Study Guides (238,413)
Canada (115,131)
Economics (558)
ECO320H1 (22)

ECO320 Midterm

13 Pages
Unlock Document

University of Toronto St. George
Donald Dewees

Property Law The law of property supplies the legal framework for allocating resources and distributing wealth. Economic theory tries to predict the effects of alternate forms of ownership, especially the effects on efficiency and distribution. Property is a bundle of rights over resources that the owner is free to exercise and whose exercise is protected from interference by others  Not immutable, and can change from generation to another Bargaining theory  Ability to negotiate  Process of bargaining:  Establishing the threat value/go-it-alone value/fallback position  The payoffs to the parties in the noncooperative solution  Must receive at least the threat value or no advantage in cooperating  Determining the cooperative surplus  the value created by moving the resource to a more valuable use  Agreeing on terms for distributing the surplus from cooperation  The most efficient outcome is when the “joint profits” (total profit) are greatest  Law is unnecessary and undesirable where bargaining succeeds and that law is necessary and desirable where bargaining fails  Bargaining occurs through communications between parties  Transaction costs: costs of communicating/ all impediments to bargaining -> cost of exchange  Search costs  Finding someone who wants to buy what you are selling or sell what you are buying  Tend to be high for unique goods or services and low for standardized goods or services  Bargaining costs  Negotiation process  When parties know the threat values and cooperative solution (common knowledge situation), bargaining games are easier to solve  Otherwise, information must be converted into public information  Efficient property law requires rights that are clear and simple.  Unclear ownership rights are a major obstacle to cooperation and a major cause of wasted resources  Bargaining becomes more costly and difficult as it involves more people especially if they are dispersed from one another  Costly to anticipate many contingencies that can arise to change the value of the bargain  Other obstacles  Hostility: parties to dispute may have emotional concerns that interfere with rational agreement  Lawyers can facilitate negotiations  Negotiators behave unreasonably (ex. Overreaching)  Bargaining strategy with miscalculations about other party  Enforcement costs  Arises when agreement takes time to fulfill  Monitoring and punishment  Lower when violation of agreement are easy to observe and punishment is cheap to administer Why are ownership rights established?  To encourage production, discourage theft and reduce the costs of protecting goods Coase Theorem  All other things equal, we would like the legal rule to encourage efficiency  Allocate the right to the party who values it the most  When bargain succeeds, the legal allocation of rights does not affect efficiency  The courts must compare the relative valuations of the rights by the two parties  When transaction costs are high enough to prevent bargaining, the efficient use of resources will depend on how property rights are assigned  Efficiency in the long run depends on the ability of private bargaining to accommodate any additional costs of altering resource use over long periods as relative prices and opportunity costs change Normative Coase and Hobbes Theorems  Some transaction costs are endogenous to the legal system in the sense that legal rules can lower obstacles to private bargaining  Lowering transaction costs “lubricates” bargaining  Normative Coase Theorem: Structure the law so as to remove the impediments to private agreements  Normative Hobbes Theorem: Structure the law so as to minimize the harm caused by failures in private agreements  Allocate property rights to the party who values them the most  Makes exchange of rights unnecessary and thus saves the cost of a transaction Efficiency requires the courts to do whichever is cheaper:  If information cost of determining who values right most is less than transaction cost -> allocate the legal right initially to the person who values it the most  If transaction cost is less than information cost -> strictly follow precedent How property rights are initially assigned  Endowment: initial assignment of ownership rights  endowment effect is the divergence between willing to buy and willing to sell price of a good  Rule of first possession  First in time, first in right  Focuses on a few simple facts so relatively easy and cheap to apply  Creates incentives for people to preempt others by making uneconomic investments to obtain ownership (invest too much too early)  Economic efficiency is concerned with production of wealth, not the transfer of it  Investments for the sake of transferring wealth are socially inefficient  Social efficiency requires investors to invest in a resource until the marginal cost equals the marginal increase in productive value  However, rule of first possession causes people to invest until MC = MB of increased production PLUS transferred ownership  Rule of tied ownership  Ties ownership to settled property  Avoids preemptive investment so long as the ownership claims in the resource to which the fugitive property is tied are already established Public vs Private The maximum sustainable yield is the largest yield sustainable in the long run. To maximize the