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Law & Legal Institutions

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Presentation on theme: "Law & Legal Institutions"— Presentation transcript:

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?

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

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