Econ 522 Economics of Law. Dan Quint Spring 2010 Lecture 4. Outline. Last lecture, we… introduced static games, the matrix representation of payoffs, and how to find equilibria motivated the need for property law (“anarchy is inefficient”) Today… the Coase Theorem. Coase.
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Econ 522Economics of Law
no reason for you to buy it, I end up with it efficient
clear incentive for me to buy it, I end up with it efficient
You can buy them if they’re worth more to you (and your guests)
I can buy them if quiet is worth more to me than party is to you
Judges have to decide on legal liability but this should not confuse economists about the nature of the economic problem involved.
In the case of the cattle and the crops, it is true that there would be no crop damage without the cattle. It is equally true that there would be no crop damage without the crops.
The doctor’s work would not have been disturbed if the confectioner had not worked his machinery; but the machinery would have disturbed no one if the doctor had not set up his consulting room in that particular place…
If we are to discuss the problem in terms of causation, both parties cause the damage.
If we are to attain an optimum allocation of resources, it is therefore desirable that both parties should take the harmful effects into account when deciding on their course of action.
It is one of the beauties of a smoothly operating pricing system that… the fall in the value of production due to the harmful effect would be a cost for both parties.
if property rights are well-defined and tradeable,
voluntary negotiations will lead to efficiency.
Rancher’s Threat Point
Farmer’s Threat Point
Gains From Cooperation
Rancher’s Payoff (IF…)
10 – c, 10 – c
-5 – c, 12 – P
12 – P, -5 – c
The date is 10,000 or 11,000 B.C. You are a member of a primitive tribe that farms its land in common. Farming land in common is a pain; you spend almost as much time watching each other and arguing about who is or is not doing his share as you do scratching the ground with pointed sticks and pulling weeds.
…It has occurred to several of you that the problem would disappear if you converted the common land to private property. Each person would farm his own land; if your neighbor chose not to work very hard, it would be he and his children, not you and yours, that would go hungry.
There is a problem with this solution… Private property does not enforce itself. Someone has to make sure that the lazy neighbor doesn’t solve his food shortage at your expense.
[Now] you will have to spend your nights making sure they are not working hard harvesting your fields. All things considered, you conclude that communal farming is the least bad solution.
Agricultural land continues to be treated as a commons for another thousand years, until somebody makes a radical technological innovation: the domestication of the dog.
Dogs, being territorial animals, can be taught to identify their owner’s property as their territory and respond appropriately to trespassers. Now you can convert to private property in agricultural land and sleep soundly. Think of it as the bionic burglar alarm.
-Friedman, Law’s Order, p. 118
“If market transactions were costless, all that matters (questions of equity apart) is that the rights of the various parties should be well-defined and the results of legal actions easy to forecast.
But as we have seen, the situation is quite different when market transactions are so costly as to make it difficult to change the arrangement of rights established by the law.
In such cases, the courts directly influence economic activity.
…Even when it is possible to change the legal delimitation of rights through market transactions, it is obviously desirable to reduce the need for such transactions and thus reduce the employment of resources in carrying them out.
What AreTransaction Costs?