yield, the application of labor and capital must equal until the marginal product of labor and capital is zero An economically rational society will privatize a resource at the time where boundary maintenance costs less than the waste from overuse of the resource Public and Private Property  Labor was much more productively employed in private  Tragedy of the commons: open access to a congested natural resource has a remorseless logic with a terrible ending  Government can intervene to prevent the destruction of a resource  Public ownership substitutes structured bargaining with collective-choice principle (such as majority rules) Private ownership assigns each resource to a person who owns it, and the owner can control access by excluding users  Works well when production and utility functions are separable or externalities affect few people who can bargain with each other  Private owners bear the cost of boundary maintenance Public ownership  Open access  Everyone can use a resource and no one can exclude anyone from using it  Nothing is spent on boundary maintenance  Works well when resource is uncongested as congestion causes tragic overuse  Political control  Lawmakers/regulators impose rules concerning access  Unanimous consent  No one allowed access unless everyone agrees  Causes tragic underuse Verifying ownerships  Balance the impediments to commerce created by uncertain ownership against the cost of maintaining a system of verification  Law must allocate the risk that stolen goods may be transferred in good faith  For efficiency, the liability should fall on the party who can verify ownership at least cost (buyer or seller) What kinds of things may be privately owned?  Efficiency requires that rivalrous and excludable goods should be controlled by individuals or small groups of people whereas nonrivalrous and nonexcludable goods should be controlled by a large group of people  Private good use and consumed by the party who values it most  Eliminate free riders problem for public goods What may owners do with their property? Common law approximates a legal system of maximum liberty – allows the right to do anything with their property as long as it does not interfere with those of others Remedies for the violation of property rights The remedies to common law court are either legal or equitable  Principal legal remedy is the payment of compensatory money damages  To “make the plaintiff whole”  “backward-looking” – compensate for harm already suffer  Equitable relief consists of an order by the court directing the defendant to perform an act or to refrain from acting in a particular manner (injunction)  “forward-looking” – prevents defendant from inflicting harm in the future Efficient solution depends on number of affected people  Private-public distinction in economics rests on a continuum describing the number of people affected by someone’s actions. As number affected increases, a vague boundary is crossed separating “private” from “public”  Where there are obstacles to cooperation (i.e. high transaction costs), the more efficient remedy is the award of compensatory money damages  When compensatory damages are perfect, they restore the victim to the same utility curve as he/she would have enjoyed without the harm. Therefore the victim cannot be any worse off and is indifferent.  However the injurer may be better off and cannot be worse off (provides them the choice to choose to pay to damage or to abate)  However, need to take into consideration the information available to the court:  If the court knows which party values the right relatively more then injunctive remedy  right remains with the party initially assigned to as no involuntary exchange  If the court knows how much one party values the right absolutely then damages remedy  The party without the right will take it if he values it more than the other party  Efficient involuntary transactions will ensure the one who values it most will result in it Where there are few obstacles to cooperation (i.e. low transaction costs), the more efficient remedy is the award of an injunction against the defendant’s interference with the plaintiff’s property  Parties will reach a cooperative agreement and do what is efficient  Injunction helps lubricate bargaining by defining clear and simple rights to give the parties a clear position from which to bargain.  The court need not undertake the difficult job of computing damages.  In light of problems of information  Injunction is more efficient when the plaintiff can estimate the defendant’s compliance costs more readily than the defendant can estimate the plaintiff’s damages Types of Damages  Temporary damages: plaintiff receives compensation for the harms the defendant has inflicted on him or her in the past. If harm continues, the plaintiff must return to court to seek additional damages.  