Cooter and Ulen

 
I. 4 Fundamental Questions of Property Law
a. How are ownership rights established?
b. What can be privately owner?
c. What may owners do with their property?
d. What are the remedies for the violation of property rights?
II. Legal Concept of Property
a. Property is a bundle of rights
b. 3 fundamental facts about property rights
i. Impersonal
ii. Owner is free to exercise rights over property
iii. Others are forbidden to interfere in exercise of property rights
II. Bargaining Theory
a. Process of bargaining
i. Establishing the threat values (payoffs in non cooperative solution)
ii. Determining the cooperative surplus (difference in value between cooperation
and non-cooperation)
iii. Agreeing on terms for distributing the surplus from cooperation
II. The Origins of the Institution of Property: A Thought Experiment
a. The same bargaining model used to explain the sale of a secondhand car can be applied
to this thought experiment, in which a primitive society develops a system of property
rights. First, a description is given of what people would do in the absence of civil
government, when military strength alone established ownership claims. That situation—
called the state of nature—corresponds to the threat values of the noncooperative solution,
which prevails if the parties cannot agree. Second, a description is given of the advantages
of creating a government to recognize and enforce property rights. Civil society, in which
such a government exists, corresponds to the game’s cooperative solution, which prevails if
the parties can agree. The social surplus, defined as the difference between the total
amount spent defending land in the state of nature and the total cost of operating a
property-rights system in civil society, corresponds to the cooperative surplus in the game.
Third, an agreement describes the methods for distributing the advantages from
cooperation. In the car example, this agreement arises from the price that the buyer offers
and the seller accepts. In the thought experiment, this agreement arises from the social
contract that includes the fundamental laws of property.
II. An Economic Theory of Property
a. The Coase Theorem
i. When transaction costs are zero, an efficient use of resources results from
private bargaining, regardless of the legal assignment of property rights
ii. When transaction costs are high enough to prevent bargaining, the efficient use
of resources will depend on how property rights are assigned
b. The Elements of Transaction Costs
i. Search costs
1. Tend to be high for unique goods and services but low for common ones
ii. Bargaining costs
1. Costly when it requires turning a lot of private information into public
information
 2. Bargaining games are easier to solve when the threat values are public
knowledge
3. Bargaining becomes more costly and difficult as it involves more parties,
especially if they are dispersed from one another
4. The need to anticipate contingencies increases bargaining costs
5. Hostility between the parties increases bargaining costs
ii. Enforcement costs
1. Arise when an agreement takes time to fulfill
2. Low when violations of the agreement are easy to observe and
punishment is cheap to administer
b. The Normative Coase and Hobbes Theorems
i. Normative Coase Theorem - structure the law as to remove the impediments to
private agreements
ii. Normative Hobbes Theorem: structure the law as to minimize the harms caused
by failures in private agreements
1. Law should be designed to prevent coercive threats and to eliminate the
destructiveness of disagreement
b. Lubricate or Allocate? Coase vs. Hobbes
i. Law can lubricate private exchanges by lowering transaction costs. Law can also
allocate rights to the party who values them most
ii. What efficiency requires
1. If transaction costs are greater than information costs, the lawmaker
should allocate the legal right initially to the person who values it the most
2. If information costs are greater than transaction costs, leave the parties
as they are (strictly follow precedent)
II. How Are Property Rights Protected?
a. Damages and Injunctions
i. Damages - legal remedy
1. Backward looking
2. Usual remedy for broken promises and accidents
3. Usual remedy in law of contracts and tort
4. "liability rule"
ii. Injunction - equitable relief
1. Forward looking
2. Usual remedy for appropriation, interference, and trespass
3. Usual remedy in law of property
4. "property rule"
b. Laundry and Electric Company: An Example
i. If transaction costs equal zero and successful bargaining can cure inefficient
laws, what the law affects is the distribution of the cooperative product, which affects
bargaining
b. Efficient Remedies
i. When transaction costs preclude bargaining, a switch in remedy from injunction
to compensatory damages makes the victim no worse off, whereas the injurer may be
better off and cannot be worse off
ii. Injunction is the superior remedy when transaction costs are low - bargaining
tends to succeed when the legal rights of the parties are clear and simple. Injunction is
 traditionally regarded as clearer and simpler than damages, because the
determination of damages by courts can be unpredictable
iii. Calabresi and Melamed (traditional prescription in law and economics):
1. when there are few obstacles to cooperation (low transaction costs),
the more efficient remedy is to enjoin the defendant's interference with the
plaintiff's property
2. Where there are obstacles to cooperation, (high TC), the more efficient
remedy is to award compensatory damages
ii. When transaction costs obstruct bargaining, what the court should do depends
on what it knows -->refinement of Calabresi and Melamed
1. When transaction costs preclude bargaining, the court should protect a
right by an injunctive remedy if it knows which party values the right relatively
more (even if it does not know how much either party values the right
absolutely). Conversely, the court should protect a right by a damage remedy if
it knows how much one of the parties values the right absolutely (even if it does
not know which party values the right relatively more)
II. What Can Be Privately Owned? Public and Private Goods
a. Efficiency requires that private goods be privately owned and public goods be publicly
owned
b. Public ownership of a private good typically results in its misallocation, by which we
mean that it is used or consumed by someone other than the person who values it the most
c. Private ownership imposes various transaction costs of private enforcement and
exchange. Public ownership imposes transaction costs in terms of public administration and
collective decision making
i. From this perspective, the choice between private and public ownership should
depend on whether the costs of private enforcement and exchange are more or less
than the costs of public administration and political bargaining.
II. What May Owners Do With Their Property
a. General rule in common law: any use is allowed that does not interfere with other
peoples’ property or other rights
II. On Distribution
a. Many economists believe that redistributive goals can be accomplished more efficiently
in modern states by progressive taxation than by reshuffling property rights
b. Several other reasons also make taxation superior to property law as a means of
redistribution. First, the income tax precisely targets inequality, whereas property law relies
on crude averages.
c. A second objection is that reshuffling property rights may not really have the distributive
effects anticipated.
d. Redistribution by property law distorts the economy more in the long run than does
progressive taxation.
 
