Property
Class Notes
“The
material we’re going to do now is fun if you don’t take it too seriously.” If we don’t care about foxes, why are we
spending time on this?
The law of capture
This
is one part of what we more broadly call “common pool” problems (“the tragedy
of the commons”). A great deal of
natural resources law deals with this common pool problem.
What’s
so important about private property? Let’s
talk about the economic basis of private property.
One
of the fundamental principles is that commonly owned property leads to waste. Economists don’t like waste! Economists would say that waste is
inefficient, and they use the word “inefficient” to mean bad and “efficient” to
mean good. But “good” means “it
increases the wealth of society”. “Bad”
means “decreasing the wealth of society”.
Let’s
accept as fact that wealth is a value
and if we increase wealth that’s desirable.
Our goal is to promote wealth. We
can certainly argue about this. We might
say that wealth without an equitable system to distribution isn’t a value, but
we won’t get into that here.
In eminent
domain, we looked at what property is and what it means to be the owner of
property. We found out that title is relative.
Now
we’re going to look at some ways to acquire property. We’re going to look at a new concept that’s
more complicated than we might think: what does it mean to say that someone is
in “possession” of property.
Possession
Braunstein
steals some pencils. June’s name isn’t
on it. He doesn’t have a receipt. He’s been using it for a long time, but how
does Braunstein know he didn’t steal it?
We
don’t want people fighting over things as a matter of public policy. But why don’t we make June prove that he owns
it? What if he had his name on it? Or what if it goes back to whoever’s name is
on it?
Why
do we say that possession is nine-tenths of the law? Ownership is almost impossible to prove, at
least ownership of personal property.
Braunstein could grab my computer and ask me to prove I’m the
owner. I couldn’t really do anything to
prove I own it, but I could only prove that I had possession of it for some
time.
The
problem is that if we had a system that only protected ownership but not
possession, people would fight each other all the time to gain possession and
then make each other prove ownership.
What we do instead is protect possession. We protect it by saying: “First in time, first in right.” Prior
possessors win out over subsequent possessors.
We
do this for very practical, instrumental reasons. We want to protect peace, order, and the
certainty of knowledge of what you own.
It’s easy and practical to prove that you possessed some property before
somebody else did. So the prior
possessor wins.
Possession
is a difficult concept. But it’s a lot
easier to do that than to try to establish ownership. So we protect possession as a proxy for ownership. But there is relativity of title.
Braunstein could be first compared to Joe, but then someone else might
be second compared to Jane, and so Jane would have better title than Braunstein
who would have better title than Joe.
Getting
possession has important legal consequences.
Whatever possession means in terms of a wild animal, getting possession
is important because your possession will be protected against the claims of
others.
Externalities
This
isn’t a difficult concept, but it’s more limited than you might think when you
first think about it.
There
are two kinds of externalities: an external
cost and an external benefit.
External cost
An external cost is a cost that an actor
imposes on others but which the law doesn’t force the actor to include in their
personal cost-benefit analysis.
Say
an electrical company is deciding what kind of coal to buy. They will tend to buy the cheapest, dirtiest
kind of coal, which will be more efficient for them but more destructive to
other people’s property rights. If we
can’t create private property rights in clean air, then we can regulate
polluters instead. We try to internalize the external cost: we force
them to take that cost into account.
We
could either say: Okay, you can burn dirty coal, but we’ll build a fence around
your property that will keep the pollution on your property. But we don’t have the technology to do
that. So we use regulation instead to
force the polluters to pay fines if they pollute. This changes the incentives of the
polluters. If the fine is $1 million,
then the polluter will only keep burning cheap coal if that action saves them more than $1 million, in which case they’ll
gladly pay the fine.
Notice
the parallel to eminent domain: we want to internalize the external costs of government
appropriation of property. By making the
government pay when it takes property, we force it to do a cost-benefit
analysis that takes into account the external costs.
One
of the cheapest ways to internalize externalities is through the institution of
private property. If it’s private
property, you tend not to waste it because
it’s yours.
External benefit
An external benefit is a benefit than an
actor provides to others but that the law doesn’t force the actor to take into
account in deciding whether or not to continue providing the benefit. The creator of the benefit cannot force the
recipients to pay, which means they may not have incentive to continue to
provide the benefit.
Take,
for example, a property owner who keeps up a very nice garden. Maybe it provides a benefit to the neighbors
and even raises their property values.
The neighbors don’t pay anything for the garden, yet they get a benefit
from it.
Another
example is a group of neighbors who had houses surrounded by a farm field. They thought it was great, but the owner of
the farm field turned around and sold it to Kroger, which built a huge
distribution center. The owner of the
farm field had been providing an external benefit to the homeowners which the
homeowners weren’t paying for. Kroger,
on the other hand, offered the farm owner a lot of money for the field.