High transaction costs for dispute resolution  Reductions in future harms = reductions in liability  Incentives for injurers to continually adopt technical improvements to reduce external costs  However, must be balanced against the potentially higher administrative costs of temporary awards Permanent damages: one lump sum compensation for past harms plus the present  discounted value of all reasonably anticipated future harm. Extinguishes claims for past and future harms at the level specified in judgement. Estimation of future harms suffers from error and thus high error costs  By paying, the injurer “purchases” the right to external harm up to the amount stipulated in the judgment  No incentive for injurers to adopt technical improvements reducing external costs below the level stipulated Transaction costs of resolving disputes, whether by trial or settlement, are low when liability is certain and damages are easily measured. Error costs are high when innovation improves abatement technology and changes the understanding of harms caused by externalities. Thus:  Temporary damages more efficient given easily measured damages and rapid innovation  Permanent damages more efficient given costly measurement of damages and slow innovation Public ownership of a private good typically results in its misallocation  Used by someone other than the person who values it the most Private ownership imposes various transaction costs of private enforcement and exchange Public ownership imposes transaction costs in terms of public administration and collective decision- making Free-rider problem prevents private bargaining solutions to the problem of externalities or public bads On distribution  Redistribution ends  Most efficient means of redistribution uses up the least value to accomplish the transfer  Progressive taxation more efficient than by reshuffling property rights  Imprecise targeting, unpredictable consequences, high transaction costs and large distortions in incentives  Redistributive means Intellectual property law  Patent system establishes ownership rights to inventions and other technical improvements  Copyright system: grants ownership rights to authors, artists, and composers  Trademark system: establishes ownership for distinctive commercial marks or symbols  Trade secrets: business practices in which commercial enterprises have a property interest Without legal intervention, competition can quickly destroy profits from innovation which results in too little innovation Information has two characteristics:  Credibility  Nonappropriability: information is costly to produce and cheap to transmit  Nonrivalrous and nonexcludable -> similar to public goods Unregulated market will undersupply creative works that embody ideas, such as science, inventions, books and paintings  Four remedies:  State to supply or subsidize art and science  Charitable contributions  Trade secrets protection  Intellectual property law Intellectual property  Provides the right to exclude others from using them and thus gains the power of exclusion to extract a price from other users  Rewards creator and results in more innovations and faster growth - "dynamic efficiency"  Encourages dissemination which results in wider user - "static efficiency"  Patents and copyright are temporary monopolies  Fee that maximizes profits for the owner is much larger than optimal fee  Results in too high user fees and too low dissemination  Deadweight loss  Innovation-dissemination tradeoff  Patents  Securing for limited time to inventors the exclusive property rights to their discoveries  Duration: number of years  Optimal life of a patent strikes the best balance between encouraging creativity and discouraging dissemination  As duration increases, society suffers more costs from less dissemination  Responds by searching for substitutes  Breadth: how similar another invention can be without infringing on the patent  Broader for those with little stand-alone value and narrower for those with large stand-alone value  20-year monopoly on the use of the invention  The holder may license the use of the patent in exchange of a royalty payment  Use of a patent without permission may lead to action for infringement and both injunctive and legal relief  Copyright  Grants writers, composers, and other artists a property right that is an original expression  Tracing costs" ensuring that own idea's are original to reduce chance of unintentional infringement  Trademark  Enable company to build up reputation for high quality and credible advertising  Encourages competition and do not imposing tracing costs Public externalities typically have characteristics of nonrivalry and nonexcludability  Harmful public externalities are also called “public bad” Utilities of individuals are interdependent because the consumption of the bad good by individual A is an argument in B’s utility functions. The presence of a variable in B’s utility function bearing the superscript a indicates an externality u = u (x ,1 ,x2)a3 Externality – the benefits or cost conveyed outside of a market regardless of whether the parties have agreed  Not priced  Supplier lacks incentives to supply the efficient quantity  When externality gets priced, its supply is channelled through a market which is called internalizing the externality  Through bargaining, externality might be internalized  However if public externality, due to the number of affected people, transaction cost of bargaining is presumably prohibitive, so the externality cannot be internalized by a private bargain In property law, a harmful externality is called a nuisance. Graphing Externalities (See page 180-181) Tort Law  Intentional tort: injurer intentionally inflicted the harm on the victim  Tort law concerns relationships among people whom transaction costs of private agreements are relatively high  Induce injurers and victims to internalize the costs of harm that can oc
More Less

Related notes for ECO320H1

Log In


Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.