X. Philosophical Concept of Property
a. Utilitarianism
i. Utilitarians measure the value of a good or an act by the net pleasure or
satisfaction that it creates. For utilitarians, the purpose of the institution of property is
to maximize the total pleasure or satisfaction obtained from material and other
resources
 ii. The utilitarian approach makes a person’s claim to property tentative. It can be
taken from him in principle if the beneficiaries of the expropriation gain more in utility
than the owner loses
b. Distributive Justice
c. Liberty and Self-Expression
i. Private property has thus been viewed by some philosophers as a bulwark
against the dictatorial authority of governments
ii. It has been argued, for example, that capitalism was deliberately invented to
thwart absolutism by depriving the king of economic power.
iii. Another connection between property and liberty focuses on individual
selfexpression. Hegel stressed the idea that people, through their works, transform
nature into an expression of personality, and, by doing so, perfect the natural world
b. Conservatism and the Origins of Property
i. Political conservatives like Burke and Hayek idealize forms of social order that,
like the common law of property, evolve over time in much the same manner as the
myriad species of life. Like organisms, social forms are, in this view, subject to the
rules of natural selection. The conservative philosophers condemn institutions
imposed on us by planners, engineers, politicians, and other societal decision makers
for much the same reasons that environmentalists condemn actions that interfere
with an area’s environmen
Topics in the Economics of Property Law
I. What can be privately owned? (private vs public goods. Private goods i.e. exclusive and rival
should be privately owned)
a. Information Economics
i. Information has 2 characteristics that make transactions in information different
from transactions in ordinary private goods
1. Credibility
2. Nonappropriability- producers have difficulty selling information for
more than a fraction of its value
3. Remedies for undersupply of information due to market failure
a. Government to supply or subsidize art and science
b. Charitable contributions
c. Trade secrets protection - non disclosure agreements
i. Survey research shows that trade secrets protection is
not very effective in silicon valley
b. Intellectual property law
b. Intellectual Property
i. Patents, Broad or Narrow?
1. Breadth - refers to how similar another invention can be without
infringing on the patent for the original invention.
2. Duration - refers to the number of years between a patent’s registration
and its expiration.
3. Too much patent
4. Conclusion on patents
ii. Copyright
iii. Trademark
b. Organizations as property
i. Organization - a structure of offices and roles capable of corporate action.
 ii. the market for organizations tends to move organizations from owners who
value them less to owners who value them more
iii. When an organization is owned, the owner usually has the power to restructure
its offices and roles, and change the people who fill them. The alternative to
ownership is often governance. A system of governance involves politics and collective
control. Ownership is usually best for pursuing wealth, and governance is usually best
for pursuing more diffuse goals.
iv. the primary function of corporations is to create wealth by pursuing profits. The
market for corporations helps to keep management focused on this task. Markets for
corporations, however, are often “thin,” by which we mean that there are few buyers
or sellers.
v. The problem of thin markets is aggravated by antitrust authorities who may
prevent one airline from merging with another. In general, blocking mergers to
thicken product markets thins the market for corporations.
vi. The problem of thin markets is aggravated by antitrust authorities who may
prevent one airline from merging with another. In general, blocking mergers to
thicken product markets thins the market for corporations.
vii. A vigorous market for corporations can prevent managers from pursuing goals
other than maximizing the company’s profits. In general, the stock market bids up the
price of a company’s stock until it equals the sum of the company’s expected future
earnings discounted to present value. If managers fail to maximize the company’s
profits, then the expected future earnings of the company fall and its stock price
declines.
b. Public and Private Property
i. Private ownership divides people into small groups. So long as externalities are
private, private owners can advance their interests by cooperating with a small
number of people. Bargaining among small groups of people tends to result in
cooperation and to achieve efficiency. Consequently, the case for private ownership is
easy to make when production and utility functions are separable, or when
externalities affect few people
ii. Solution to tragedy of the commons
1. Turn ownership of the resource over to an individual
2. devise an enforceable and effective method of restricting access to the
common resource.
ii. Instead of unstructured bargaining and a requirement that everyone agree, the
switch from private to public ownership substitutes structured bargaining and a
collective choice principle, such as majority rule
iii. Public ownership comes in three forms
1. First, open access allows everyone to use a resource, and no one can
exclude anyone from using it. Nothing is spent on boundary maintenance. Open
access works well when the resource is uncongested, but congestion causes
tragic overuse
2. Second, political control allows lawmakers or regulators to impose rules
concerning access. Limited access is the most common rule for the state’s
property, including public lands.
3. Third, the opposite of open access is unanimous consent, which allows
no one access unless everyone agrees. The need for unanimous consent among
multiple owners causes tragic underuse. In special circumstances where the aim
 is to preserve a resource in its unused condition, underuse is serendipitous
rather than tragic
 
