Econ 522 Economics of Law

1. Econ 522Economics of Law Dan Quint Fall 2009 Lecture 7

2. 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

3. Today: more applications of property law

4. More on: what can be privately owned?

5. Organizations • Most organizations are not owned by anyone • churches, clubs, cooperatives, charities, etc. • But many corporationsare 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

6. 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

7. 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.

8. 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.

9. How are property rights established/verified?

10. 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”?)

11. 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

12. 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

13. 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

14. 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.

15. 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

16. 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

17. 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

18. 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.

19. 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)

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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

26. 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

27. What can/can’t owners do with their property?

28. 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

29. 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

30. 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

31. 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”

32. Limitations/exceptions to property rights

33. 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

34. 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. 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 • Arguments in favor of inalienability… • children • atomic weapons • human rights

36. 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!