1. Econ 522 Economics of Law
Dan Quint
Fall 2009
Lecture 5

2. Logistics HW1 online – due Tues October 6
First midterm – Tues October 13 (in class)
covers all material through end of Property Law
sample questions online
No lecture Thurs October 1
If you didn’t get my on Tuesday…

3. Last lecture…
Coase: in the absence of transaction costs, if property rights are well-defined and tradeable, voluntary negotiations will lead to efficiency
or, if property rights are comprehensive enough, we can overcome externalities
Demsetz: yes, but more comprehensive property rights are more costly to administer
will only develop when benefits outweigh costs

4. Last lecture… Sources of Transaction Costs: Search costs
Bargaining costs
Asymmetric information
Threat points being private information or uncertain
Large number of buyers or sellers
Hostility
Enforcement costs

5. Last lecture… Coase Theorem: transaction costs  efficiency
Normative Coase: design the law to minimize transaction costs
Normative Hobbes: design the law to minimize losses from breakdown in bargaining
(or, roughly, allocate rights efficiently)
Transaction costs vs. information costs
trans costs low, info costs high  minimize transaction costs
(“lubricate private bargaining”)
trans costs high, info costs low  allocate rights efficiently
(make private bargaining unnecessary)

6. what can be privately owned? what can an owner do?
Today:
what can be privately owned?
what can an owner do?
how are property rights established?
what remedies are given?
We said that any property rights system must address four questions:
What things can be privately owned?
What can (or can’t) an owner do with his/her property?
How are property rights established?
And what remedies are given when they are violated?
Today, we’ll talk about all four of these
In particular, we’ll ask the question, what would efficiency suggest for an answer to each of these?
Or, how would an efficient property system answer each question?
We begin with one we haven’t yet considered at all: remedies
And we begin with an important paper (on the syllabus), by Calabresi and Melamed

7. Calabresi and Melamed treat property and liability under a common framework
Calabresi and Melamed (1972), Property Rules, Liability Rules, and Inalienability: One View of the Cathedral
Liability
Is the rancher liable for the damage done by his herd?
Property
Does the farmer’s right to his property include the right to be free from trespassing cows?
Entitlements
Is the farmer entitled to land free from trespassing animals?
Or is the rancher entitled to the natural actions of his cattle?
we begin today with an important paper from 1972 by Guido Calabresi and Douglas Melamed, titled, “Property Rules, Liability Rules, and Inalienability: One View of the Cathedral”
the topic of the is how property rights are enforced, that is, what remedies are used when rights are violated
Calabresi and Melamed state that their goal is to treat both property and liability law under a common framework, rather than keeping them as distinct topics
we’ve already been doing this
when we think about the rancher-farmer question, we can pose it in terms of liability – is the rancher liable for the damage his herd does?
or we can pose it in terms of property – does the farmer’s right to his property include the right to be free from trespassing cows? or does the rancher’s right to his herd include the right to not be punished when they stray?
Calabresi and Melamed were the first to consider both property and liability in the same terms
They consider both cases to be cases of “entitlements”
is the farmer entitled to land without trespassing animals, or is the rancher entitled to be free from herd-damage liability?
Similarly, are you entitled to have a noisy party, or am I entitled to get a good night’s sleep?

8. Three possible ways to protect an entitlement
Property rule / injunctive relief
Violation of my entitlement is punished as a crime
Injunction: court order clarifying a right and specifically barring any future violation
Property Rules, or Injunctive Relief
This is when you are legally barred from violating my entitlement without my prior agreement
This is the usual rule for protecting private property – if it’s mine, you simply can’t take it unless I give it to you
And if you do choose to take it, you’ve committed a crime – you don’t just owe me the value of what you took, you may go to jail, you may face other severe consequences
(the idea of a property rule is that the punishment is so severe, you’ll never choose to violate my right without my permission)
An injunction is basically a court order clarifying someone’s rights and specifically barring someone from violating them
For example, if a factory is polluting and the neighbors object and take it to court, the court might issue an injunction, which would bar the factory from further pollution
The factory could still negotiate with the neighbors and reach some bargain where the neighbors agree not to enforce the injunction, but this would be completely at the discretion of the neighbors