II. How are property rights established and verified (people agree to establish property rights to
share the benefits from increased productivity)
a. Establishing Property Rights Over Fugitive Property: First Possession versus Tied
Ownership
i. Fugitive property - objects that move around or have indefinite boundaries, like
natural gas or wild animals
ii. Two general principles can solve the problem of establishing ownership
1. First possession: oil and gas are not the property of anyone until
reduced to actual possession by extraction
a. rule of first possession. The rule of first possession applies the
legal maxim “first in time, first in right."
b. A great advantage of the rule of first possession is that it
focuses on a few simple facts, so it is relatively easy and cheap to apply
c. There is, however, an economic disadvantage of the rule of first
possession: it creates an incentive for some people to preempt others by
making uneconomic investments to obtain ownership of property
d. Under the rule of first possession, an investment thus yields two
types of benefits to the investor: (1) production (more is produced from
existing resources), and (2) future rent (scarcity value of the resource in
the future).
2. Tied ownership: the owner of the surface has the exclusive right to
subsurface deposits
a. rule of tied ownership, ties ownership of fugitive property to
settled property
b. Principle of accession - a new thing is owned by the owner of
the proximate or prominent property
c. avoids preemptive investment so long as the ownership claims
in the resource to which the fugitive property is tied are already
established.
d. The problem with the second rule, as illustrated by the facts in
Hammonds, is the difficulty of establishing and verifying ownership rights
ii. Rules that tie ownership to possession have the advantage of being easy to
administer and the disadvantage of providing incentives for uneconomic investment
in possessory acts, whereas rules that allow ownership without possession have the
advantage of avoiding preemptive investment and the disadvantage of being costly to
administer.
1. Choosing the more efficient rule in a case such as Hammonds requires
balancing the incentive to overinvest under the rule of first possession against
the cost of administering and enforcing ownership without possession.
b. When to Privatize Open-Access Resources: Congestion versus Boundary Maintenance
i. Open access resource - Property that is accessible for use by a broad public
ii. Preventing overuse of common resources involves controlling use by means
other than the open-access rule
iii. Another method to prevent overuse is privatization, which means in this context
converting from public to private ownership.
 iv. A rule of open access causes over-use of a resource, whereas private property
rights require costly exclusion of non-owners. This formulation suggests when an
economically rational society will change the rule of law for a resource from open
access to private ownership. When the resource is uncongested and boundary
maintenance is expensive, open access is cheaper than private ownership. As time
passes, however, congestion may increase, and the technology of boundary
maintenance may improve
v. An economically rational society will privatize a resource at the point in time
where boundary maintenance costs less than the waste from overuse of the resource
b. Recording and Transferring Title: Verification Costs versus Registration Costs
i. Property law thus has to develop rules that balance the impediments to
commerce created by uncertain ownership against the cost of maintaining a system of
verification
b. Can a Thief Give Good Title?-
i. American rule - transferors can usually convey only those property rights that
they legitimately have. Thus, a person without title cannot convey title to a purchaser.
1. gives buyers an extra incentive to verify that the seller is truly the owner
ii. European rule - the buyer acquires title by purchasing the good “in good
faith.”40 The good-faith requirement means that the buyer must genuinely believe
that the seller owns the good. The good-faith requirement prevents a “fence” of
stolen goods from hiding behind the law. The law may also require the buyer to make
reasonable efforts to verify ownership, such as checking that the serial number was
not filed off the television.
1. gives owners an extra incentive to protect their property against theft.
ii. Spanish rule
1. “American Rule” typically applies when the thief steals the good from a
household and sells to a merchant.
2. “European Rule” that a buyer can acquire good title from a thief
typically applies when the thief steals the good from a merchant and sells it to
another merchant or a household
b. Breaks in the Chain of Title- Uncertain ownership burdens commerce and causes deep
discounting of the value of an asset by prospective purchasers. Consequently, economic
efficiency requires clearing away uncertainties, or “clouds,” from the title to property. T
i. Adverse Possession - Someone can acquire ownership of another’s property by
occupying it for a period of time specified in a statute, provided the occupation is
adverse to the owner’s interests, and the original owner does not protest or take legal
action.
1. The economic advantage of adverse possession is that it clears the
clouds from title and allows property to move to higher-valuing users
2. adverse possession prevents valuable resources from being left idle for
long periods of time by specifying procedures for a productive user to take title
from an unproductive user.
3. Besides the two types of economic benefit, adverse possession has a
cost. The cost is that owners must actively monitor their land to eject
trespassers who might otherwise become owners through adverse possession.
ii. Estray Statutes
1. Like registering title, estray statutes discourage the theft of property
 2. Given an estray statute, a thief who is caught with another’s property
cannot avoid liability by claiming that he or she found it.
3. Thus, an estray statute helps to distinguish a good-faith finder from a
thief.
4. , estray statutes also provide an incentive for owners to monitor their
property.
5. Finally, estray statutes induce the dissemination of information by
finders and thus reduce the search costs of owners who lose or mislay their
property.
