1. How do you lose property rights over something?

2. Example 5 A county ordinance requires houses to be set back 5 feet from the property line. Joe Potatoes buys some heavily wooded land in an undeveloped area and builds a house on it. Ten years later Fred Parsley, who owns the adjoining lot, has his land surveyed and discovers that Potatoes’ house extends 2 feet over the property line onto Parsley’s property. Potatoes offers to compensate Parsley for the trespass, but Parsley rejects the offer and sues to have Potatoes relocate the house in conformity with the ordinance.

3.  Adverse possession Acquire possession by use w/o timely objection of rightful owner  Clears the clouds from title  Moves property to more productive uses  Provides incentives for owners to monitor property  Estray statutes Procedures to establish ownership of lost property  Discourages theft by eliminating “I found it” excuse  Encourages finders to disseminate information  Provides incentives for owners to monitor property How do you lose property rights over something?

4. What can owners do with their property?  Bequests and inheritance Rules that restrict transfers tend to prevent owners from maximizing value of property  circumvention costs  depletion costs Rule against perpetuities  “lives-in-being plus 21 years”  Restricts foolish heirs  Maximizes value across generations Primogeniture? Generation-skipping rule

5. Exceptions to Property Rights  “fair use” exception to copyrights  Private necessity Ploof v. Putnam (1908)  Inalienability Organs, sex, heroin, children, votes, human rights  Unbundling Excessive unbundling may increase TC and lower overall value General rule: injunctive relief against trespass (encourages bargaining) Pennsylvania land rights: Surface estate Mineral estate Support estate

6. Remedies for PR Violations  Injunctions for private bads  Damages for public bads Temporary damages  compensation for past harms  Imposes high TC for private bargaining  Creates incentives to adopt cleaner/safer tech Permanent damages  compensation for future harms  Imposes high error costs (difficult to predict future harms)  Creates no incentives to adopt cleaner/safer tech

7.  Summary of damages If damages are easy to measure and innovation occurs rapidly, use temporary damages If damages are difficult to measure and innovation occurs slowly, use permanent damages Remedies for PR Violations Common practice for public bads: temp. damages and injunction

8. Boomer v Atlantic Cement Co. (1970)  Plaintiffs awarded temporary damages but denied injunction against future harms  Appeals court argued injunction would create too much harm in closing the factory; ordered permanent damages to be paid Damages were paid as “servitude to the land” Damages were for “all reasonably anticipated future harms”

9. Takings  5 th Amendment: “ nor shall private property be taken for public use, without just compensation”  Eminent domain “just compensation”  “fair market value”  Channels gov’t into taxes rather than takings “public use”  Poletown v City of Detroit (1981)  Kelo v City of New London (2005)  Regulations  Lucas v South Carolina Coastal Council (1992) “public purpose”? “significant reduction in property value”?

10. The following table which represents a two person game played once by individuals who cannot communicate with each other. Each individual can either choose a cooperative or selfish strategy. Which statement best describes the outcome of the game? A cooperateselfish B cooperate10, 104, 8 selfish8, 46, 6 a)The game has no unique solution b)A and B have different dominant strategies c)Both parties will act selfishly d)The game has no Nash equilibrium e)B will cooperate if A behaves selfishly and act selfishly if A cooperates

11. The weak version of the Coase theorem states that in the absence of transaction costs a)resources will be put to identical uses independent of the initial assignment of rights. b)wealth effects are independent of the initial assignment of rights. c)parties will be compensated for any harms caused by externalities. d)resources will be allocated efficiently independent of the initial assignment of rights. e)all of the above.

12. A railroad emits sparks which damage the farmer’s crops. The amount of damage depends on the number of trains run. If the railroad is not liable for the farmer’s damages and transaction costs are zero, the railroad will run: Number of Trains Railroad Profits Total damages to farmer’s crops 1$ 2 2 5 4 3 9 6 410. 5 8 510 a)0 trains if the farmer’s profit (before deducting crop damage but allowing for other costs) is $15 b)4 trains c)4 trains only if the farmer’s profit is more than $7 d)3 trains e)3 trains only if the farmer’s profit is more than $7.50

13. Suppose a factory emits pollutants that injure adjacent homeowners. The law will promote efficiency if it a)creates an incentive for the factory to relocate to a different location if the harm it causes is greater than its profits. b)creates an incentive for homeowners to move to a different location if the cost of moving is less than the harm caused by the pollution. c)holds the factory liable for damages or enjoins it from polluting when the harm it cause is greater than its profits d)holds the factory liable if the homeowners located there first and holds the factory harmless if it located there first e)none of the above

14. The statement that best describes the difference between protecting entitlements by property rights or by liability rules is: a)the harm is greater from violating an entitlement protected by a property right than one protected by a liability rule. b)both apply to high transaction cost settings but the remedy under a property right is an injunction while the remedy under a liability rule is damages. c)the cost of enforcing a property right exceeds the cost of enforcing a liability rule. d)property rights are good against all trespassers while liability rules apply only to parties unwilling to compensate victims in voluntary transactions. e)a property right approach assumes that a voluntary transaction is economical whereas a liability rule approach assumes that transactions costs prevent a voluntary transaction