9. Three possible ways to protect an entitlement
Property rule / injunctive relief
Violation of my entitlement is punished as a crime
Injunction: court order clarifying a right and specifically barring any future violation
Liability rule / damages
Damages are a payment to a victim to compensate for actual damage done
Better when prior negotiation is impossible
Inalienability
Liability Rules, or Damages, is when you can violate my entitlement without my agreement, but must compensate me afterward for whatever damages I incur
under a liability or damages rule, the factory could go on polluting, and the neighbors would sue them for damages
the court would then have to calculate an objective value of the damage done
the neighbors can argue that the damage incurred was high, but they are only awarded what is considered fair value, not what they argue they would have held out for in the beginning
This is the type of rule behind eminent domain, which we’ll talk about in a bit
if the government wants to build a school, or an army base, or a town dump, on land that I own, they can force me to sell my land
and they can force me to sell at what is considered fair market value, not to hold out for whatever amount I want based on my sentimental attachment to the house I grew up in or anything else
Liability rules obviously work better than property rules in settings where prior negotiation is impossible
Clearly, I have an entitlement to not be hit by someone’s car when I’m walking, but it’s hard to imagine them approaching me beforehand and bargaining for the right to hit me.
The difference: damages are backward-looking – they compensate for harm already done, while injunctions and property rules are forward-looking – they specifically forbid future harms from occurring.
Third way to protect an entitlement – Inalienability – we’ll come back to later

10. Comparing property/injunctive relief to liability/damages rule
Injuree (person whose entitlement is violated) always prefers a property rule
Injurer always prefers a damages rule
Why?
Punishment for violating a property rule is severe
If the two sides need to negotiate to trade the right, injurer’s threat point is lower
Even if both rules eventually lead to the same outcome, injurer may have to pay more
We know from Coase that either rule should lead to an efficient outcome if transaction costs are low
But they may still lead to different outcomes – the rules will favor different sides
In particular, a property rule will always be more favorable toward the injuree (the person whose entitlement is to be violated), and a liability rule will always be more favorable toward the injurer
This is because the punishment for violating an injunction without the other side’s permission is much harsher than damages – it may involve criminal trespass or violating a court order
So when the two sides bargain, the injurer will have a much lower threat point when facing an injunction, so the injuree will end up with a higher payoff if they do choose to cooperate
(We’ll see an example.)
We know from Coase that in a world without transaction costs, either rule should be sufficient to allow private bargaining to lead to efficiency
However, since the two rules give the two sides different threat points, they change the payoff achieved by each side during negotiations
In a world with transaction costs, of course, one may lead to a more efficient outcome than the other

11. Comparing injunctive relief to damages – example
E profits = 1,000 L profits = 300  100 E prevention = 500 L prevention = 100
Comparing injunctive relief to damages – example
Electric company E emits smoke, dirties the laundry at a laundromat L next door
E earns profits of 1,000
Without smoke, L earns profits of 300
Smoke reduces L’s profits from 300 to 100
E could stop polluting at cost 500
L could prevent the damage at cost 100
Consider the example in Cooter and Ulen
There is an electric company E that emits smoke, which dirties the laundry at a laundromat L next door
The electric company earns profits of 1000
Without smoke, the laundromat earns profits of 300.
Smoke does $200 of damage (reducing profits to 100)
The electric company could stop emitting smoke by installing scrubbers in its smokestack, at a cost of 500.
The laundromat could also avoid the damage by installing filters on its ventilation system, at a cost of 100.

12. First, we consider the non-cooperative outcomes
E profits = 1,000 L profits = 300  100 E prevention = 500 L prevention = 100
First, we consider the non-cooperative outcomes
Polluter’s Rights (no remedy)
E earns 1,000
L installs filters, earns 300 – 100 = 200
Laundromat has right to damages
E earns 1,000, pays damages of 200  800
L earns 100, gets damages of 200  300
Laundromat gets injunction
E installs scrubbers, earns 1,000 – 500 = 500
L earns 300
First, we’ll consider the non-cooperative outcome, that is, what happens when the two sides do not try to negotiate with each other
Given the remedies we’re considering right now, there are three possibilities
the electric company is allowed to pollute with no consequences;
the laundromat is entitled to damages;
or the laundromat can get an injunction preventing pollution

13. Noncooperative payoffs
E profits = 1,000 L profits = 300  100 E prevention = 500 L prevention = 100
Noncooperative payoffs
Polluter’s Rights
Damages
Injunction
E payoff (non-coop)
1,000
800
500
L payoff (non-coop)
200
300
300
Combined payoff (non-coop)
1,200
1,100
800
Clearly, the efficient outcome is for L to install filters, leading to combined profits of 1200
(This avoids $200 in damage at a cost of $100, and is the cheapest way to avoid the damage.)
This is the outcome that occurs in the Polluter’s Rights case
(No reason this should be true generally, just in this example)
In the other two cases, the noncooperative outcome is inefficient
But if there are not transaction costs, the two sides could still negotiate an agreement to achieve efficiency
But in each case, the threat points would be different, so the division of surplus will be different under the different rules.