II. What may owners do with their property? (theory of externalities, maximum liberty)
a. Bequests and Inheritances: Circumvention Costs and Depletion Costs
i. Circumvention costs and depletion costs provide two reasons for allowing an
owner freedom in transferring property at death
b. Rights to Use Someone Else’s Property
i. In brief, the private necessity doctrine allows compensated trespass in an
emergency.
b. Inalienability
c. Unbundling Property Rights
i. In general, the owners of property possess a bundle of rights. To standardize
property, the law must restrict the owner’s ability to repackage these rights. The
owner may want to unbundle these rights and sell w an
ii. The law should obligate sellers to disclose improbable restrictions on ownership
due to past transactions, but as long as the parties understand what they are
purchasing, the law should generally enforce agreements to unbundled property
rights. d x to one person, while retaining y and z for himself. Sometimes, however, law
only allows sales of the complete bundle. For example, the owner of a city lot can sell
it as a whole, but city regulations may prevent him from cutting it in half and selling
half of it
II. What are the Remedies for the Violation of Property Rights? (injunctive remedy is preferred for
private bads with low transaction costs for private bargaining and damage remedy is preferred for
public bads with high transaction costs that preclude private bargaining)
a. Externalities and Public Bads
i. When an externality gets priced, its supply is channeled through a market,
which is called internalizing the externality. Thus, the solution to interdependent uses
of property is to channel them through the market, or to internalize the externality
ii. If interdependence affects a small number of people, the externality is
“private.”
iii. If the interdependence affects a large number of people, the externality is
“public.
b. Remedies for Externalities
i. In property law, a harmful externality is called a nuisance.
ii. With temporary damages, the plaintiff receives compensation for the harms the
defendant has inflicted on him or her in the past. If harms continue in the future, the
plaintiff must return to court in order to receive additional damages. Thus, temporary
damages impose high transaction costs for dispute resolution. With temporary
damages, reductions in future harms translate directly into reductions in liability.
Consequently, temporary damages create incentives for injurers to continually adopt
technical improvements that reduce external costs.
 iii. With permanent damages, the plaintiff receives compensation for past harms
plus the present discounted value of all reasonably anticipated future harms.
Permanent damages impose high error costs. Furthermore, by paying permanent
damages the injurer “purchases” the right to external harm up to the amount
stipulated in the judgment. Consequently, permanent damages create no incentive for
injurers to adopt technical improvements that reduce external costs below the level
stipulated in the judgment.
iv. temporary damages tend to be more efficient given easily measured damages
and rapid innovation. Conversely, permanent damages tend to be more efficient given
costly measurement of damages and slow innovation
b. Graphing Externalities
c. Takings
i. Compensation
1. Economics provides strong reasons for financing the state by taxes
rather than takings. Any kind of expropriation distorts people’s incentives and
causes economic inefficiency, but taxes distort far less than uncompensated
takings.
2. focused taxes distort more than broad taxes.
a. avoiding broad taxes is harder than avoiding narrow taxes
ii. Public Use
1. The public-use requirement forbids the use of takings to bypass markets
and transfer private property from one private person to another. Instead,
property must be taken for a public use
ii. Holdouts
1. The government must purchase large tracts of land from many owners
in order to provide some public goods. These projects often demand
“contiguity,” which means that the parcels of land must touch each other.
Contiguity disrupts bargaining by creating opportunities for owners to hold out.
2. The government should resort to compulsory sale principally when
there are many sellers, each of whom controls resources that are necessary to
the project. Thus, takings should be guided by this principle: in general, the
government should only take private property with compensation to provide a
public good when transaction costs preclude purchasing the necessary property
ii. Insurance
iii. Regulations
1. Regulations restrict the use of the property without taking title from the
owner. Enacting regulations involves a political fight between the beneficiaries
and victims
2. Regulations typically cause a fall in the value of some target property,
which may prompt a suit for compensation
3. . If the state need not compensate for restrictions, then it will impose
too many of them. If there are too many restrictions, then resources will not be
put to their highest-valued use. Thus, uncompensated restrictions result in
inefficient uses.
4. Conversely, if the state must compensate fully for restrictions, then
property owners will be indifferent about whether the state restricts them. If
property owners are indifferent about whether the state restricts them, they
will improve their property as if there were no risk that restrictions will prevent
 the use of the improvements. If restrictions subsequently prevent the use of the
improvements, the investment will be wasted. Thus, compensated restrictions
result in wasteful improvements.
5. no compensation for the loss of value in investments caused by
uncertain governmental action provides incentives for efficient private
investment.
6. full compensation for the loss of value in investments caused by
uncertain governmental action provides incentives for excessive private
investment
7. the noncompensability of regulations gives government officials an
incentive to overregulate, whereas the compensability of takings makes
government officials internalize the full cost of expropriating private property
8. elasticity in the supply of private investment with respect to
compensation favors regulation instead of takings, and elasticity in the supply of
state action with respect to compensation favors takings instead of regulations.
ii. Bargaining with the State
iii. Zoning and the Regulation of Development

