As a consequence, many fish and marine mammals have been overhunted, nearly
to extinction
Similarly, we mentioned earlier, common hunting land is often overhunted,
common pasture land overgrazed, and public forests overharvested.
How do we fix this problem?
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Tied ownership is one solution
o 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
o These costs are referred to as “boundary maintenance.”
o 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
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(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.)
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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
o Trademarks are registered to avoid overlap
o 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?
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.
The textbook 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, to
ceremonially pass 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.
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.
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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
o So a person without title (without lawful ownership) cannot transfer title
to a buyer
o In this case, even though you thought you were buying the TV, you were
actually buying nothing, and the original owner still owns the TV
o If you can find the seller, you are entitled to your money back
 There are exceptions, however
o If a thief steals money and uses it to buy your TV, the original owner of
the money cannot get it back from you
o So while a thief cannot give good title to most stolen goods, he can convey
good title to money
o Another exception: 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
o as long as you acted “in good faith,” that is, you genuinely believed the
seller owned the object, it is yours to keep
o the original owner would have to try to recover your money from the thief.
 In Spain, the law is a hybrid of the two
o 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
o This rule discourages merchants from buying stolen goods, in turn
discouraging theft by making it less profitable
o On the other hand, the “European Rule” that a good-faith buyer receives
good title applies to goods stolen from a merchant.
The book again tries to derive a general rule by comparing two costs
 The cost to an owner of privately protecting himself against theft (for example, by
engraving his name and address on the side of his TV)
 The cost to a buyer of verifying that he’s dealing with the rightful owner of a
good he wants to buy
 Which of these costs is higher determines whether it’s efficient for a good-faith
buyer to acquire good title to a stolen object or not
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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
 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
my land?
Adverse possession is so named because the 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 the owner did 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.
Why does such a law make sense?
 One benefit is that, over time, it clears up any uncertainty about ownership
 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 by making rights unambiguous over time, these laws facilitate trade, making it
easier for the property to be sold to whoever values it the most
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.
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Of course, adverse possession also has a cost – property owners must actively monitor
their land against possible trespass
 Now if you’re renovating your garden close to the property line, I have to keep an
eye on you, to make sure you stay on your side of the boundary
 If you cut into my land a little, I can’t say to myself, “I’m not using that bit of
land now, so I’ll let it go, and complain later if I decide I want to use it.”
 Thus, I incur monitoring costs, which are inefficient
So whether adverse possession laws are efficient depends on whether the costs –
basically, these monitoring costs – are outweighed by the benefits
One other way I can give up my property rights to something is to lose it
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Suppose 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
o 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
o The court may then place an ad in the newspaper
o After a certain amount of time, if the owner has not claimed the property,
it belongs to the finder
o 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.
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Next: some applications of What can owners do with their property?
One thing owners can typically do with their property is to determine who gets it when
they die.
 This wasn’t always the case. In medieval England, land passed automatically to
the owner’s eldest son, and changes to this could only be made under very
particular circumstances
 Feudal and tribal societies typically specified who inherited land, and restricted
the sale of land, especially to outsiders
 Over time, however, the trend in Western countries has been towards more
freedom to specify of owners to specify who will inherit their property and what
they may do with it.
What effect do limitations like this have?
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Suppose I own some large estate, which the law says I must pass on to my eldest
son when I die, but I’d prefer to give it to my daughter
One thing I can do: look for ways to circumvent the rules
I might be able to sell her the property now, and rent it back from her while I’m
still alive
There might be other technicalities that allow me to get around the intent of the
law
But these are likely to be somewhat costly, so I would incur what the book refers
to as Circumvention Costs.
On the other hand, it may be too costly, or impossible, for me to give the property to my
daughter; I may have to accept the fact that it will go to my lazy, worthless son
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In this case, I’m likely to start caring much less about the value of my estate after
I am gone, which creates an incentive for me to use the property inefficiently
o I may choose to overhunt now, not caring whether I wipe out the animals
on my land
o I might cut down trees prematurely, before they mature all the way, to get
more use out of the land now (while I’m alive) at the expense of its future
value (which I no longer care about)
The book refers to the loss due to these decisions as Depletion Costs –
inefficiencies I bring on because I stop caring as much about the future value of
the property.
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Circumvention costs and depletion costs seem to argue in favor of giving an owner more
freedom in determining what happens to his property after he dies. However, there is
also a danger when this freedom is made too absolute.
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Suppose that the estate I own is my family’s ancestral home, and I specify in my
will that nobody should ever use that land for purposes other than a residence
I die, and several years later, my heirs want to turn the land into a golf course, or
sell it to a developer to turn into a mall. Should this be allowed, or should the
restrictions in my will be upheld?
o If my restrictions are routinely set aside by the law, then we return to the
old problem – since I don’t have control over what will happen to my
estate after I die, I have an incentive to circumvent the law or to deplete
the value of the property
o On the other hand, if the restrictions are typically upheld, it becomes
difficult to maintain efficiency as circumstances change, since my heirs
may not be able to put the land to its most valuable use (or sell it to an
owner who values it more).
If I’m wealthy but don’t trust my childrens’ judgment, I may try to create a trust
that will prevent them from accessing most of my wealth until they reach a certain
age. Similarly, if I don’t trust them to use my estate wisely, I may try to put
restrictions on what they can do with it.