14. What about with bargaining?
E profits = 1,000 L profits = 300  100 E prevention = 500 L prevention = 100
What about with bargaining?
Polluter’s Rights
Damages
Injunction
E payoff (non-coop)
1,000
800
500
L payoff (non-coop)
200
300
300
Combined payoff (non-coop)
1,200
1,100
800
Gains from Trade
100
400
But now, suppose there are no transaction costs, and the electric company and laundromat owners are able to negotiate with each other
Clearly, the efficient outcome is for the laundromat to install air filters – this prevents the damage the cheapest way possible, and leads to the highest combined payoffs
So if the two sides bargain, that’s the outcome they’ll reach
In the polluter’s rights case, this is already the outcome – they have nothing to bargain over
But in the other two cases, they do
In the case of damages, the noncooperative outcome is inefficient – the electric company is paying $200 for damage that could be prevented for $100, so there are $100 in gains from trade
If we imagine the gains from trade are divided equally, each side will end up with $50 more than their threat point
In the case of injunction, the gains from trade are even bigger – now they create $400 in new surplus by bargaining
If this gets divided equally, the payoffs are 700 and 500
What does Coase say? That the bottom row are all the same – regardless of the initial allocation, bargaining leads to the efficient outcome
BUT, the two sides care very much about the initial allocation
The more favorable the initial rule is to the electric company, the better he does in the end; and the more favorable the initial rule is to the laundromat, the better he does in the end
E payoff (coop)
1,000
850
800 + ½ (100)
700
500 + ½ (400)
L payoff (coop)
200
350
300 + ½ (100)
500
300 + ½ (400)
Combined
1,200
1,200
1,200

15. How do we choose between the rules?
In this case…
Polluter’s rights > damages > injunction when there is no bargaining
All three equally efficient when there is bargaining
Normative Hobbes: allocate rights efficiently to begin with
Polluter’s rights in this case, no reason to believe this more generally
Normative Coase: just work to lower transaction costs, let people negotiate when they need to
So what do we do?
Remember our two normative approaches from last class

16. How do we choose between the rules?
Injunctions are cheaper for court to implement
No need to calculate exact amount of damage done
Damages are more efficient when private bargaining fails
Leads Calabresi and Melamed to the following conclusion:
When transaction costs are high, a liability rule (damages) is more efficient
When transaction costs are low, a property rule (injunctive relief) is more efficient
But which rule is more efficient in general?
First of all, “no remedy” can’t be the right answer, so we’re really comparing injunctions to damages
An injunction is cheaper for a court to implement
the court simply clarifies the property right; it does not have to calculate the exact amount of damage that was done
damages are more difficult for a court to implement, since they must assess the monetary value of damage that was done
(We’ll return to the question of how damages are computed when we get to tort law; but for now, just realize this requires going to court, expert testimony, and a judgment.)
However, in this example, if private bargaining fails, damages lead to a more efficient result than an injunction, and this turns out to be true more generally
We’ll talk more about why in a minute
This leads Calabresi and Melamed to the following conclusion:
When transaction costs are high (or there are impediments to private negotiations), a liability rule (damages) is more efficient
When transaction costs are low (or private negotiations can be expected to succeed), a property rule (or injunctive relief) is more efficient

