the economics of property rights

7/30/2019 The Economics of Property Rights

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THE ECONOMICS OF PROPRIGHTS

By Grant Suk


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THERE IS NO SUCH THING AS PURECAPITALISM

What we know as capitalism is a system thathas been formed on top of a base of laws thatdetermine how we act and how the economyworks.

When people attack the financial industry, forexample, it isnt entirely correct to say thatcapitalism caused the 2008 recession, but that a

specific form of capitalism did.


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WHAT IS THE BASIS FOR OUR ACTIONSMARKET SOCIETY?

Property Law is, according to Robert B. Cooter of UC Berkeley, the legaframework for allocating resources and distributing wealth.

Philosophers have viewed property to be an expectation, an object of fadistribution, or the foundation of liberty, but the legal definition is a burights. These rights determine the extent to which individuals can do anything with their

Rights are tied to the property, not the individual.

The individual is not required to exercise any of those rights Others must not interfere with the rights of the owner

Property law establishes what can be owned, how ownership is established, whcan do with property, and how to fix violations of property rights.

Property law is one form of addressing negative externalities with efficient solu


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HOW DOES HAVING PROPERTY LAWACTUALLY HELP?

Imagine you have a farm in a pre-socialcontract era. Property rights only exist to the degree

that people defend their property

You have neighbors around you

You have can steal, grow corn, or/anddefend. Assume you cant farm at theexact moment you are also defending.

What do you do?


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HOW DOES HAVING PROPERTY LAWACTUALLY HELP?

Imagine you have a farm in a pre-socialcontract era. People need to decide how many

resources to allocate for defending theirproperty

Since resources are not infinite, they willspend until the marginal cost of defending= marginal benefit

Because spending resources defendingprevents us from growing corn, as asociety, we cannot produce as much cornas possible.

But when we have our property defined andprotected by the government, we can actmore efficiently.


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A REVIEW OF BARGAINING THEORY

Professor Kamala has an answer key to the final that she values at $100, thethe paper, ink, and labour she poured into creating it. A student has $1000, athe answer key at $600.

Threat values: Prof. Kamala: $100, Student: $600

Threat value: AKA the Go it alone value

What is a fair price? What is the cooperative surplus?


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A REVIEW OF BARGAINING THEORY

Professor Kamala has an answer key to the final that she values at $100, the cost ofink, and labor she poured into creating it. A student has $600, and values the answe$500.

Threat values: Prof. Kamala: $100, Student: $600

A fair price is somewhere in between, typically agreed upon as the halfway poin(500+100)/2, or $300.

Assuming the key is sold for 300, the transaction creates a cooperative surplus odollars.

|100-300|+|500-300| = 400

As long as the price is between 100 and 500, and transaction costs are low, regaHOW the surplus is split, there will still be $400 of cooperative surplus. With coothere is a total value of 1100. Without, the total value is 700. It is more efficient tocooperate.


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HOW IS BARGAINING RELATED TO THELAW?

An example:

There is a rancher who has cows and a farmerwho plants crops.

There are cows on the ranch that go onto thefarm and start destroying the crops.

Cows go around and cause 400 dollars/yr of

damage to the farm

Assume it costs 1200 dollars/yr to fence off theranch. It costs 300 dollars/yr for the farm.

What should be done?


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HOW IS BARGAINING RELATED TO THELAW?

It costs 1200 dollars to fence off the ranch. Itcosts 300 dollars for the farm. Cows cause 400dollars of damage.

Clearly, the farm should be fenced from anefficiency standpoint.

But now imagine two different sets ofscenarios:

1) We have ranchers rights (polluters) Farmer is liable

2) We have farmers rights (pollutees) Rancher is liable


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WHAT IF THE RANCHER AND THE FARMMARRIED?

Under ranchers rights (polluters), the farmer must build the fence (or suffdamage). This is the most efficient solution.

Under farmers rights, the rancher must either pay for damages, or build aaround his ranch. These are both inefficient.

But what if they married? Regardless of whose right it is, they would agreefence must be put around the farm.


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WHERE BARGAINING COMES INTO PLA

Under farmers rights, rancher says, OK, I will pay you 300 dollars for you fence around your farm.

Would you say yes or no as the farmer?


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WHERE BARGAINING COMES INTO PLAAPPLICATION OF THE COASE THEOREM

Under farmers rights, rancher says, OK, I will pay you 300 dollars for you to build your fence arfarm.

What the farmer SHOULD say is that

I am no better off from you building a fence around my farm than if you built a fence around y

It costs you 1200 dollars to fence off your ranch. It costs 300 dollars to fence of my farm. Give what you saved from me cooperating.

(1200-300)/2= 450 The farmer should bargain for 450 dollars on top of the money for the fence. There is distribut

wealth, but we have arrived at a more efficient solution.

The Coase Theorem: When there are externalities and no transaction costs, bargaining leads to effoutcomes regardless of which side the law is on.


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GOING FURTHER: REMEDIES

Broadly, there are two types of remedies in a dispute.1. Damages

2. Injunctions

Damages are after-the-fact and pay for the market value (does not accoun

utility)Injunctions enjoin others from trespassing on anothers rights. Have the poexclude.

Pollutee v Polluter: Who is better off under damages? Under injunctions?


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THERE IS AN ELECTRIC COMPANY ANDLAUNDROMAT

Laundry (Pollutee)No Filter Filter

Electric Company

(Polluter) No Scrubbers 1001000 2001000

Scrubbers 300500 200500

Cost of scrubbers= 500

Damage to Laundromat=200

Cost of filters for Laundromat= 100

Lets add. Which case is the most efficient?


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THERE IS AN ELECTRIC COMPANY ANDLAUNDROMAT CONT.

Non Cooperation (netprofit) Cooperate(net profit)Electric company Laundromat Surplus Electric company Laundromat

Polluters rights 1000 200 0 N/A N/APollutees rights(damages) 800 300 100 850 350

Polluteesrights(injunctions) 500 300 400 700 500

Laundry (Pollutee)No Filter Filter

Electric Company

(Polluter) No Scrubbers 1001000 2001000

Scrubbers 300500 200500


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CONCLUSION OF REMEDIES

Injunctive Remedy is always better for the victim

He has a stronger bargaining position

Damages is always better for the polluter.

When the law says for damages, the polluter can choose to pay for damagways to not pollute. Regardless, he will find what is cheaper.

the economics of property rights

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