Furubotn and Pejovich Property Rights and Economic Theory

 
1. Extension of theory of production and theory of exchange
a. new interpretation is given to the role of individual decision makers within the
productive organization. The organization per se is no longer the central focus; rather,
individuals are assumed to seek their own interests and to maximize utility subject to the
limits established by the existing organizational structure
b. more than one pattern of property rights can exist and that profit (or
wealth)maximization is not assured.
i. The other key idea in the analysis is that different property rights assignments
lead to different penalty-reward structures and, hence, decide the choices that are
open to decision makers.
b. transactions costs are recognized as being greater than zero in virtually all case of
practical importance.
c. Economic actors maximize utility rather than profit
d. Property rights refer to the sanctioned behavioral relations among men that arise from
the existence of things and pertain to their use
e. The prevailing system of property rights in the community can be described as the set of
economic and social relations defining the position of each individual with respect to the
utilization of scarce resources
f. The value of any good exchanged depends, ceteris paribus, on the bundle of rights that
is conveyed in the transaction
g. Ownership is not an unrestricted right. It is an exclusive right in the sense that it is
limited only by those restrictions that are explicitly stated in the law as it is interpreted from
time to time
h. the attenuation of private (or state) property rights in an asset, through the imposition
of restrictive measures, affects the owner's expectations about the
uses to which he can put the asset, the value of the asset to the owner and to others, and
consequently, the terms of trade.
 
 2. Private property rights and resource allocation
a. A more complete specification of individual property rights diminishes uncertainty and
tends to promote efficient allocation and use of resources
b. the limitations of the traditional theory are traceable, in part, to the highly simplified
assumptions made in this area. Specifically, the standard competitive model envisions a
special system where one particular set of private property rights governs the use of all
resources, and where the exchange, policing and enforcement costs of contractual activities
are zero.
c. Externalities
i. Transaction costs may be so high that it would be better not to do anything
about the externality (parking lot example)
ii. Different liability systems can be expected to yield different patterns of resource
use because each of the respective systems tends to be associated with a different
total transactions cost
b. Attenuation of private property rights

