ECMC37 - Chapter 4.docx

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University of Toronto Scarborough
Economics for Management Studies
Michael Krashinsky

ECMC37 – Notes Chapter 4 – An Economic Theory of Property The Law of Property – Provides legal framework for allocating resources and distributing wealth, allowing owners with complete control over resources. The Rule of First Possession – The first party to use an unowned resource acquires a claim to it. The Legal Concept of Property – “Property is a bundle of rights. Rights describing what they can or cannot do, use, develop, improve, transform, consume, deplete, destroy, sell, donate or exclude others from their property.”  Three rights in the bundle: o Rights are impersonal – attached to properties and not individuals o Free to exercise the right over his or her property (ie. A farmer can either cultivate his or her crop or let it wither and the law will be indifferent) o External persons are forbidden to interfere with owner’s exercise of his or her right. Bargaining Theory – There are individuals perceived values from benefiting from property, one individual may value a used 1954 Chevy as $3000 while a collector may value it at $4000. This leaves room for bargaining and the optimal point would be somewhere between the two figures. The parties can both help each other as we move a property from someone who values it less to someone who values it more.  Cooperative Surplus – Value created by moving such property or resources to a more valuable use. ie. Bargaining theory  Bargaining & negotiations are a cooperative game relative to noncooperative games such as prisoners dilemma.  Dependent on both parties reaching an agreement in which how the value is divided between both parties.  Threat value – Value of the parties going through in the noncooperative solution. Value of both parties if deal is not made.  Three step process : Establish the threat values -> determine contributed surplus -> agreeing on terms for distributing the surplus from cooperation An Economic Theory on Property Law – Laws are not required when bargaining is succeeding and would be an unnecessary tool to invoke deals to be made, likewise can be said when bargaining fails, then laws created will allow the cooperation of parties to reach a cooperative surplus. The Coase
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