17. So that’s our answer: Calabresi and Melamed
When transaction costs are high, a liability rule (damages) is more efficient
When transaction costs are low, a property rule (injunctive relief) is more efficient
But why are damages more efficient when bargaining fails?
Under damages rule, injurer has two choices: prevent the damage, or pay cost afterwards
Under injunction, injurer has only one choice: prevent the damage
Injuree is compensated, so doesn’t matter to him
So whichever is cheaper for injurer, is more efficient
So that’s our answer.
When transaction costs are high, bargaining is likely to fail, and a liability rule is more efficient
When transaction costs are low, injunctive relief is more efficient, since the parties can reallocate the right if it’s assigned incorrectly
Why is liability more efficient when bargaining is likely to fail?
Think of it this way
In the example we just saw, there were three ways to deal with the harm: the electric company could prevent it, the laundry could prevent it, or they could both just let it happen and deal with it
When the two parties bargain, they’ll always choose whichever of the three is cheapest – so they’ll get the efficient outcome
When the two parties don’t bargain, under an injunction, the electric company has only one choice: prevent the harm itself
Under a damages rule, it has two choices: prevent the harm itself, or allow the harm to occur and pay damages
The laundromat doesn’t care which he does – the laundromat will be fully reimbursed for any harm that does occur
So the electric company faces the full cost in either case; it will choose the cheaper option, and therefore the more efficient option
When the electric company can prevent the harm at a lower cost than the cost of the harm itself, injunctions or damages will lead to the same outcome
When it can not, injunctions will be more costly than damages

18. High transaction costs  damages Low transaction costs  injunctive relief
“Private bargaining is unlikely to succeed in disputes involving a large number of geographically dispersed strangers because communication costs are high, monitoring is costly, and strategic behavior is likely to occur. Large numbers of land owners are typically affected by nuisances, such as air pollution or the stench from a feedlot. In these cases, damages are the preferred remedy.
On the other hand, property disputes generally involve a small number of parties who live near each other and can monitor each others’ behavior easily after reaching a deal; so injunctive relief is usually used in these cases.”
(Cooter and Ulen)
Cooter and Ulen point out that this is how things are typically done in certain types of disputes
“Private bargaining is unlikely to succeed in disputes involving a large number of geographically dispersed strangers because communication costs are high, monitoring is costly, and strategic behavior is likely to occur. Large numbers of land owners are typically affected by nuisances, such as air pollution or the stench from a feedlot. In these cases, damages are the preferred remedy.”
On the other hand, property disputes generally involve a small number of parties who live near each other and can monitor each others’ behavior easily after reaching a deal; so injunctive relief is usually used in these cases.
But, in the first case – where transaction costs are high, so bargaining is likely to fail – a liability rule is only efficient when the court is able to correctly calculate the amount of damages
(Damages get the injurer to internalize his externality – he pays the cost that he imposes on the injurer – but if damages are calculated wrong, he pays the wrong cost, and so he won’t behave efficiently)
On the other hand, injunctive relief is efficient any time the court can determine who values the right more, regardless of its absolute level
(If the court assigns the right to the correct party, no bargaining is necessary)
This leads Cooter and Ulen to a different interpretation of efficient remedies in the case of high transaction costs:

19. A different view of the high-transaction-costs case…
“When transaction costs preclude bargaining, the court should protect a right by an injunctive remedy if it knows which party values the right relatively more and it does not know how much either party values it absolutely.
Conversely, the court should protect a right by a damages remedy if it knows how much one of the parties values the right absolutely and it does not know which party values it relatively more.”
(Cooter and Ulen)
This leads them to a different interpretation of efficient remedies in the high-transaction-costs case:
When transaction costs preclude bargaining, the court should protect a right by an injunctive remedy if it knows which party values the right relatively more and it does not know how much either party values it absolutely.
Conversely, the court should protect a right by a damages remedy if it knows how much one of the parties values the right absolutely and it does not know which party values it relatively more.
For example: suppose the court knows that a good night’s sleep is worth exactly $200 to me. Then it can protect this right be damages; then you’ll only have a party if having the party is worth more than $200 to you, since that’s what you’d have to pay me; and this is exactly what’s efficient.
On the other hand, suppose the court has no idea what a good night’s sleep is worth to me, but knows it’s worth more to me than having a party is to you. The court can’t use damages, since it won’t know how much damages to assess; but it can give me an injunction against noise, and then you won’t be able to have the party, which is efficient in this case.