Harold Demsetz Toward a Theory of Property Rights

I. Concept and Role of Property Rights in Social Systems
a. Property rights help a man form those expectations which he can reasonably hold in his
dealings with others.
b. property rights specify how persons may be benefited and harmed,
c. A primary function of property rights is that of guiding incentives to achieve a greater
internalization of externalities.
d. Condition to make costs and benefits externalities - The cost of a transaction in the
rights between the parties (internalization) must exceed the gains from internalization.
e. The output mix that results when the exchange of property rights is allowed is efficient
and the mix is independent of who is assigned ownership (except that different wealth
distributions may result in different demands).
II. Guidance for Investigating the Emergence of Property Rights
a. the main allocative function of property rights is the internalization of beneficial and
harmful effects,
b. the emergence of property rights can be understood best by their association with the
emergence of new or different beneficial and harmful effects.
c. the emergence of new property rights takes place in response to the desires of the
interacting persons for adjustment to new benefit-cost possibilities.
d. Property rights develop to internalize externalities when the gains of internalization
become larger than the cost of internalization.
e. See example involving american indians and beavers
II. The Coalescence and Ownership of Property Rights
a. Communal ownership
i. Right which can be exercised by all members of the community
ii. the community denies to the state or to individual citizens the right to interfere
with any person's exercise of communally-owned rights.
iii. Communal property results in great externalities. The full costs of the activities
of an owner of a communal property right are not borne directly by him, nor can they
be called to his attention easily by the willingness of others to pay him an appropriate
sum.
 iv. Under the communal property system the maximization of the value of
communal property rights will take place without regard to many costs, because the
owner of a communal right cannot exclude others from enjoying the fruits of his
efforts and because negotiation costs are too high for all to agree jointly on optimal
behavior.
 
b. Private ownership
i. Implies that the community recognizes the right of the owner to exclude others from
exercising the owner's private rights.
ii. Advantages
1. Concentration of benefits and costs
2. Reduction of transaction costs
 
c. State ownership
i. Implies that the state may exclude anyone from the use of a right as long as the state
follows accepted political procedures for determining who may not use state-owned
property.

Calabresi and Melamed MAIN TAKEAWAY FROM ARTICLE :

1. when there are few obstacles to cooperation (low transaction costs), the more efficient remedy
is to enjoin the defendant's interference with the plaintiff's property (property rule)
2. Where there are obstacles to cooperation, (high TC), the more efficient remedy is to award
compensatory damages (liability rule)
 
I. Introduction
a. 3 types of entitlement rules to be considered
i. Entitlements protected by property rules
1. someone who wishes to remove the entitlement from its holder must
buy it from him in a voluntary transaction in which the value of the
entitlement is agreed upon by the seller.
2. Gives rise to the least amount of state intervention
3. Involves a collective decision as to who is to be given an initial
entitlement but not as to the value of the entitlement
4. Also known as injunction
ii. Entitlements protected by liability rules
1. Someone may destroy the entitlement if he is willing to pay an
objectively determined value (by some state organ) for it
2. Also known as damages
ii. Inalienable entitlements
1. Transfer not permitted even between a willing buyer and seller
2. Quite different from property and liability rules. Unlike those rules,
rules of inalienability not only "protect" the entitlement; they
may also be viewed as limiting or regulating the grant of the entitlement
itself
II. The Setting of Entitlements (discusses the factors considered in giving people entitlements)
a. Economic Efficiency
i. To minimize the administrative cost of enforcement
ii. Pareto efficiency (two examples are mentioned in the subpoints below)
 1. Economic efficiency asks for that combination of entitlements to engage
in risky activities and to be free from harm which will most likely lead to
the lowest sum of accident costs and costs of avoiding accidents
2. Economic efficiency asks for that form of property which leads to the
highest product for the effort of producing
b. Distributional Goals
i. There are 2 types of distributional concerns which affect the choice of
entitlements
1. Distribution of wealth itself
a. Placement of entitlements has a fundamental effect on a
society's distribution of wealth. For example, society can give an
entitlement away for free and then, by paying the holders of the
entitlement to limit their use of it, protect those who are injured by
the free entitlement.
2. Distribution of specific goods called merit goods
a. Whenever society wishes to maximize the chances that
individuals will have at least a minimum endowment of certain
particular goods (like education, clothes, bodily integrity, etc.) the
society is likely to begin by giving individuals an entitlement to
them. If the society deems such an endowment to be essential
regardless of individual desires, it will make the entitlement
inalienable
b. Whenever transactions to sell or buy entitlements are very
expensive, such an initial entitlement decision will be nearly as
effective in assuring that individuals will have the merit good as
would be making the entitlement inalienable
b. Other Justice Reasons
II. Rules for Protecting and Regulating Entitlements
a. Property and Liability Rules
i. The article explains that an argument for moving from the property rule to the
liability rule is that market do not guarantee that people will express their true
valuations of property
1. For example, in eminent domain, there is the holdout problem which
renders market valuation of property inefficient. The holdout problem
would be gone if we shifted to a liability rule because it would be the job
of the judge to determine the value of the expropriated property
ii. Accidents are another instance in which society uses liability rules.
1. Pre-accident negotiations/ valuations are prohibitively expensive
2. Post accident, the victim can always inflate the proper compensation
amount to restore him to his former utility
ii. The most common reason for employing the liability rule rather than property
rule is that market valuation of the property is deemed inefficient
iii. Whenever transaction costs are low, and economic efficiency is the goal, we
could employ entitlements protected by property rules even though we would
not be sure that the entitlement chosen was the right one
b. Inalienable Entitlements
i. Inalienable entitlements are good for when a transaction would create
significant externalities for 3rd parties
 ii. Inalienability is also justified when external costs do not lend themselves to
collective measurement which is acceptably objective and nonarbitrary
(moralisms regarding slavery and selling internal organs)
iii. 2 efficiency reasons
1. Self paternalism - allows the individual to choose what is best in the
long run rather than in the short run, even though that choice entails
giving up some short run freedom of choice.
a. An example is passing a bill of rights so that individuals will be
prevented from yielding to momentary temptations which they
deem harmful to themselves
2. Paternalism - premised on the fact that some individuals know what is
best for other persons
a. For example, prohibition on certain activities by minors
b. There is a danger in paternalism though in that what is justified
on, for example, paternalism grounds is really a hidden way of
accruing distributional benefits for a group whom we would not
otherwise wish to benefit.
i. For example, government may justify a zoning
ordinance preserving open spaces on the ground that the
poor will ultimately be happier even though they don't know
it yet. However, the said ordinance is really intended to
increase the land values of the suburban homeowners
regardless of whether or not the poor benefit.
 
