Law & Legal Institutions
Civil Law
 Legislatively enacted
 Inquisitorial process
Common Law
 Based on social norms and precedent
 Adversarial process
 Use of juries
Law & Legal Institutions
State Courts
 Trial courts: “entry level” courts
 Appellate courts
 Supreme courts
Federal Courts
 94 districts
 13 appellate districts
 US Supreme Court
Federal Jurisdiction:
• Federal questions
• Cases to which US is a party
• Diversity cases
Nature of a Legal Dispute
 Parties
 Plaintiff
 Defendant
 Burden of Proof
 Civil cases: preponderance of evidence
 Criminal cases: beyond a reasonable doubt
 Verdict/Judgment
 Appellate decisions
 Affirm
 Reverse
 Remand
Evolution of Common Law
Butterfield v. Forrester, 11 East 60 (1809)
 Contributory negligence
Davies v. Mann, 10 M&W 545 (1842)
 Last clear chance doctrine
Riggs v. Palmer, 22 N.E. 188 (1889)
 Can a murderer inherit from the person whom
he murdered?
Four Areas of Law
Property
Contract
Tort
Criminal
Property Law
Legal framework for allocating resources
and distributing wealth
 Economic Goal: efficient resource allocation
Economic Theory of Property
 Bargaining theory (game theory)
 Public goods theory
 Externalities theory
4 Questions
1.
2.
3.
4.
What things may be privately owned?
How are ownership rights established?
What can owners do with their property?
How are property rights protected?
Example 2 (p75)
Orbitcom, Inc., spent $125 million designing,
launching, and maintaining a satellite for the
transmission of business data between Europe and
the US. The satellite is positioned in a
geosynchronous orbit 25 miles above the Atlantic
Ocean. Recently a natural resource-monitoring
satellite belonging to the Windsong Corp. has
strayed so close to Orbitcom’s satellite that the
company’s transmissions have become unreliable.
As a result, Orbitcom has lost customers and has
sued Windsong for trespassing on Orbitcom’s right
to its geosynchronous orbit.
Smoke from BBQ
Economics of Bargaining
 Peter owns a horse which he claims is worth $9,000 to
keep, and Mary covets the horse and decides she is willing
to pay $11,000 for it. Mary has $15,000 inheritance
income.
 Non-cooperative outcome: no trade (threat values)
 Cooperative outcome: trade at mutually agreed price
Value of Non-cooperative Outcome = $9000 + $15,000 = $24,000
Reasonable sale price = $10,000
Value of Cooperative Outcome = [10,000] + [11,000 + 5,000] = $26,000
Cooperative Surplus = $2,000
Coase Theorem
 Ronald A. Coase, “The Problem of Social Cost,”
3 J. L. & Econ. 1 (1960)
Aunt Linda and the Nudist
Rifle River
Aunt Linda
$1500
Nudist
$1250
$1000
Judge rules in favor of Aunt Linda
Fence comes down
Judge rules in favor of Nudist
Fence comes down
(Linda pays Nudist)
2
rulings
A Theorem and a Corollary
Coase Theorem
If transactions costs are low enough, then private bargaining
will result in an efficient use of resources, regardless of the
legal assignment of property rights.
Corollary
When transactions costs are high enough to prevent
bargaining, the efficient use of resources will depend on
how property rights are assigned.
Search costs
Negotiation costs
Enforcement costs
Lubricate or Allocate?
Normative Coase Theorem
 Structure the law so as to remove
impediments to private agreements
Prior appropriation: “first in time, first in right”
Water rights in western US
Homesteading Act
Normative Hobbes Theorem
 Structure the law so as to minimize the harm
caused by failures in private agreements
Lubricate or Allocate?
Lawmaker tradeoff:
 IC = information cost of the court in
determining who values a right the most
 TC = transaction costs of private bargaining
Efficient courts would follow this rule:
 If IC < TC  allocate legal right to the party
who values it the most
 If TC < IC  strictly follow precedent
How are property rights protected?
Remedies for violations:
 Damages (legal)
Torts or contracts
 compensatory money payment
 “backward-looking”
 Injunctions (equitable)
Property
 an order to perform or refrain from an action
 “forward-looking”
FlexMag v. Neighbors
Neighbors
No
Insulation
No Wall
Wall
2000, 500
2000, 700
1600, 800
1600, 700
FlexMag
Insulation
FlexMag has D.S.: No Insulation
Neighbors don’t have D.S.
