Property Class Notes 1/21/04


“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.




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.




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.


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