IV. The Framework and Pollution Control Rules
a. Whenever transactions between the affected parties are easy and economic efficiency is
our goal, we could employ entitlements protected by property rights (injunction) even
though we would not be sure that the entitlement chosen was the right one
i. A right to be free from pollution protected by the property rule (injunction) is
better if the polluter could reduce the costs of pollution more efficiently than
the pollutee.
ii. A right to pollute protected by the property rule from an economic standpoint is
better if it is the pollutee who is in a better position to reduce the costs of
pollution.
1. If we are wrong in our judgment of who can better reduce the cost of
pollution, and if there are transaction costs are very cheap the
entitlements in a) and b) would be traded and an economically efficient
result would occur in either case
b. If transaction costs are significant, we turn to a liability rule whenever we are uncertain
whether the polluter or the pollutees can most cheaply avoid the cost of pollution.
i. If we know who can most cheaply avoid the costs of pollution and transaction
costs are high, we go back to the property rule because economic efficiency will
be attained without transactions by making the correct initial entitlement
II. The Framework and Criminal Sanctions
a. Why not convert all property rules into liability rules? The answer is, of course, obvious.
Liability rules represent only an approximation of the value of the object to its original
owner and willingness to pay such an approximate value is no indication that it is
worth more to the thief than to the owner.
 b. We also impose sanctions as a means of deterring future attempts to convert property
rules into liability rules