20. Low transaction costs  injunctive relief
Cheaper for the court to administer
With low transaction costs, we expect parties to negotiate privately if the right is not assigned efficiently
But… do they really?
Ward Farnsworth (1999), Do Parties to Nuisance Cases Bargain After Judgment? A Glimpse Inside The Cathedral
20 nuisance cases: no bargaining after judgment
“In almost every case the lawyers said that acrimony between the parties was an important obstacle to bargaining…
Frequently the parties were not on speaking terms...
…The second recurring obstacle involves the parties’ disinclination to think of the rights at stake… as readily commensurable with cash.”
In the case where transaction costs are low, however, injunctive relief is assumed to be more efficient
because it is cheaper for the court to implement
and because, by making property rights clear, it is more likely to encourage negotiations
Calabresi and Melamed defend injunctions as being optimal by assuming that the parties will privately negotiate after the court rules
Cooter and Ulen (on their website) mention a paper by Ward Farnsworth, examining whether this occurs.[1]  Quoting:
Farnsworth "examines twenty nuisance cases and finds no bargaining after judgment in any of them; nor did the parties’ lawyers believe that bargaining would have occurred if judgment had been given to the loser.
Farnsworth asked the lawyers why they though that no bargaining occurred after judgment.  The lawyers cited two impediments to post-judgment bargaining.
"First, in almost every case the lawyers said that acrimony between the parties was an important obstacle to bargaining.  The parties in these cases often thought that their adversaries were behaving in ways that were unreasonable, discourteous, and unneighborly.  Frequently the parties were not on speaking terms by the time the case was over (sometimes much earlier).  ... 
The second recurring obstacle involves the parties’ disinclination to think of the rights at stake in these cases as readily commensurable with cash."  
[1] Ward Farnsworth, “Do Parties to Nuisance Cases Bargain After Judgment?  A Glimpse Inside the Cathedral,” 66 U. Chi. L. Rev. 373 (1999). 

21. Finally, inalienability
Inalienability: when an entitlement is not transferable or saleable
As the title of the paper suggests, Calabresi and Melamed also talk about a third type of protection for entitlements: inalienability
This is when an entitlement is not transferable or sellable
For example, I an entitled to not be a slave, and I am not allowed to give away or sell that right
Similarly, you can’t give away or sell your right to vote
(We can think of this as the case of owning a historical landmark: it is your property, but it may be unalienable, in that you cannot sell it to someone who would put it to a different use.)
Inalienability is a bit of a funny case
The word might resonate as being a positive one – think of the well-known line from the Declaration of Independence, that all men are endowed with “certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness”
But in our context, inalienability seems more negative
Everything we’ve done so far – in particular, Coase – has assumed that the way to get efficient outcomes it to allow people to trade rights with each other, in order to get them owned by whoever values them the most
I own two kidneys; some kidney patient needs one; if my second kidney is worth more to him than to me, why shouldn’t I be allowed to sell it to him?
In some cases, we can defend inalienability by talking about externalities
If giving away a particular right imposed a large externality on others, maybe it makes sense not to allow it
In other cases, it seems to be more a case of paternalism
that is, the government thinking it knows what is good for you
In the kidney case, it may have nothing to do with the kidney itself, but the incentives for other behavior
we might acknowledge that me having two kidneys is inefficient; but if we allowed the sale and trade of kidneys, then murder rates might go up, because everyone was always carrying around hundreds of thousands of dollars worth of organs
But inalienability is not that common – thinking about remedies usually comes down to comparing injunctive relief to damages

22. what can be privately owned? what can an owner do?
how are property rights established?
what remedies are given?
We’ve now addressed the fourth question, remedies
We move next to the first: what things can be privately owned?

23. Public versus Private Goods
rivalrous – one’s consumption precludes another
excludable – technologically possible to prevent consumption
example: apple
Public Goods
non-rivalrous
non-excludable
examples: defense against nuclear attack
infrastructure (roads, bridges)
parks, clean air, large fireworks displays
You may recall from micro a discussion of Public and Private Goods.
Private Goods tend to be characterized by two properties:
Rivalrous – one person’s consumption of a private good precludes another person’s enjoyment of its benefits
if I eat an apple, you won’t be able to eat that same apple
Excludable – it’s technologically possible to prevent others from consuming it
It shouldn’t be too hard for me to prevent you from eating it.
Public Goods tend to be characterized by the opposite of these two properties:
Nonrivalrous – one person’s consumption of a public good does not impact others’ enjoyment of it
Nonexcludable – hard to prevent people from taking advantage
The cleanest example of a public good is defense against a nuclear attack
It’s very hard for me to defend myself from a nuclear attack in a way that doesn’t also protect you a bit
and you being safe from nuclear attack doesn’t impact my enjoyment of this privilege.
Other public goods are urban infrastructure (bridges and roads) (although roads may become somewhat rivalrous when there is congestion); parks, clean air, the ocean, large fireworks displays, and so on.

