Econ 522
Economics of Law
Dan Quint
Fall 2009
Lecture 7
Logistics
 No office hours next Wed Sept 30
 No lecture next Thurs Oct 1
 Extra OH Mon afternoon Oct 5, 1:30-3:30 p.m.
 HW1 due Tues Oct 6, 11:00 a.m. SHARP
 Extra OH Mon afternoon Oct 12, 1:30-3:30 p.m.
 Midterm 1 Tues Oct 13, in class
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Today: more applications of property law
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More on: what can be
privately owned?
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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
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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
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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.
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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?
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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.
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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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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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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?
Friedman, Law’s Order, p. 117
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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?
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
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)
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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
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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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Can a thief give good title?
 If B steals something from A, sells it to an innocent buyer C
and disappears, does A still have a claim to the good?
 U.S: “You can only transfer property rights you have”


C thought he was buying a TV, but instead, he was buying nothing
But there are exceptions: money, buying from legitimate dealers
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Can a thief give good title?
 If B steals something from A, sells it to an innocent buyer C
and disappears, does A still have a claim to the good?
 U.S: “You can only transfer property rights you have”


C thought he was buying a TV, but instead, he was buying nothing
But there are exceptions: money, buying from legitimate dealers
 Most of Europe: if C acted in good faith, he keeps the object
 Spain – hybrid rule


American rule applies to goods stolen from a house and sold to
merchant
European rule applies to goods stolen from a merchant
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How might you 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
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How might you 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
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How might you 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
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What can/can’t owners do
with their property?
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One thing owners can do: determine who
inherits their property after they die
 Wasn’t always the case
 Limitations on who inherits lead to…

Circumvention costs
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One thing owners can do: determine who
inherits their property after they die
 Wasn’t always the case
 Limitations on who inherits lead to…


Circumvention costs
Depletion costs
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One thing owners can do: determine who
inherits their property after they die
 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
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One thing owners can do: determine who
inherits their property after they die
 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”
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Limitations/exceptions to
property rights
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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 32
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 33
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:



organs
sex
heroin



children
atomic weapons
human rights
 Arguments in favor of inalienability…
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That’s all for today
 Next Tuesday:



more exceptions to property law
more on remedies
governmental takings (eminent domain)
 If you want to read ahead: Blume and Rubinfeld article
 Have a good weekend!
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