Cooter and Schafer - Solomon's Knot - How law can end the poverty of nations
 
A. Land Reform, Squatters, and Dead Capital - chapter concerns how property law helps people
keep what they make
a. Land Reform
i. Forced redistribution of land by politicians usually causes productivity to fall,
sometimes disastrously and sometimes moderately
1. China
2. Zimbabwe - markets continually redistribute land from less productive
to more productive owners. Unlike markets, President Mugabe took land from
political opponents and gave it to loyal supporters. Loyalty correlates badly with
productivity.
a. Besides being worse farmers on average, the new owners in
Zimbabwe were insecure. Fearing that someone else might take the land
from them, they were reluctant to plant new crops, dig irrigation
channels, or otherwise invest. Forced redistribution generally unsettles
property rights, which increases the risk of investing. The second reason
why production plummeted in Zimbabwe is that uncertain ownership
discouraged investment.
ii. In contrast, land reform that creates markets usually causes agricultural
production to rise. Again, the most dramatic example comes from China. After Mao
Zedong’s death in 1976, past policies were gradually reversed and China began to
dissolve the communes in 1978. Agricultural production consequently soared in the
1980s.
iii. Private persons, not the state, must plant most of the nation’s crops and build
most of its barns, houses, apartments, shops, and factories. For private persons to
make these investments, they must feel secure in owning the improvements that they
make. A lease can provide this security, provided that the lease is long and easily
renewed, even though the state retains ownership
iv. Other attempts to privatize land created chaos instead of markets
1. Papua New Guinea
ii. In sum, agricultural land changes owners by market transactions and political
fiat. Production usually falls when politicians redistribute land by force to their
loyalists, and productivity usually surges in socialist, feudal, or tribal societies when
legal reforms create active markets for land
b. Squatters
i. Thin rental and mortgage markets give many poor farmers few choices for
acquiring land except to seize it. Land seizures, however, are the main reason why real
estate markets for poor farmers are thin. By destroying markets, land invasions make
themselves necessary. If courts promptly evicted people who seized rural land, and if
courts made borrowers repay their debts, then renting and buying land would
flourish. Markets easily dominate seizures as a mechanism to redistribute land and
raise living standards.
ii. Squatters live in shanties of cardboard and tin when they feel too insecure to
invest in them. An investment might draw the attention of the owners and increase
 the likelihood of losing everything. Fear of eviction creates some of the world’s worst
housing conditions. Conversely, when squatters feel secure, they invest time and
money to improve their dwellings… Squatters invest not only because they feel secure
but to make themselves secure
iii. Modern apartments are so expensive because the difficulty of securing title
constricts their supply
b. Live and Dead Capital
i. Lenders prefer “liquid” security, which means a good that is easy to sell in an
active market with many buyers. Consequently, liquid assets are “living capital” that
finances growth, whereas illiquid assets are “dead capital” that cannot finance
growth.
ii. Real estate is the most valuable asset that many people own, especially the
lower and middle classes. Furthermore, creditors in poor countries prefer real estate
as collateral because land and dwellings are harder to hide than silver bracelets,
bonds, or barrels of beer.
iii. When seizure and sale is easy, mortgage markets are liquid and real estate is
living capital. However, bad laws and policy make much of the world’s real estate
illiquid.
iv. Three obstacles to real estate transactions plague countries with weak property
law.
1. First, the buyer in a real estate transaction must ascertain that the seller
truly owns the property. Defects in registries increase the risk of mistake or
fraud in buying real estate.
2. the second way that ineffective laws lower the sale value of real estate
concerns its use. Besides ascertaining the seller’s identity, the buyer must
ascertain what he can do with the property. Obtaining a construction permit is
so bureaucratic, slow, and costly in many countries that owners bribe officials to
turn a blind eye to illegal construction.
3. Third, the creditor bears the burden of filing a complaint against a
defaulting debtor and going forward with legal action. In some countries, the
legal process of debt collection costs too much or consumes too much time, so
legal debt collection is impractical
 
 
B. Creativity and Property
a. Imitators gain a competitive advantage by escaping the costs of creating, including
research and development costs. However, creativity plummets. Thus creativity and breadth
of use trade off. Unrestricted copying of creations expands use and slows creativity.
Conversely, patent or copyright restrictions expand creativity up to a point and narrow use.
b. When users and creators are from different countries, national tensions rise, especially
concerning enforcement efforts.
c. Poor countries with low labor costs want to export manufactured goods to rich
countries with high labor costs. Rich countries with high technical abilities want poor
countries to recognize and enforce intellectual property rights. So the two groups make a
political bargain. By supporting the applications of poor countries to join the World Trade
Organization (WTO), rich countries agree to accept imports from poor countries. In return,
the countries that seek admission to the WTO must join the World Intellectual Property
Organization (WIPO) and agree to recognize and protect intellectual property rights
 d. Unfortunately, theft is much harder to prevent for intellectual property than
automobiles or real estate. Even with relatively effective intellectual property laws,
Americans and Europeans steal much more software and recorded music than cars or land.
e. Trademark law gives the owner of a brand name the power to build its reputation,
which can protect consumers from inferior products.
B. Organization as Property
a. Partnerships, corporations, and other kinds of firms can be bought and sold. The owner
has rights to the firm’s profits and power over its organization. Since the owner of a small
firm does with it as he or she wishes, ownership allows for quick decisions at low cost.
b. Unowned organizations often make decisions collectively, following rules of governance
that involve politics. Thus some clubs, churches, cooperatives, and governments proceed by
majority rule. Compared to ownership, nonownership often leads to slow decisions at
transaction cost.
c. Ownership affects an organization’s goals. When a firm that is owned underperforms
financially, a buyer can purchase it and increase its profits by changing its goals, strategies,
personnel, and structure. Expecting higher profits, the buyer should be willing to pay more
for the firm than its current owners can earn. Markets for organizations pressures the
owners to maximize profits or sell the firm to someone else.
d. Nationalizing a firm eliminates private ownership and usually increases the influence of
politicians and other state officials, who broaden its goals. Conversely, privatizing a state
enterprise usually refocuses it on profitability.
e. For privatization to refocus a firm on profitability, however, laws and policies must
provide the foundation for markets. Otherwise privatization can degenerate into looting the
state, which is what happened all too often in the 1990s in the formerly communist
countries of Europe that did not join the European Union. T
B. Conclusion
a. Our analysis identified three economic consequences of effective property rights. First,
effective property rights enable the people who can produce the most from the asset to
acquire it.
b. Second, effective property rights give owners the security to invest.
c. Third, effective property rights create liquid markets, so assets can serve as collateral for
owners to borrow money and make investments.