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
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