week 3 - property law Flashcards
(24 cards)
What is property law?
legal perspective vs economic perspective
allocation of rights of property
legal perspective; defined by national jurisdiction law, property means ownership and has boundries and benefits
economic perspective; property law is a bundle of rights that makes exchange possible which makes markets work. It gives you the rights to;
- use, enjoy, exclude, dispose of, split
Property rights, from an economic perspective, is considered to be a bundle of rights. What rights does it include?
5 points
- right to use
- right to enjoy
- right to dispose of
- right to exclude (others) from
- right to split - ex. rent
How do property rights differ in common law vs civil law systems?
Common law = ex. UK - property term is broader and more flexible
Civil law = ex. NL - property term is more rigid + formal
3 key ideas outline in “the problem of social cost”?
hint; what are externalities + how do we resolve them, high vs low TC, property rights
3 key ideas outline in “the problem of social cost”?
Coase wrote a paper called the problem of social cost, which highlighted 3 key ideas;
(1) externalities are social costs that can be internalized via bilateral negotiation
- externalities are imposed on third parties without their consent, and can lead to market failure - but can be fixed via negotiation WITHOUT the use of gov intervention
(2) when transaction costs are ZERO, the way that property rights are allocated is irrelevant because the outcome will always be efficient (aka regardless of the legal rule that allocates the law in a certain way, when TC are low the outcome is always efficient)
(3) IF transaction costs are NOT zero, allocation of rights DOES matter - this is a major limitation of the Coase THeorem as in reality high TC are likely to occur
A factory has the right to pollute water. A fisherman has the right to clean water. If a factory keeps polluting the water, the fisherman catches less fish.
Factory = makes 1500 euros in revenue
Fisherman = makes 1000 euros in revenue
Pollution = - 900 euros for the fisherman
Cost of filter to stop pollution = 700
If transaction costs are low, what is the most efficient outcome (should the filter be installed or compensation be paid)? Does it matter how the laws are allocated?
a) factory must ocmpensate fisherman for polluting his lake
b) factory installs a filter
IF FISHERMAN HAS THE RIGHT TO CLEAN WATER;
**IF **the factory must compensate the fisherman for polluting his lake;
- the factory makes 1500 euros in revenue but must pay 9000 euros in damages and is left with 6000 euros in revenue. The fisherman makes 1000 euros and thus total social welfare is 1600 euros.
a) Factory = 1500 euros - 900 euros = 600 euros
b) Fisherman; 1000 euros
total welfare; 1600 euros
**IF **the factory must instal the filter to stop polluting;
a) Factory = 1500 - 700 = 800 euros
b) fisherman; 1000 euros
total welfare = 1800 euros
Therefore, it is most efficient if the factory installs the filter to stop pol.uting
IF THE FACTORY HAS THE RIGHT TO POLLUTE;
IF the fisherman must pay the damages;
a) Factory = 1500
b) Fisherman = 1000 euros - 900 euros = 100 euros
total welfare = 1600 euros
If the fisherman must pay the factory to instal the filter;
a) factory = 1500 + 700 euros - 700 euros = 1500 euros
b) Fisherman = 1000 euros - 700 euros = 300 euros
total welfare = 1800 euros
= THEREFORE REGARDLESS OF HOW THE RIGHTS ARE ALLOCATED, THE MOST EFFICIENT OUTCOME IS FOR THE FILTER TO BE INSTALLED
A factory has the right to pollute water. A fisherman has the right to clean water. If a factory keeps polluting the water, the fisherman catches less fish.
Factory = makes 1500 euros in revenue
Fisherman = makes 1000 euros in revenue
Pollution = - 900 euros for the fisherman
Cost of filter to stop pollution = 700
If transaction costs are 250 euros, what is the most efficient outcome (should the filter be installed or compensation be paid)? Does it matter how the laws are allocated?
a) factory must ocmpensate fisherman for polluting his lake
b) factory installs a filter
IF FISHERMAN HAS THE RIGHT TO CLEAN WATER;
If factory pays compensation for pollution;
a) factory = 1500 - 900 - 250 = 350
note; factory must talk to fisherman and give them the money
b) fisherman = 1000
total welfare = 1350
If factory pays for filter;
a) factory = 1500 - 700 = 800
note; no TC bc factory doesnt talk to fisherman they just buy the filter themselves
b) fisherman = 1000
total welfare = 1800
most efficient = filter
IF FACTORY HAS RIGHT TO POLLUTE
If fisherman pays compensation
a) factory = 1500
b) fisherman = 1000 - 900 = 100
total welfare = 1600
If fisherman buys filter ;
b) fisherman = 1000 - 700 - 250 = 50
a) factory = 1500 + 700 - 700 = 1500
= total welfare 1550
=most efficient = if factory pollutes and compensates fisherman
SO THE TRANSACTION COSTS INFLUENCE THE MOST EFFICIENT OUTCOME
What are transaction costs?
any cost that is not a production cost
- ex. extra costs ppl face when trying to make an agreement or deal (ex. a contract)
they hinder trade / make exchange of goods more difficult
Define Transaction Costs in a broad sense vs a Strict Sense
broad sense;
- ex ante = costs incurred before a deal (searching, negotiating, drafting agreements)
- ex post = costs incurred after the deal (enforcing, settling disputes, monitoring
strict sense;
- stricty legal / contractual costs o fmaking a deal official ex. notary fees, contract enofrcement (NOT broker fees - who helps u find a buyer)
What are five main types of transaction costs?
1) search and information costs
2) negotiation costs
3) decision making costs
4) monitoring costs
5) enforcement costs
(Transaction Costs inlcudes both direct costs + opportunity costs
What are five things that influence how high / low TC are?
