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Transaction Costs Can Prevent Parties from Reaching Bargains that are “Efficient” (= Would Make Everyone Better Off) . Demsetz : 1 st Thesis. New property rights tend to develop “when the gains of internalization become larger than the cost of internalization.”.

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Transaction Costs Can Prevent Parties from Reaching Bargains that are “Efficient” (= Would Make Everyone Better Off)


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Demsetz : 1st Thesis

New property rights tend to develop “when the gains of internalization become larger than the cost of internalization.”


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DQ32: Costs of Internalization?

  • Costs of bargaining privately

  • Costs of collectively creating new rules (can be very expensive)

    • multi-party negotiation

    • legislation


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Demsetz : 1st Thesis

New property rights tend to develop “when the gains of internalization become larger than the cost of internalization.” =

If cost of externalities >

cost of change  change in rule


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Demsetz : 1st Thesis

  • If cost of externalities > cost of change  change in rule

    • Rough Approximation (Not Precise Math)


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Demsetz : 1st Thesis

  • If cost of externalities > cost of change  change in rule

    • Rough Approximation (Not Precise Math)

    • Resulting Change in Rule Unpredictable


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Demsetz : 1st Thesis

  • If cost of externalities > cost of change  change in rule

    • Rough Approximation (Not Precise Math)

    • Resulting Change in Rule Unpredictable

    • Often Results from Social/Cultural Change

      • New Social Habits  Scarcity

      • New Science/Technology 

        Scarcity or Better Monitoring


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Basic Demsetz Analysis: 1st Thesis

  • Identify decision/activity at issue


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Basic Demsetz Analysis: 1st Thesis

  • Identify decision at issue

  • Identify old rule/legal regime


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Basic Demsetz Analysis: 1st Thesis

  • Identify decision at issue

  • Identify old rule

  • Identify neg. externalities under old rule


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Basic Demsetz Analysis: 1st Thesis

  • Identify decision at issue

  • Identify old rule

  • Identify neg. externalities under old rule

  • Identify change in circumstances


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Basic Demsetz Analysis: 1st Thesis

  • Identify decision at issue

  • Identify old rule

  • Identify neg. externalities under old rule

  • Identify change in circumstances

  • Does change increase neg. externalities?


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Basic Demsetz Analysis: 1st Thesis

  • Identify decision at issue

  • Identify old rule

  • Identify neg. externalities under old rule

  • Identify change in circumstances

  • Increase in neg. externalities?

  • If new cost of externalities > cost of change  change in rule


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Apply to Shaw

  • Identify decision at issue

  • Identify old rule

  • Identify neg. externalities under old rule

  • Identify change in circumstances

  • Increase in neg. externalities?

  • If cost of externalities > cost of change  change in rule


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DQ33: Apply to Montagnes

  • Identify decision at issue

  • Identify old rule

  • Identify neg. externalities under old rule

  • Identify change in circumstances

  • Increase in neg. externalities?

  • If cost of externalities > cost of change  change in rule


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DQ34

Why does the author believe that the tribes of the Southwestern U.S. did not adopt a system similar to that of the Montagne?


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DQ34

Why does the author believe that the tribes of the Southwestern U.S. did not adopt a system similar to that of the Montagne?

No issue of scarcity


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DQ34

Why does the author believe that the tribes of the Southwestern U.S. did not adopt a system similar to that of the Montagne?

No issue of scarcity

“Buffalo roam” (harder to administer)


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DQ35: Apply to Regulation of Air Pollution

  • Identify decision at issue

  • Identify old rule

  • Identify neg. externalities under old rule

  • Identify change in circumstances

  • Increase in neg. externalities?

  • If cost of externalities > cost of change  change in rule

    Did in Class Friday


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DQ35: Apply to Development of Sexual Harassment Regs

  • Identify decision at issue

  • Identify old rule

  • Identify neg. externalities under old rule

  • Identify change in circumstances

  • Increase in neg. externalities?

  • If cost of externalities > cost of change  change in rule


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Demsetz First Thesis

  • Useful description of how legal change can occur

  • Can use to argue that legal change should occur

  • Qs?


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Demsetz Second Thesis

Over Time, Process Described in 1st Thesis Leads to More and More Private Property


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DQ36: Alternatives to Private Property

  • State of Nature: (Can Use Power to Exclude)

    • Common Law re Rights among Family Members

    • Fairly Uncommon Today


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DQ36: Alternatives to Private Property

  • State of Nature: (Can Use Power to Exclude)

  • Communal Ownership

    • No one can exclude others

    • Often in Practice Variants on First in Time


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DQ36: Alternatives to Private Property

  • State of Nature: (Can Use Power to Exclude)

  • Communal Ownership

  • Can Have Non-Communal State Ownership

    • e.g., Military Bases; Post Offices

    • Like Private Ppty BUT Gov’t Management


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Demsetz: Private Property More Efficient Than Communal Property

  • The members of the community will have trouble negotiating among themselves to achieve the optimal level of use of the resource.


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Demsetz: Private Property More Efficient Than Communal Property

  • The members of the community will have trouble negotiating among themselves to achieve the optimal level of use of the resource.

  • The members of the community will have trouble negotiating with other communities or outsiders to prevent interference with their rights and achieve useful bargains about allocating property rights.


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Demsetz Second Thesis Property

Over Time, Process Described in 1st Thesis Leads to More Private Property

Non-Private Property =

High Externalities


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Demsetz Second Thesis Property

Over Time, Process Described in 1st Thesis Leads to More Private Property

Non-Pvt Property = High Externalities

High Externalities  Rule Change


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Demsetz Second Thesis Property

Over Time, Process Described in 1st Thesis Leads to More Private Property

Non-Pvt Property = High Externalities

High Externalities  Rule Change

Rule Changes Unpredictable

If to Pvt Property, Low Externalities = Stable

If not, Higher Externalities  More Change


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DQ38 Property

In your experience, do communities have ways of preventing anti-community behavior aside from bargaining or paying off the anti-social community members? Examples?


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DQ38 Property

If bargaining among members of a community is so difficult, how do private property systems get created at all?


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WHAT TO TAKE FROM DEMSETZ Property

  • Externalities Important (Want Decision-Makers to Consider Real Costs)


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WHAT TO TAKE FROM DEMSETZ Property

  • Externalities Important

  • Useful Description of a Way Changes in Society Create Changes in Property Rights


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WHAT TO TAKE FROM DEMSETZ Property

  • Externalities Important

  • Useful Description of Changes in Property Rights

  • Arguments re Advantages of Private Property


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WHAT TO TAKE FROM DEMSETZ Property

  • Externalities Important

  • Useful Description of Changes in Property Rights

  • Advantages of Private Property

  • Description of What Property Is (1st para.)

    • Expectations re Rights to Act

    • Protection from Others’ Interference

    • Construct of Society/Culture


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NEON: Mullett Brief Property

Statement of the Case:

Mullett …

sued Bradley …

for [cause of action]

seeking [remedy]


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NEON: Mullett Brief Property

Statement of the Case:

Mullett, original owner of an escaped sea lion, sued Bradley, who purchased it from its finder, for conversion seeking damages.


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Mullett Brief Property

Procedural Posture: After a trial, the trial judge dismissed the complaint. The plaintiff appealed.


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Mullett Brief Property

Procedural Posture:

After a trial, the trial judge dismissed the complaint. The plaintiff appealed.

  • Evidence of trial:The evidence not only fails to show that there was any animus revertendi on its part, but the inference from the facts proven is quite the contrary. (p.34)


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NEON: Mullett Brief Property

Facts (Relevant to Analysis)?