Maybe
the neighbors valued that land in its natural state more than Kroger did! Maybe if the neighbors could have gathered
together and taken up a collection they would have been willing to offer the
farmer more than Kroger for the land.
But there’s a collective action problem there and higher transaction
costs than there would be for Kroger.
So
the external benefit remains an external benefit with no way to internalize it. Even though the neighbors value the land more
than Kroger, Kroger is still going to buy it and turn it into a distribution
center. This is a bad result! There is less wealth in society!
How
do we get around this? Well, we can use zoning.
We may require that all land in a certain area be used for “compatible
purposes”.
So
this is an example where private property rights might work, and the technology isn’t a problem, but the transaction
costs are so high that while it could work in theory, it won’t work in
practice. Therefore, we substitute regulation
for private property.
Externalities
tend to lead to inefficient results. Private
property tends to reduce (or internalize)
externalities.
We
want land to be used in its most
productive way. Therefore, we want
people to take into account all the
consequences of their decisions when they choose how to use their
land. If the landowner can’t be forced
to pay the costs imposed on others by, for example, burning cheap coal, they may
do that irrespective of the fact that the harm being caused to others is greater than the profit being made by
burning cheap coal. Thus, the wealth of
society is decreased.
On
the other hand, maybe burning cheap coal is
the most productive activity. With
different incentives, we might not get different behavior, but we will be able
to compensate the people harmed by the external cost.
The
difference between a bribe and a fine is simply a matter of who has the
property rights.
The Coase
theorem
It’s
simple! What he said, in essence, is
that it doesn’t make any difference from a social perspective how property rights are allocated. That’s not to say that there isn’t justice or
injustice in how property rights are allocated.
But if we accept that wealth is a value (the more wealth the better),
then it doesn’t make a difference how property rights are initially allocated,
because if transaction costs are low, property rights will always end up in the
hands of the person who can use them most productively.
For
example, consider a cave that could either be used for growing mushrooms or
storing bank records. Does it matter
whether the bank or the mushroom grower gets it first? Coase said no,
because whoever values it most will end up with it. That is to say that if the mushroom grower
can make more money growing mushrooms than the bank can make storing records
there, then the mushroom grower will buy the cave from the bank. But if it’s worth more to the bank than to
the mushroom grower, then the bank will buy it from them.
On
the other hand, whoever gets it first will end up with some money. But we have no reason to prefer one party
over another.
That’s
why bribes and fines have the same effect.
It doesn’t make a difference whether we say AEP has the right to pollute
and the people of Vermont must bribe them to stop or, on the other hand, we say
AEP has no right to pollute and they must bribe the people of Vermont or pay a
fine.
That’s
not to say that everything can be traded.
You can’t give up your own right to bodily integrity and sell the right
to kill you.
Assuming that bargaining is
free, property rights will end up in the hands of the person who values them
the most. We like this because it means property rights
will be put to their most productive use.
Obviously,
there are transaction costs. “All of you are studying very hard to become transaction costs.” There are all sorts of transaction
costs. You have to figure out who’s
lying and telling the truth. You need to
ferret out free riders.
Sometimes
the transaction costs are more than the benefit you could get if you entered
into the transaction.
Coase goes on to say: When markets don’t
work, you ought to allocate property rights in the way that the market
would if it did work. In other words, we should give the property
right to the person who values the property the most.
The tragedy of the commons
The
idea of a commons is that everybody owns the land together. Say we have a field and there are ten
villagers. None of them owns the exclusive right to use the field, but
they can all use it in common with each other.
Say its only purpose is to graze cattle.
What’s
going to happen? Say there are ten
guys. They’re going to overgraze the
field! When they’re finished, the field
may be totally worthless! How come? Everybody looks at the field and they say: “What’s
the benefit to me if I put another cow out here? It’s the profit from the cow. What’s the cost to me if I put another cow
out there? If I consider the problem of
overgrazing, then the cost is very high and I shouldn’t put the cow out. But all the other villagers might graze their
cows anyway. Therefore, the cost to me
is really zero. It’s true I’m causing some harm, but that
harm will occur no matter what I do. If
I don’t graze more cows, the other guys will graze more cows.”
The
worse the field gets, the faster they’re going to put cows on the field until
finally it can’t support any cattle at all.
The villagers “rush headlong to their own destruction!” Why?
The
commons created a series of misincentives.
It created an incentive to
consume and a disincentive to
conserve. That’s because even if I conserve, I have no assurance that my neighbors will conserve.
This
is a simple case. With a small group of
people, they may be able to overcome this problem.
But
now let’s say that each of the ten villagers owns one of ten parcels, privately. Each villager has the right to use the parcel
and exclude others. Now
the calculation changes. You have
to weigh the profit from grazing another cow against the cost of failing to
conserve.
This
problem comes up in many circumstances.
Global warming is an example of this problem. It causes problems with oil and gas as well.