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Earlier, we used the term “inalienability” to define entitlements which you are not
allowed by law to get rid of
Limitations on the use of property are sometimes called “restraints on
alienation,” since among other things they limit an heir’s legal right to dispose of
the property
English common law typically imposes a time limit on such restrictions, ruling
out what is referred to as a perpetuity, a restriction that would last forever
o Thus, I can legally restrict what happens to my property after I die for a
certain length of time, but not forever.
o The time limit is typically defined as “lives-in-being plus 21 years,” that
is, they are binding for the lifetime of my heir plus an additional 21 years.
The effect of this time limit is basically to allow me to place restrictions on the
next generation, but not the generation after that
o If I pass my estate on to my daughter, with the restriction that it not be
sold or developed into for commercial uses, this limits my daughter
o But once she dies and passes the estate on to her children, after a certain
length of time, they will be free to do what they want with it
Thus, this acts as a “generation-skipping rule” – I’m free to do what I want, and
the second generation after me is once again free to do what they want, but the
generation in between is not.
This sort of law makes a lot of sense if you assume that “most” heirs will be prudent and
well-behaved, but that every once in a while someone will come along whose judgment
can’t be trusted. The law protects my estate from a single bad heir, since whoever passes
the property on to them can restrict them; but it does not tie up the property forever in
what might eventually be an inefficient way.
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Exceptions to Property Rights
We said before that property rights are typically protected by injunctive relief
 Using another owner’s property without permission is typically considered
criminal trespass
 When transaction costs are low, this leads to bargaining and through bargaining to
efficient use of the property.
 However, these restrictions are not absolute
 We already noted there are “fair use” exceptions to copyright protection
o even though a copyright is a form of ownership, there are ways in which I
can use others’ property legally, such as for educational purposes or in
satire
 There are also exceptions in general property law
 The Supreme Court of Vermont decision established one such exception, in the
case of Ploof v Putnam, decided in 1908.
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Ploof was sailing on Lake Champlain with his wife and two children when a
storm came up very suddenly and they needed a safe harbor quickly
The nearest one was on an island owned by Putnam
Ploof tied his boat to a pier on the island to wait out the storm
But an employee of Putnam’s worried that the boat would bang against the pier
and cause damage, so he untied the boat (with Ploof and his family still aboard)
and pushed it away
Ploof sued, claiming that the eventual wreckage of his boat and injuries to his
family were the fault of Putnam (through his employee)
o Ploof claimed that the emergency justified his trespassing on the
defendant’s property without permission; he asked for damages
o Putnam answered that property owners have the right to exclude
trespassers, and claimed that it was so obvious the case should not even go
to trial
The Vermont Supreme Court agreed with Ploof, saying that private necessity
was an exception to the general rule of trespass.
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Thus, in an emergency, one person can use another’s property without permission,
and must only compensate the owner for the cost of use
So if Ploof’s boat had indeed damaged Putnam’s dock, Ploof would have had to
pay to repair the dock, but would not be punished for trespassing.
Similarly, a lost hiker is allowed to break into a remote cabin for food and shelter,
but must pay for the damage to the cabin and whatever food he took.
Other examples where private necessity justifies unauthorized use of another
owner’s property
o breaking into a pharmacy when someone is deathly ill and the owner
cannot be found
o using someone’s valuable vase as a weapon against a murderer.
This is also similar to the rule we saw in Demsetz as property rights over land
were being established among Native Americans
o you could kill an animal for food on someone else’s land if you were
starving, but you could not keep its valuable fur.
This type of exception to the general rule of property law makes perfect sense, if we see
property law as an attempt to encourage individuals to bargain over the most efficient use
of property
 Clearly, in an emergency, there is no time for bargaining
 Or, transaction costs can be thought of as being prohibitively high
 So a damages rule is more efficient than a property rule, since it ensures that the
property will be put to its most efficient use.
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(If Ploof had been able to find Putnam and had tried to bargain with him, Putnam
would have found himself in a very strong bargaining position, and might have
demanded an unreasonable amount of money
Ploof might have agreed to pay it, and then tried to get out of it after the fact
Once we get to contract law, we’ll discuss, among other things, the legality of
contracts signed under situations like this.)
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Inalienability
We mentioned earlier that entitlements can be protected in three ways:
 as property (through an injunction)
 by a liability rule (through damages)
 or through inalienability
There are lots of things that cannot legally be sold, and most of them strike us as creepy
to even think about in those terms:
 the book gives the examples of organs, sex, heroin, children, votes, atomic
weapons, and human rights
 In some cases, you can neither sell the entitlement nor give it away – as with the
right to vote. (You can choose not to vote, but you can’t transfer your right to
vote to another person.)
In most cases, there is not a clear economic argument for the rule, so much as an attempt
to rule out something that is seen as disgusting or immoral. The book does mention one
argument for outlawing the sale of blood: that it might undermine blood donations.
 Most (but not all) blood in the U.S. is provided by donations, and its safety is
protected by two means:
o a medical history given by the donor
o and a lab test for infections
 One could imagine that a person has no reason to lie about their history when
donating blood; if you were selling blood, you might choose to hide a condition
that made you an unfit donor
 So blood might be more safely supplied by donation rather than purchase
 But if some places paid for blood, nobody would want to donate for free
 So outlawing the sale of blood might end up being efficient.
(In the U.S., the sale of blood is legal, but the sale of organs is not. The supply of
transplantable kidneys – both from live donors and from cadavers – falls far short of the
demand. There has been lots of discussion about ways to improve the system…)
That’s it for today. Thursday, we’ll wrap up exceptions to property law; revisit
remedies; and discuss governmental takings, that is, the seizure of private property
under eminent domain laws. If you want to read something , look at the article on the
syllabus by Blume and Rubinfeld.
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