Econ 522
Economics of Law
Dan Quint
Fall 2010
Lecture 8
Logistics
 First homework back today
 Second homework due next Monday (Oct 11)
 First midterm next Wednesday (Oct 13) – in Bascom 272
1
More on: what can be
privately owned?
2
Organizations
 Most organizations are not owned by anyone

churches, clubs, cooperatives, charities, etc.
 But many corporations are owned

can be bought and sold like property
 General principle:


Organizations whose primary purpose is to earn profits
should be owned
Organizations whose primary purpose is something else
should not
 Ownership leads to a principal-agent problem
3
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
 Political Control/Regulation
4
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.
5
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.
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How are property rights
established/verified?
7
Fugitive property
 Hammonds v. Central
Kentucky Natural Gas Co.




Central Kentucky leased
tracts of land above natural
gas deposits
But geological dome lay
partly under Hammonds’
land
Hammonds sued, claiming
some of the gas they were
extracting was his
(Anybody see “There Will
Be Blood”?)
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Two principles for establishing ownership
 First Possession


fugitive property belongs to nobody until someone extracts it,
establishing ownership
Central Kentucky would own all the gas, since they were first to
actually possess it
 Tied Ownership



ownership of fugitive property is tied to something else which is
easier to establish – in this case, surface of the land
Hammonds would own some of the gas, since it was located under
his land
principle of accession – a new thing is owned by the owner of the
proximate or prominent property
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First Possession versus Tied Ownership
 First Possession


generally simpler to apply – easy to determine who possessed
property first
but, incentive to invest too much to early in order to establish
ownership
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First Possession versus Tied Ownership
 First Possession


generally simpler to apply – easy to determine who possessed
property first
but, incentive to invest too much to early in order to establish
ownership
 Tied Ownership


encourages efficient use of the resource (no need to extract quickly)
but, difficulty of establishing and verifying ownership rights
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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.
12
A nice historical example: the Homestead
Act of 1862
 Meant to encourage settlement of the Western U.S.
 Citizens could acquire 160 acres of land for free, provided



head of a family or 21 years old
“for the purpose of actual cultivation, and not… for the use or
benefit of someone else”
had to live on the claim for 6 months and make “suitable”
improvements
 Basically a first possession rule for land – by living on the
land, you gained ownership of it
 Friedman: caused people to spend inefficiently much to
gain ownership of the land
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Friedman on the Homestead Act of 1862
“The year is 1862; the piece of land we are considering is…
too far from railroads, feed stores, and other people to be
cultivated at a profit.
…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.
…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.
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Friedman on the Homestead Act of 1862
How early will you have to come?
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 in losses
for $20,000 in real estate – not as good as getting it for free, but still
an attractive deal.
…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.”
15
When should resources become privately
owned?
 First Possession and Tied Ownership are doctrines for how
ownership rights are determined
 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.
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When should resources become privately
owned?
 First Possession and Tied Ownership are doctrines for how
ownership rights are determined
 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)
17
What can be done to prove ownership of
something?
 Branding cattle
 Vehicle ID numbers
on cars
 States grant deeds for
property, and keep
registry of legal owner
18
What can be done to prove ownership of
something?
 Branding cattle
 Vehicle ID numbers
on cars
 States grant deeds for
property, and keep
registry of legal owner
 No such system for apples


Too many apples – high cost of maintaining a registry
Apples inexpensive – not much of a problem
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Remedies
20
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
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Types of damages
 Compensatory Damages

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
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
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Temporary versus permanent damages
 Temporary damages


Require victim to keep returning to court if harm continues
Create an incentive to reduce harm in the future
 Permanent damages


One-time, permanent fix
No incentive to reduce harm as technology makes it easier
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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…
24
Boomer v Atlantic Cement Co
(NY Ct of Appeals, 1970)
 Atlantic owned large cement plant near Albany



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dirt, smoke, vibration
neighbors sued
plant was found to be a nuisance, court awarded damages
neighbors appealed, requesting an injunction
 Court ruled that…
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
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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”
25
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”
26
Limitations/Exceptions to
Property Rights
27
One limitation: ways to 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
28
One limitation: ways to 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
29
One limitation: ways to 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
 Estray statutes – laws governing lost and found property
30
Another limitation: determining what
happens to your stuff after you die
 Owners today control who inherits their property

Wasn’t always the case
 Limitations on who inherits lead to…

Circumvention costs
31
Another limitation: determining what
happens to your stuff after you die
 Owners today control who inherits their property

Wasn’t always the case
 Limitations on who inherits lead to…


Circumvention costs
Depletion costs
32
Another limitation: determining what
happens to your stuff after you die
 Owners today control who inherits their property

Wasn’t always the case
 Limitations on who inherits lead to…


Circumvention costs
Depletion costs
 Restrictions I place on how they can use it


Impossible  circumvention and depletion costs
Allowed  difficult to maintain efficiency in changing circumstances
33
Another limitation: determining what
happens to your stuff after you die
 Owners today control who inherits their property

Wasn’t always the case
 Limitations on who inherits lead to…


Circumvention costs
Depletion costs
 Restrictions I place on how they can use it





Impossible  circumvention and depletion costs
Allowed  difficult to maintain efficiency in changing circumstances
“Restraints on alienation”
Common law generally prohibits perpetuities
Restrictions limited to “lives-in-being plus 21 years”
34
Another limitation: 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 35
Another limitation: 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 36
Another limitation: Inalienability
 Three ways to protect an entitlement:



as property (through injunction)
by liability rule (through damages)
through inalienability
 Lots of things that can’t be bought/sold:

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organs
sex
heroin

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
children
atomic weapons
human rights
 Arguments in favor of inalienability…
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