6 points
- level of trust = decrease TC bc it may lead to opportunism
- uncertainty abt quality of goods = increase TC
- uprfront investments
- complexity of good /service = increases TC
- frequency of TC (between the same parties) = decreases TC bc it increases Trust
- monitoring problems - the more difficult to monitor (observe) - the higher the TC
What is opportunism?
when one party takes advantage of one situation for their own benefit at the expense of the other party
What are legal things (rules / agreements / principles) which decrease TC?
1) default rules = automatic rules used if parties dont specify a certain circumstance in their contract, saves time as no negotiation is required
2) binding power of agreements = when two parties agreed on something legally binding there is no need to spend money on. monitoring and enforcement costs
3) Good faith principle = forces both parties to act fairly, prvents opportunism (reduces disputes and litigation = saves money)
Who is Calabresi and Melamed
- scholars who wrote a 1972 paper called one view of the cathedral
- showed importance of L and E as a subject, built on ideas of Coasean Theorem
What are the key messages outlined in Calabresi and Melameds 1972 paper ‘one view of the cathedral’
1) individual rights should be allocated to the individual who values it the most (this is the most efficient owner, coase agrees)
2) inefficient allocation of rights (if someone else has a good but another perosn who doesnt have it values it more) can be corrected through bilateral negotiation between the parties
3) the initial allocation of rights impacts whether or not the outcome is efficient if transaction costs are high, the outcome will always be efficient if transaction costs are low (dif from what coase said)
new;
4) individual rights should be legally protected via; property rules, liability rules, inalienability
acc to calabresi and melamed, what are 3 ways in which indv rights should be protected?
1) property ruloes
2) liability rules
3) inalienability
what is the property rule protection?
- nobody can take you right without your permission, if someone wants it they must negotiation and you can say yes or not and set your own price / terms (ONLY WORKS W LOW TC)
- THE price u set relfects personal value (dif ppl will give the same product dif values based on how they personally value it)
- thus the transfer of entitlements is voluntary
What are liability rules
- liability rules outline that if somebody interferes with your right without your permission, they can but you MUST be compensated
- the payment amount is determined by law = does not reflect personal value in the way property rule protection does (objective evaluation of the product)
- thus there is an involuntary transfer of entitlements
- necessary when there are HIGH TC
What is inalienability?
- when ones entitlement (property right) is non-transferable
- ex. bc of ethics, health, etc. (ex. cant sell organs)
What was the Spur v Del Webb Case (USA)
what rule was used - liability or property?
F; spur industries established a feeding place for cattle, del webb bought cheap famrland and stared preparing it for residential use (no residents yet)
- the plot nearest to spurs feeding place did not sell bc it smelled like shit
R: court said that
- spur must relocate the feeding place for cattle to protect the interest of future residents
- BUT del webb has to compensate spur for the relcation, esp since this would give del web money bc ppl would buy the land
note; many residents indicates TC would be high due to difficulty negotiating, whiilst under liability rule - the judge deices obj compensation
What is the Sturges v Bridgman case (facts + result), after coase analyzed this case, what was his conclusion? he graphed this
-
F;
- Dr. sturges moved next door to bridgman
- dr. sturges needed silence, bridgeman had a loud bakery
- dr sturges believed he had a right to silence, bridgman believed he had a right to make noise
- dr. complained to court abt bridgmans noise
court;
- court ruled in favour of dr - established his right to work in silence
coase analyzed this case;
- determined it would’ve been more efficient to let them negotiate, he proved it by graphing the cost of silence (x axis) vs silence (y axis)
- for sturges, to be silent was cheap, to tolerate loudness was expensive
- for baker, to be silent was expensive and to tolerate loudness was cheap
- the two curves intersect - the intersection point indicates the optimal level noise and adequate compensation
- regardless of how the rights were allocated (whether the dr had the right to silence or baker had the right to be loud) the outcome was efficient in both conditions
What is an efficient contract breach
= when a party breaches a contract and compensating the injured party is more beneficial then performing it
- breaching party internalizes externality by compenating the injured party, thus the injured party is indifferent whether they get performance or compensation because the outcome to them is beneficial under both
- -
compare + contrast
liability protection rule vs property protection rule
liability protection rule = an individual can cause damage so long they later compensate the damaged party. the right to prevent harm is not absolute.
- involuntary transfer of entitlements
- objective evaluation of damage
- necessary in cases of high TC
- compensation price often determined by a judge who ensures it is just and fair to the circumstance
property protection rule = nobody can cause damage to the property of another person without their permission. The right holder has the ability to negotiate and say yes or no.
- voluntary transfer of entitlements
- only works when TC are low
- subjective evaluation of damage
according to cosean, in an ideal world, contract breaches dont require gov intervention - why?
- people are rational,
- can predict future scenarios,
- TC are low
- written contracts are complete + include info on - what happens when a contract is breached, amount of ocmpensation, expectation force majuere, etc.
- thus when a contract is breached under these conditions there is no need for a judge to be involved as the two parties can resolve it through bilateral negotiation
According to the property rule (encouraged by calabresi and melamed), what happens after a contract is breached?
- the non breaching party (injured party) has a right to demand actual performance
- it occurs when TC are low, and the party highly values the performance (subjective evaluation of performance)
- SO if the one party wants to breach the contract, they must ‘buy’ permission from the othe rparty to do so
aka under property rule the contract must be fufilled, since TC are low if a breach is more efficient the two parties can negotiate it (ideally)
SO MAJOR LIMITATION = high transaction costs where efficient bargaining would not occur
