THE ECONOMICS OF PROPERTY RIGHTS

By Grant Suk

THERE IS NO SUCH THING AS PURE CAPITALISM

What we know as capitalism is a system that has been formed on top of a base of laws that determine how we act and how the economy works.
When people attack the financial industry, for example, it isnt entirely correct to say that capitalism caused the 2008 recession, but that a specific form of capitalism did.

WHAT IS THE BASIS FOR OUR ACTIONS IN A MARKET SOCIETY?

Property Law is, according to Robert B. Cooter of UC Berkeley, the legal framework for allocating resources and distributing wealth.
Philosophers have viewed property to be an expectation, an object of fair distribution, or the foundation of liberty, but the legal definition is a bundle of rights.
These rights determine the extent to which individuals can do anything with their property 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, what people can do with property, and how to fix violations of property rights. Property law is one form of addressing negative externalities with efficient solutions

HOW DOES HAVING PROPERTY LAW ACTUALLY HELP?

Imagine you have a farm in a pre-social contract 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/and defend. Assume you cant farm at the exact moment you are also defending.

What do you do?

HOW DOES HAVING PROPERTY LAW ACTUALLY HELP?

Imagine you have a farm in a pre-social contract era.
People need to decide how many resources to allocate for defending their property Since resources are not infinite, they will spend until the marginal cost of defending = marginal benefit Because spending resources defending prevents us from growing corn, as a society, we cannot produce as much corn as possible. But when we have our property defined and protected by the government, we can act more efficiently.

A REVIEW OF BARGAINING THEORY

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

A REVIEW OF BARGAINING THEORY

Professor Kamala has an answer key to the final that she values at $100, the cost of the paper, ink, and labor she poured into creating it. A student has $600, and values the answer key at $500.
Threat values: Prof. Kamala: $100, Student: $600

A fair price is somewhere in between, typically agreed upon as the halfway point of (500+100)/2, or $300.
Assuming the key is sold for 300, the transaction creates a cooperative surplus of 400 dollars. |100-300|+|500-300| = 400 As long as the price is between 100 and 500, and transaction costs are low, regardless of HOW the surplus is split, there will still be $400 of cooperative surplus. With cooperation, there is a total value of 1100. Without, the total value is 700. It is more efficient to cooperate.

HOW IS BARGAINING RELATED TO THE LAW?

An example:
There is a rancher who has cows and a farmer who plants crops. There are cows on the ranch that go onto the farm 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 the ranch. It costs 300 dollars/yr for the farm.

What should be done?

HOW IS BARGAINING RELATED TO THE LAW?

It costs 1200 dollars to fence off the ranch. It costs 300 dollars for the farm. Cows cause 400 dollars of damage.
Clearly, the farm should be fenced from an efficiency standpoint. But now imagine two different sets of scenarios: 1) We have ranchers rights (polluters)
Farmer is liable

2) We have farmers rights (pollutees)

Rancher is liable

WHAT IF THE RANCHER AND THE FARMER MARRIED?

Under ranchers rights (polluters), the farmer must build the fence (or suffer damage). This is the most efficient solution.
Under farmers rights, the rancher must either pay for damages, or build a fence around his ranch. These are both inefficient. But what if they married? Regardless of whose right it is, they would agree that a fence must be put around the farm.

WHERE BARGAINING COMES INTO PLAY

Under farmers rights, rancher says, OK, I will pay you 300 dollars for you to build a fence around your farm.
Would you say yes or no as the farmer?

WHERE BARGAINING COMES INTO PLAY: APPLICATION OF THE COASE THEOREM

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

It costs you 1200 dollars to fence off your ranch. It costs 300 dollars to fence of my farm. Give me part of 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 distribution of wealth, but we have arrived at a more efficient solution. The Coase Theorem: When there are externalities and no transaction costs, bargaining leads to efficient outcomes regardless of which side the law is on.

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 account for utility) Injunctions enjoin others from trespassing on anothers rights. Have the power to exclude. Pollutee v Polluter: Who is better off under damages? Under injunctions?

THERE IS AN ELECTRIC COMPANY AND A LAUNDROMAT

Laundry (Pollutee)
Electric Company (Polluter)

No Scrubbers

Scrubbers
Cost of scrubbers= 500 Damage to Laundromat=200

No Filter 100 1000 300 500

Filter 200 1000 200 500

Cost of filters for Laundromat= 100

Lets add. Which case is the most efficient?

THERE IS AN ELECTRIC COMPANY AND A LAUNDROMAT CONT.

Polluters rights Pollutees rights (damages) Pollutees rights (injunctions)

Non Cooperation (net profit) Electric company 1000

800

Laundromat 200 300

Surplus 0 100

Cooperate (net profit) Electric company N/A

850

Cost of scrubbers= 500

Laundromat N/A 350

Damage to Laundromat=200 Cost of filters for Laundromat= 100

500

300

400

700

500

Suppose both parties cannot cooperate:

Laundry (Pollutee) Electric Company (Polluter)

No Scrubbers Scrubbers

No Filter 100 1000 300 500

Filter 200 1000 200 500

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 damages or find ways to not pollute. Regardless, he will find what is cheaper.