24. Public versus Private Goods
When private goods are owned publicly, they tend to be overutilized/overexploited
A principle you may remember from intermediate micro: When private goods are owned publicly, they tend to be overutilized, or overexploited.
This is the point of the classic paper by Hardin on the syllabus, the tragedy of the commons
His example: a large common area where everyone is permitted to graze their cattle
Since it’s public, nobody considers the cost their herd imposes on the grass
So the grass on the commons gets wiped out by overgrazing
Similar problems with overhunting, or overfishing, in unregulated public land
Another example of this is congestion on busy roads
Most roads are provided publicly (no toll, free to use)
When there’s lots of traffic, roads become rivalrous – the more people on the road, the less utility I get from driving on them – so they take on one of the characteristics of a private good
But when people are deciding whether or not to drive, they tend not to consider the externality that their choice to drive has on other drivers; so the roads get overused
(Some cities are looking at ways to solve this problem with congestion pricing – charging people to use the roads during peak hours, so that people internalize this externality.)

25. Public versus Private Goods
When private goods are owned publicly, they tend to be overutilized/overexploited
When public goods are privately owned, they tend to be underprovided/undersupplied
One the other hand, when public goods are privately owned, they face the opposite problem: they will be underprovided
suppose a town wants to build a park, but has to pay for it with voluntary donations
people weigh their donations only against their private gain from the park, ignoring the positive effect it has on everyone else
so people will donate very little, and a nice park will not be built in this way
this is exactly the free-rider problem we talked about earlier when we were considering bargaining
Example: 100 people, each with utility 10 sqrt( Park ) + $, where Park is the sum of everyones’ contributions.
When each person decides how much to contribute, he maximizes 10sqrt(X+x) – x, where X is what everyone else contributed
Solving the problem establishes that when contributions are voluntary, X+x=25 – total contributions will be 25, giving everyone an average utility of 10 sqrt (25) – 25/100 = 49.75
On the other hand, suppose everyone agreed to contribute $1 each; a park of quality 100 would be built, leading everyone to utility of 10 sqrt( 100 ) – 1 = 99
So obviously, the bigger park is Pareto-superior, even though only the small one could be built through voluntary private contributions.)
Recall our earlier story of a hops farmer and a brewery
When there was a single hops farmer, he could negotiate with the brewery to reduce pollution and breathe cleaner air
But if the dirty air affects lots of people, it becomes a “public bad” – and if each person tries to negotiate separately with the brewery to reduce pollution, they will reduce it less than efficiency would suggest.

26. Public versus Private Goods
When private goods are owned publicly, they tend to be overutilized/overexploited
When public goods are privately owned, they tend to be underprovided/undersupplied
Efficiency suggests private goods should be privately owned, and public goods should be publicly provided/regulated
Which brings us to the general rule proposed by Cooter and Ulen:
Efficiency suggests that private goods should be privately owned, and public goods should be publicly provided or regulated
Private ownership of private goods avoids overuse, and allows trade, leading to efficient allocations (Coase)
Public provision of public goods avoids undersupply
This also gives us another interpretation of the Demsetz example we did last week, of the development of property rights to land among Native Americans
What makes the case interesting is that land can be either a public or a private good, depending on the circumstances.
National forests can be thought of as a public good
they’re a good thing ecologically, they’re pretty to drive by and hike in, I can enjoy them even if other people are enjoying them, and it’s hard to exclude other people from getting their benefits.
On the other hand, 900 square feet in the middle of a city is a private good
if I build an apartment there and live in it, that precludes you doing the same; and as long as I get a door with a decent lock, I can keep you out.
Demsetz’s observation was that property rights over land developed among Native Americans as the fur trade became more important economically
We can interpret this in terms of public and private goods.

