1. Law & Legal Institutions
Civil Law
Legislatively enacted
Inquisitorial process
Common Law
Based on social norms and precedent
Adversarial process
Use of juries

2. Law & Legal Institutions
State Courts
Trial courts: “entry level” courts
Appellate courts
Supreme courts
Federal Courts
94 districts
13 appellate districts
US Supreme Court
Federal Jurisdiction:
Federal questions
Cases to which US is a party
Diversity cases

3. Nature of a Legal Dispute
Parties
Plaintiff
Defendant
Burden of Proof
Civil cases: preponderance of evidence
Criminal cases: beyond a reasonable doubt
Verdict/Judgment
Appellate decisions
Affirm
Reverse
Remand

4. Evolution of Common Law
Butterfield v. Forrester, 11 East 60 (1809)
Contributory negligence
Davies v. Mann, 10 M&W 545 (1842)
Last clear chance doctrine
Riggs v. Palmer, 22 N.E. 188 (1889)
Can a murderer inherit from the person whom he murdered?

5. Four Areas of Law
Property
Contract
Tort
Criminal

6. Property Law
Legal framework for allocating resources and distributing wealth
Economic Goal: efficient resource allocation
Economic Theory of Property
Bargaining theory (game theory)
Public goods theory
Externalities theory

7. 4 Questions What things may be privately owned?
How are ownership rights established?
What can owners do with their property?
How are property rights protected?

8. Example 2 (p75)
Orbitcom, Inc., spent $125 million designing, launching, and maintaining a satellite for the transmission of business data between Europe and the US. The satellite is positioned in a geosynchronous orbit 25 miles above the Atlantic Ocean. Recently a natural resource-monitoring satellite belonging to the Windsong Corp. has strayed so close to Orbitcom’s satellite that the company’s transmissions have become unreliable. As a result, Orbitcom has lost customers and has sued Windsong for trespassing on Orbitcom’s right to its geosynchronous orbit.

9. Smoke from BBQ

10. Economics of Bargaining
Peter owns a horse which he claims is worth $9,000 to keep, and Mary covets the horse and decides she is willing to pay $11,000 for it. Mary has $15,000 inheritance income.
Non-cooperative outcome: no trade
Cooperative outcome: trade at mutually agreed price
(threat values)
Value of Non-cooperative Outcome = $ $15,000 = $24,000
Reasonable sale price = $10,000
Value of Cooperative Outcome = [10,000] + [11, ,000] = $26,000
Cooperative Surplus = $2,000

11. Coase Theorem
Ronald A. Coase, “The Problem of Social Cost,” 3 J. L. & Econ. 1 (1960)

12. Aunt Linda and the Nudist
Rifle River
Aunt Linda
Nudist
$1500
$1250
$1000
Judge rules in favor of Aunt Linda
Judge rules in favor of Nudist
Fence comes down 2
rulings
Fence comes down
(Linda pays Nudist)

13. A Theorem and a Corollary
Coase Theorem
If transactions costs are low enough, then private bargaining will result in an efficient use of resources, regardless of the legal assignment of property rights.
Corollary
When transactions costs are high enough to prevent bargaining, the efficient use of resources will depend on how property rights are assigned.
Search costs
Negotiation costs
Enforcement costs

14. Lubricate or Allocate? Normative Coase Theorem
Structure the law so as to remove impediments to private agreements
Normative Hobbes Theorem
Structure the law so as to minimize the harm caused by failures in private agreements
Prior appropriation: “first in time, first in right”
Water rights in western US
Homesteading Act

15. Lubricate or Allocate? Lawmaker tradeoff:
IC = information cost of the court in determining who values a right the most
TC = transaction costs of private bargaining
Efficient courts would follow this rule:
If IC < TC  allocate legal right to the party who values it the most
If TC < IC  strictly follow precedent

16. How are property rights protected?
Remedies for violations:
Damages (legal)
compensatory money payment
“backward-looking”
Injunctions (equitable)
an order to perform or refrain from an action
“forward-looking”
Torts or contracts
Property

17. FlexMag v. Neighbors Neighbors FlexMag No Wall Wall No Insulation
2000, 500
2000, 700
FlexMag
Insulation
1600, 800
1600, 700
FlexMag has D.S.: No Insulation
Neighbors don’t have D.S.

