How do you lose property rights over something? 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 Parsleys 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. How do you lose property rights over something? 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 What can owners do with their property? Bequests and inheritance Rules that restrict transfers tend to prevent
owners from maximizing value of property Primogeniture? circumvention costs depletion costs Rule against perpetuities lives-in-being plus 21 years Generation-skipping rule Restricts foolish heirs Maximizes value across generations Exceptions to Property Rights General rule: injunctive relief against trespass (encourages bargaining)
fair use exception to copyrights Private necessity Inalienability Ploof v. Putnam (1908) Organs, sex, heroin, children, votes, human rights Unbundling Excessive unbundling may increase TC and lower overall value Pennsylvania land rights: Surface estate Mineral estate Support estate 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 Remedies for PR Violations
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 Common practice for public bads: temp. damages and injunction 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 Takings 5th Amendment: nor shall private property be taken for public use, without just compensation Eminent domain just compensation public use fair market value Channels govt into taxes rather than takings
public purpose? Poletown v City of Detroit (1981) Kelo v City of New London (2005) Regulations Lucas v South Carolina Coastal Council (1992) significant reduction in property value? 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 B a) b) c) d) e) cooper ate
coopera te selfish 10, 10 4, 8 The game has 8, no 4 unique solution selfish 6, 6 A and B have different dominant strategies Both parties will act selfishly The game has no Nash equilibrium B will cooperate if A behaves selfishly and act selfishly if A cooperates The weak version of the Coase theorem states that in the absence of transaction costs a) b) c)
d) e) resources will be put to identical uses independent of the initial assignment of rights. wealth effects are independent of the initial assignment of rights. parties will be compensated for any harms caused by externalities. resources will be allocated efficiently independent of the initial assignment of rights. all of the above. A railroad emits sparks which damage the farmers crops. The amount of damage depends on the number of trains run. If the railroad is not liable for the farmers damages and transaction costs are zero, the railroad will run: a) b) c) d) e)
Number of Trains Railroad Profits Total damages to farmers crops 1 $2 $2 2 5 4 3 9 6 4
10. 5 8 5 10 10 0 trains if the farmers profit (before deducting crop damage but allowing for other costs) is $15 4 trains 4 trains only if the farmers profit is more than $7 3 trains 3 trains only if the farmers profit is more than $7.50 Suppose a factory emits pollutants that injure adjacent homeowners. The law will promote efficiency if it a) b) c) d)
e) creates an incentive for the factory to relocate to a different location if the harm it causes is greater than its profits. 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. holds the factory liable for damages or enjoins it from polluting when the harm it cause is greater than its profits holds the factory liable if the homeowners located there first and holds the factory harmless if it located there first none of the above The statement that best describes the difference between protecting entitlements by property rights or by liability rules is: a) b) c) d)
e) the harm is greater from violating an entitlement protected by a property right than one protected by a liability rule. 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. the cost of enforcing a property right exceeds the cost of enforcing a liability rule. property rights are good against all trespassers while liability rules apply only to parties unwilling to compensate victims in voluntary transactions. a property right approach assumes that a voluntary transaction is economical whereas a liability rule approach assumes that transactions costs prevent a voluntary transaction
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