FlexMag v. Neighbors
Non-Cooperative
Outcome
Cooperative
Outcome
FlexMag
Neighbors
Surplus
FlexMag
Neighbors
2000
700
0
2000
700
2. Neighbors’
right to
damages
1700
800
200
1800
900
3. Neighbors’
right to
injunction
1600
800
300
1750
950
1. Polluter’s
Rights
Normative Hobbes: only rule 1 is efficient
Coase Theorem: choice of rule doesn’t matter
Calabresi and Melamed (1972)
If TC are low, then injunctions are efficient
 For private bads
If TC are high, then damages are efficient
 For public bads
What can be privately owned?
 Private goods: rival and excludable
 Public goods: non-rival and non-excludable
Free rider problem
 Conclusion:
 Private goods should be privately owned
 Public goods should be publicly owned
What may owners do with their
property?
Externality exception to maximum liberty
doctrine
What Can Be Privately Owned?
Information Economics
 How is information different from other goods?
It’s (usually) a public good
 Under-provision remedies
Government supply or subsidy
Charitable contribution
Trade secrets protection (contract law)
Intellectual property law
 Patents
 Copyrights
 Trademarks
Weather Forecasting?
Patent Law
Legal monopoly
rights for 20 years
Number of Patents Issued per year in US
 Non-obvious
 Practical utility
 Not commercialized 1 year prior to application
Suppose that an investment of $100,000 in research yields a
pioneering invention that has no commercial value. A
subsequent investment of $50,000 in development yields an
improvement to the pioneering invention that has commercial
value of $1 million. An efficient patent law would grant the
patent to:
a)
b)
c)
d)
The pioneer
The developer
Equal rights to both
Neither of them
Patent Law: Breadth
Broad: encourages fast, duplicative
fundamental research
Little stand-alone value
Narrow: encourages slower,
complementary developmental research
Large stand-alone value
R&D is a “joint product”
 Unified R&D efforts?
 What would Coase say?
Patent Law: Duration
Tradeoff: innovation v. dissemination
$
MC
One size fits all?
MB
D*
duration
Germany: petty patents
Business methods?
Orphan drugs
Prizes?
Copyright
Prevents unauthorized copying of the
products of expressive activity
Breadth
 Fair use
 Sony Betamax case: “time-shifting” vs “archiving”
Duration
 Life of artist + 70 years
Why limit duration?
Tracing costs exist
Why has duration increased?
Copying costs have fallen
“Droit de suite”
Is resale of art the same as
reproduction of art?
Pt = $ 1,000
Pt+n = $10,000
 France requires a resale
royalty be paid to original
artist (or heirs)
 California requires resale
royalty by paid to artist
(while living)
Trademarks
Signal of product quality
Duration of TM left to owner
 Tradenames that have become generic?
Anti-commons?
Common property is subject to the
“tragedy of the commons”
 Corrective: assign private property rights
Excessive ownership rights
 Leads to under-use
DNA patents and the public domain?
Open source computing
When should unowned resources
become owned?
Privatize when cost of
administering boundaries is
less than cost of congestion
How are Property Rights Established?
Oil
Hammonds v. Central Kentucky Natural Gas Co (1934)
How are Property Rights Established?
Fugitive Property
 First possession: property doesn’t belong to
anyone until someone extracts it
 Tied ownership: fugitive property is tied to
something else that is easier to establish
How are Property Rights Established?
Oil
How are Property Rights Established?
Fugitive Property
 First possession: property doesn’t belong to
anyone until someone extracts it
 Simple to administer
 Encourages inefficient pre-emptive investments
 Tied ownership: fugitive property is tied to
something else that is easier to establish
 Costly to administer
 Encourages efficient use of resource
Stack Island
thalweg
Louisiana
Mississippi
What can be done to prove ownership?
 Paper titles for cars
 Deeds for property
 Branding
 Livery of seisin
Stolen goods?
 US: thief can not give good title
Buyers bear risk of verification
 Europe: thief can give good title
Original owners bear risk of verification
Liability should fall on those who can bear the risk at lowest cost