Property Rules vs. Liability Rules

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Property Rules vs. Liability
Rules


Interests of property owners may
conflict
E.g., cement factory and neighbors:
• Right to clean air
• right to pollute/manufacture


Who has the right?
How should it be protected?
• Property rule
• Entitlement rule
• Inalienability rule
Property Rule

Consent of owner required for transfer
• Home or land ownership



Sale
Rental
Injunction against nuisance or trespass
• Personal property – watch, car




Sale
Rental
Theft punishable by criminal law
Value of right decided in market
transaction
Liability Rule

Consent of owner not required for
transfer
• Eminent domain
• Boomer v. Atlantic Cement
• Damage to car in accident

Value determined by courts/legal
system
Inalienability Rule

No transfer permitted
• Selling self into slavery
• Selling organs
• Selling babies
What is the most efficient rule?


Property rule where cost of allocating
rights by market transactions is low
Liability rule where cost of allocating
rights by litigation is low

Property rule is inefficient where
transaction costs are high
• Group of farmers own land and neighbors
want to purchase it for a park
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