EC 410 _ Property Overview University of Alabama EC 410
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Module
EC 410
Institution
EC 410
EC 410 ~ Property Readings
Cooter/Ulen ~ Chpater 4: An Economic Theory of Property
Cooter identifies four fundamental questions of property law:
o How are ownership rights established?
H2O: prior appropriation vs. riparian rights
prior appropriation: first in time - first in right
...
ec 410 property readings cooterulen chpater 4 an economic theory of property cooter identifies four fundamental questions of property law o how are ownership rights established h2o prior
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EC 410 ~ Property Readings
Cooter/Ulen ~ Chpater 4: An Economic Theory of Property
Cooter identifies four fundamental questions of property law:
o How are ownership rights established?
H2O: prior appropriation vs. riparian rights
prior appropriation: first in time - first in right
o Under the doctrine of prior appropriation whoever uses a
particular river water first acquires a right to continued
enjoyment of the same over and above rival claimants who
start consuming later. Subsequent users can utilize only
the remaining water.
o Here downstream owners suffer a distinct disadvantage
since those upstream can appropriate as much water as
they need for beneficial purpose, of course, without causing
water pollution or without contaminating the river.
o Western States follow prior appropriation principles for
use of river and stream waters.
riparian rights : water allocated to those who possess land along
its path
o Under the riparian principles landowners, whose property
is adjoining a stream, can use its water.
In lean seasons when demand exceeds supply,
water is rationed out among the different
landowners in proportion the frontage on the water
source.
These rights to water cannot be sold or transferred
independently except along with the adjoining land.
o Riparian water claims cover the right to swim, boat, fish
and navigate on the water and make other beneficial uses
of the same.
o The courts allow riparian owners to consume water for
pollution control, preservation, recreational, and aesthetic
purpose. Riparian owners enjoy protection against water
pollution or contamination of water upstream.
o The riparian theory is followed in the eastern states of the
United States.
o What can be privately owned?
foot traffic may constitute a trespass whereas radio frequencies passing
over the same land may not
o What may owners do with their property?
nuisance law creates remedies for unreasonable use
o What are the remedies for the violation of property rights?
damages
injunctions
, The Legal Concept of Property
o From a legal viewpoint, property is a bundle of rights.
These rights describe what people may and may not do with the resources
they own: the extent to which they may possess, use, develop, improve,
transform, consume, deplete, destroy, sell, donate, bequeath, transfer,
mortgage, lease, loan, or exclude others from their property.
These rights are not immutable; they may, for example, change from one
generation to another.
But at any point in time, they constitute the detailed answer of the law to
the four fundamental questions of property law listed above
o Three facts about the bundle of legal rights constituting ownership are
fundamental to our later understanding of property.
First, these rights are impersonal in the sense that they attach to property,
not persons.
Any person who owns the property has the rights.
In this respect, property rights are different from contract rights.
Contract rights are personal in the sense that one person owes
something to another person.
Second, the owner is free to exercise the rights over his or her property, by
which we mean that no law forbids or requires the owner to exercise those
rights.
In our example at the beginning of the chapter, Parsley can farm
his land or leave it fallow, and the law is indifferent as to which he
chooses to do.
Third, others are forbidden to interfere with the owner’s exercise of his
rights.
If others interfere, the court will enjoin them to stop—the court
will issue an order that they must stop interfering on pain of
punishment for contempt of court.
Thus, if Parsley decides to farm his land, Potatoes cannot put
stones in the way of the plow.
In other words, property ≈ a bundle of impersonal rights that the owner is
free to exercise without interference.
o Bargaining Theory
To develop an economic theory of property, we must first develop the
economic theory of bargaining games. The elements of bargaining theory
can be developed through an example of a familiar exchange—selling a
used car.
Consider these facts: Adam, who lives in a small town, has a 1957
Chevy convertible in good repair. The pleasure of owning and
driving the car is worth $3000 to Adam. Blair, who has been
coveting the car for years, inherits $5000 and decides to try to buy
the car from Adam. After inspecting the car, Blair decides that the
pleasure of owning and driving it is worth $4000 to her.
, According to these facts, an agreement to sell will enable the car to pass
from Adam, who values it at $3000, to Blair, who values it at $4000.
The potential seller values the car less than the potential buyer, so
there is scope for a bargain.
Assuming that exchanges are voluntary, Adam will not accept less
than $3000 for the car, and Blair will not pay more than $4000,
so the sale price will have to be somewhere in between.
A reasonable sale price would be $3500, which splits the
difference.
The logic of the situation can be clarified by restating the facts in the
language of game theory.
The parties to the kind of game represented by this example can
both benefit from cooperating with each other.
To be specific, they can move a resource (the car) from someone
who values it less (Adam) to someone who values it more (Blair).
Moving the resource in this case from Adam, who values it at
$3000, to Blair, who values it at $4000, will create $1000 in
value.
The cooperative surplus is the name for the value created by
moving the resource to a more valuable use.
Of course, the share of this surplus that each party receives
depends on the price at which the car is sold.
o If the price is set at $3500, each will enjoy an equal share
of the value created by the exchange, or $500.
o If the price is set at $3800, the value will be divided
unequally, with Adam enjoying 4/5 or $800, and Blair
enjoying 1/5 or $200.
o Or if the price is set at $3200, Adam will enjoy $200 or 1/5
of the value created, whereas Blair will enjoy $800 or 4/5.
o To apply game theory to this example, let us characterize the possible outcomes
as a cooperative solution and a noncooperative solution.
The cooperative solution is the one in which Adam and Blair reach
agreement over a price and succeed in exchanging the car for money.
The noncooperative solution is the one in which they fail to agree on a
price and fail to exchange the car for money.
o To analyze the logic of bargaining, we must first consider the consequences of
noncooperation.
If the parties fail to cooperate, they will each achieve some level of well-
being on their own.
Adam will keep the car and use it, which is worth $3000 to him.
Blair will keep her money—$5000—or spend it on something other than
the car.
For simplicity, assume that the value she places on this use of her
money is its face value, specifically, $5000.
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