How do you lose property rights over
something?
Example 5
A county ordinance requires houses to be set back
5 feet from the property line. Joe Potatoes buys
some heavily wooded land in an undeveloped area
and builds a house on it. Ten years later Fred
Parsley, who owns the adjoining lot, has his land
surveyed and discovers that Potatoes’ house
extends 2 feet over the property line onto
Parsley’s property. Potatoes offers to compensate
Parsley for the trespass, but Parsley rejects the
offer and sues to have Potatoes relocate the house
in conformity with the ordinance.
How do you lose property rights over
something?
Adverse possession
 Acquire possession by use w/o timely objection
of rightful owner
 Clears the clouds from title
 Moves property to more productive uses
 Provides incentives for owners to monitor property
Estray statutes
 Procedures to establish ownership of lost
property
 Discourages theft by eliminating “I found it” excuse
 Encourages finders to disseminate information
 Provides incentives for owners to monitor property
What can owners do with their
property?
Bequests and inheritance
Primogeniture?
 Rules that restrict transfers tend to prevent
owners from maximizing value of property
 circumvention costs
 depletion costs
 Rule against perpetuities
“lives-in-being plus 21 years”
Generation-skipping rule
 Restricts foolish heirs
 Maximizes value across generations
Exceptions to Property Rights
General rule: injunctive relief against trespass
(encourages bargaining)
 “fair use” exception to copyrights
 Private necessity
 Ploof v. Putnam (1908)
 Inalienability
 Organs, sex, heroin, children, votes,
human rights
 Unbundling
 Excessive unbundling may increase
TC and lower overall value
Pennsylvania land rights:
Surface estate
Mineral estate
Support estate
Remedies for PR Violations
Injunctions for private bads
Damages for public bads
 Temporary damages
 compensation for past harms
 Imposes high TC for private bargaining
 Creates incentives to adopt cleaner/safer tech
 Permanent damages
 compensation for future harms
 Imposes high error costs (difficult to predict future harms)
 Creates no incentives to adopt cleaner/safer tech
Remedies for PR Violations
Summary of damages
 If damages are easy to measure and innovation
occurs rapidly, use temporary damages
 If damages are difficult to measure and innovation
occurs slowly, use permanent damages
Common practice for public bads: temp. damages and injunction
Boomer v Atlantic Cement Co. (1970)
 Plaintiffs awarded temporary damages but denied
injunction against future harms
 Appeals court argued injunction would create too
much harm in closing the factory; ordered
permanent damages to be paid
 Damages were paid as “servitude to the land”
 Damages were for “all reasonably anticipated future harms”
Takings
 5th Amendment: “nor shall private property be taken for
public use, without just compensation”
 Eminent domain
 “just compensation”
 “fair market value”
 Channels gov’t into taxes rather than takings
 “public use”
“public purpose”?
 Poletown v City of Detroit (1981)
 Kelo v City of New London (2005)
 Regulations
 Lucas v South Carolina Coastal Council (1992)
“significant reduction in property value”?
The following table which represents a two person game played
once by individuals who cannot communicate with each other. Each
individual can either choose a cooperative or selfish strategy. Which
statement best describes the outcome of the game?
A
cooperate
B
a)
b)
c)
d)
e)
selfish
cooperate
selfish
10, 10
4, 8
8, 4
6, 6
The game has no unique solution
A and B have different dominant strategies
Both parties will act selfishly
The game has no Nash equilibrium
B will cooperate if A behaves selfishly and
act selfishly if A cooperates
The weak version of the Coase theorem states that in
the absence of transaction costs
a)
b)
c)
d)
e)
resources will be put to identical uses
independent of the initial assignment of
rights.
wealth effects are independent of the initial
assignment of rights.
parties will be compensated for any harms
caused by externalities.
resources will be allocated efficiently
independent of the initial assignment of
rights.
all of the above.
A railroad emits sparks which damage the farmer’s crops. The amount of
damage depends on the number of trains run. If the railroad is not liable for
the farmer’s damages and transaction costs are zero, the railroad will run:
a)
b)
c)
d)
e)
Number of
Trains
Railroad
Profits
Total damages to
farmer’s crops
1
$2
$2
2
5
4
3
9
6
4
10. 5
8
5
10
10
0 trains if the farmer’s profit (before deducting crop
damage but allowing for other costs) is $15
4 trains
4 trains only if the farmer’s profit is more than $7
3 trains
3 trains only if the farmer’s profit is more than $7.50
Suppose a factory emits pollutants that injure adjacent
homeowners. The law will promote efficiency if it
a)
b)
c)
d)
e)
creates an incentive for the factory to relocate
to a different location if the harm it causes is
greater than its profits.
creates an incentive for homeowners to move
to a different location if the cost of moving is
less than the harm caused by the pollution.
holds the factory liable for damages or enjoins
it from polluting when the harm it cause is
greater than its profits
holds the factory liable if the homeowners
located there first and holds the factory
harmless if it located there first
none of the above
The statement that best describes the difference between
protecting entitlements by property rights or by liability
rules is:
a)
b)
c)
d)
e)
the harm is greater from violating an entitlement
protected by a property right than one protected
by a liability rule.
both apply to high transaction cost settings but
the remedy under a property right is an injunction
while the remedy under a liability rule is damages.
the cost of enforcing a property right exceeds the
cost of enforcing a liability rule.
property rights are good against all trespassers
while liability rules apply only to parties unwilling
to compensate victims in voluntary transactions.
a property right approach assumes that a
voluntary transaction is economical whereas a
liability rule approach assumes that transactions
costs prevent a voluntary transaction