27. Public versus Private Goods
When private goods are owned publicly, they tend to be overutilized/overexploited
When public goods are privately owned, they tend to be underprovided/undersupplied
Efficiency suggests private goods should be privately owned, and public goods should be publicly provided/regulated
Before the fur trade, land was pretty much a public good
There was no shortage of animals, so hunting grounds were not particularly rivalrous – I could hunt on your land, and still leave enough game for you to hunt the next day
With the emergence of the fur trade came stronger incentives for hunting
Fur-bearing animals became more valuable, so were hunted more, so became scarce, so the land became a rivalrous good – the more I hunted, the less luck you would have hunting on the same land
So the emergence of the fur trade led to a sort of transition of land from being a public to a private good
Efficiency would then suggest that at the same time, it should go from being publicly owned (everyone could hunt on it) to being privately owned (one family might have exclusive rights to hunt in a particular area)
Which is pretty much what happened
So the general principle is, private goods should be owned privately, and public goods should be publicly provided/regulated
The book mentions the move in the 1990s toward deregulation/privitization as an example of correcting a situation of private goods being publicly supplied
services that did not involve externalities, and could therefore be supplied by private industry, but for historical reasons were being run by the government
in the 1990s, there was a big movement to dismantle or sell off government monopolies on trains, planes, and other services worldwide.

28. A different view: transaction costs
Clean air
Large number of people affected  transaction costs high
 injunctive relief unlikely to work well
Still two options
One: give property owners right to clean air, protected by damages
Two: public regulation
Argue for one or the other by comparing costs of each
Damages: costs are legal cost of lawsuits or pretrial negotiations
Regulation: administrative costs, error costs if level is not chosen correctly
Cooter and Ulen also point out that in many cases, either type of ownership, public or private, will involve some transaction costs, and the case can be made for one or the other by considering the magnitude of these costs
(In fact, we can think of public goods as goods where costs of privately transacting are too high – enforcement costs are high because the good is nonexcludable, or bargaining costs are high because so many people are affected)
Consider again the example of clean air
If there are lots of consumers affected by pollution from a factory, injunctive relief is unlikely to work well, since transaction costs tend to be high when there are lots of parties affected
However, there are still two possible ways to maintain clean air
One way is to grant property owners the right to clean air, but protected by damages; so that a factory, if it felt it worthwhile, could choose to pollute and pay damages
Alternatively, clean air could be viewed as a public good, and regulated by a government agency
We can argue for the efficiency of one system or the other by comparing the magnitude of these transaction costs
In the case of damages, the transaction cost here would be the legal cost of these lawsuits, or pretrial negotiations, including the cost to the court of calculating damages
In the case of regulation, this would involve the administrative costs of setting up and running a government agency to regulate air quality, and could run the risk of the level of pollution not being the one that is socially optimal
Whichever costs would be lower, suggests which system would be more efficient

29. what can be privately owned? what can an owner do?
how are property rights established?
what remedies are given?
So that gives a general answer to the question, What can be privately owned?
Efficiency says, private goods should be privately owned, public goods should not.
The next question, How do I establish rights to something?
we’ve seen a couple examples of this already: in whaling, and foxes (Pierson v Post)
there isn’t really a general theory behind it – we can see it as an extension of the question of what can be owned
we will come back to this and talk about it through some more applications
Which leaves us with the question, what can an owner do with his property?

30. What can an owner do with his property?
Priniciple of maximum liberty
Owners can do whatever they like with their property, provided it does not interfere with other’ property or rights
That is, you can do anything you like so long as it doesn’t impose an externality (nuisance) on anyone else
This leaves us with the question of, what can an owner do with his property?
which we’ve already discussed some in the context of nuisance law
Efficiency suggests that anything that makes me better off, and doesn’t affect anyone else, is efficient
And so efficiency suggests the principle of maximum liberty
maximum liberty suggests that owners can do anything with their property that does not interfere with other peoples’ property or rights
that is, you can do anything you like with your property as long as it doesn’t impose an externality on anyone else
once one person’s actions begin to affect another, we run into what we’ve already been looking at – nuisance law
In the textbook, they make the case that the common law approximates the rule of maximum liberty, although I’m a bit skeptical
Legislatures may pass laws that impose further restrictions on what people can do with their property
In general, these laws are only efficient if the behavior they are restricting causes an externality.

31. That’s it for today Up next: applications (Textbook ch. 5)
That wraps up what we want to say about property law in the abstract, that is, the broad principles that an efficient property law system would adhere to
Next week, we’ll examine how this all works in practice, by looking at a number of applications.
If you want to read ahead, that’s chapter 5 in the textbook