18. Non-Cooperative Outcome
FlexMag v. Neighbors
Non-Cooperative Outcome
Cooperative
Outcome
FlexMag
Neighbors
Surplus
1. Polluter’s Rights
2000
700
2. Neighbors’ right to damages
1700
800
200
1800
900
3. Neighbors’ right to injunction
1600
300
1750
950
Normative Hobbes: only rule 1 is efficient
Coase Theorem: choice of rule doesn’t matter

19. Calabresi and Melamed (1972)
If TC are low, then injunctions are efficient
For private bads
If TC are high, then damages are efficient
For public bads
Two qualifications:
High TC
Award injunctions if relative valuations known
Award damages if absolute valuation known
Low TC
Award injunction when plaintiff can estimate defendant’s compliance costs more readily than
the defendant can estimate the plaintiff’s damages

20. What can be privately owned?
Private goods: rival and excludable
Public goods: non-rival and non-excludable
Conclusion:
Private goods should be privately owned
Public goods should be publicly owned
Free rider problem

21. What may owners do with their property?
Externality exception to maximum liberty doctrine

22. What Can Be Privately Owned?
Information Economics
How is information different from other goods?
It’s (usually) a public good
Under-provision remedies
Government supply or subsidy
Charitable contribution
Trade secrets protection (contract law)
Intellectual property law
Patents
Copyrights
Trademarks
Weather Forecasting?

23. Patent Law Legal monopoly rights for 20 years Non-obvious
Number of Patents Issued per year in US
Legal monopoly rights for 20 years
Non-obvious
Practical utility
Not commercialized 1 year prior to application

24. Suppose that an investment of $100,000 in research yields a pioneering invention that has no commercial value. A subsequent investment of $50,000 in development yields an improvement to the pioneering invention that has commercial value of $1 million. An efficient patent law would grant the patent to:
The pioneer
The developer
Equal rights to both
Neither of them 1 2 3 4 5

25. Patent Law: Breadth
Broad: encourages fast, duplicative fundamental research
Narrow: encourages slower, complementary developmental research
R&D is a “joint product”
Unified R&D efforts?
What would Coase say?
Little stand-alone value
Large stand-alone value

26. Patent Law: Duration Tradeoff: innovation v. dissemination $ MC
One size fits all? MB D*
duration
Germany: petty patents
Business methods?
Orphan drugs
Prizes?

27. Copyright
Prevents unauthorized copying of the products of expressive activity
Breadth
Fair use
Sony Betamax case: “time-shifting” vs “archiving”
Duration
Life of artist + 70 years
Why limit duration?
Tracing costs exist
Why has duration increased?
Copying costs have fallen

28. “Droit de suite” Is resale of art the same as reproduction of art?
France requires a resale royalty be paid to original artist (or heirs)
California requires resale royalty by paid to artist (while living)
Pt = $ 1,000
Pt+n = $10,000

29. Trademarks Signal of product quality Duration of TM left to owner
Tradenames that have become generic?

30. Anti-commons?
Common property is subject to the “tragedy of the commons”
Corrective: assign private property rights
Excessive ownership rights
Leads to under-use
DNA patents and the public domain?
Open source computing

31. When should unowned resources become owned?
Privatize when cost of administering boundaries is less than cost of congestion

32. How are Property Rights Established?
Oil
Hammonds v. Central Kentucky Natural Gas Co (1934)

33. How are Property Rights Established?
Fugitive Property
First possession: property doesn’t belong to anyone until someone extracts it
Tied ownership: fugitive property is tied to something else that is easier to establish

34. How are Property Rights Established?
Oil

35. How are Property Rights Established?
Fugitive Property
First possession: property doesn’t belong to anyone until someone extracts it
Simple to administer
Encourages inefficient pre-emptive investments
Tied ownership: fugitive property is tied to something else that is easier to establish
Costly to administer
Encourages efficient use of resource

36. Stack Island
thalweg
Louisiana
Mississippi

37. What can be done to prove ownership?
Paper titles for cars
Deeds for property
Branding
Livery of seisin
Stolen goods?
US: thief can not give good title
Buyers bear risk of verification
Europe: thief can give good title
Original owners bear risk of verification
Liability should fall on those who can bear the risk at lowest cost