Law and Economics-Charles W. Upton How Property Rights are Protected.

Law and Economics-Charles W. Upton

How Property Rights are Protected


Protecting Property Rights

• Suppose you begin to build a house on my land. The judicial system has the responsibility of protecting my property rights. But how?



• Suppose you begin to build a house on my land. The judicial system has the responsibility of protecting my property rights. But how?– Damages (Backward Relief). The court can

award me damages for your construction.




award me damages for your construction.– Injunctions (Forward Relief). The court can

forbid you to build or order you to remove any structure.




award me damages for your construction.– Injunctions (Forward Relief). The court can

forbid you to build or order you to remove any structure.

Even if the house has already been built, the injunction decision sets the stage for bargaining, which will be efficient iffi TC < IC


Laundry

No Filter Filter

No Scrubber

πL=100

πEC=1000

πL=200

πEC=1000

Electric Company Scrubber πL=300

πEC=500

πL=100

πEC=500

An Example


Laundry

No Filter Filter

No Scrubber

πL=100

πEC=1000

πL=200

πEC=1000


πEC=500

πL=100

πEC=500

An Example


Laundry

No Filter Filter

No Scrubber

πL=100

πEC=1000

πL=200

πEC=1000


πEC=500

πL=100

πEC=500

An Example


Three Rules

• The Electric Company is free to pollute

• The Laundry is entitled to compensation

• The Laundry is entitled to an injunction


Three Rules




Lets see what happens under these three rules, assuming initially that they cannot bargain.


Laundry No Filter Filter

No Scrubber

πL=100

πEC=1000

πL=200

πEC=1000


πEC=500

πL=100

πEC=500

Electric Company Free to Pollute

There will be no side payment, and we will end up here.



No Scrubber

πL=100

πEC=1000

πL=200

πEC=1000


πEC=500

πL=100

πEC=500

Laundry is Entitled to Compensation

If L is entitled to compensation, E will pollute, and pay $200 to L, who will not

install filters. Total benefit = $1100.



No Scrubber

πL=100

πEC=1000

πL=200

πEC=1000


πEC=500

πL=100

πEC=500

Entitled to Compensation

Why $200? With a scrubber,πL =300;

without a scrubber πL =$100, or $200 less.).

If L is entitled to compensation, E will pollute, and

pay $200 to L, who will not install

filters. Total benefit = $1100.



No Scrubber

πL=100

πEC=1000

πL=200

πEC=1000


πEC=500

πL=100

πEC=500

Laundry is Entitled to an Injunction

If L is entitled to an injunction, E will install a scrubber and L will not install

filters. Total benefit = $800.


Three Rules




If they cannot bargain, Rule 1 is preferable.

But lets see what happens if they can bargain.


Three Rules




If they cannot bargain, Rule 1 is preferable.

But lets see what happens if they can bargain.

If TC =0, the choice of rule is irrelevant, only determining who gets

the money.


Gains from Bargaining

Rule πEC πL Gains from

Bargaining 1 1000 200 2 800 300 200 3 500 300 500




Bargaining 1 1000 200 2 800 300 200 3 500 300 500

Under Rule 1, we end up at the best

solution without bargaining.




Bargaining 1 1000 200 2 800 300 200 3 500 300 500

Under Rules 2 or 3 there are gains

from bargaining.


Lubricating the Bargaining


Bargaining 1 1000 200 2 800 300 200 3 500 300 500

Suppose TC0 and the laundry has a right to clean air. Damages or Injunction?




Bargaining 1 1000 200 2 800 300 200 3 500 300 500

Suppose TC0 and the laundry has a right to clean air. Damages or Injunction?

Play Solomon. Issue the injunction and really lubricate the

bargaining




Bargaining 1 1000 200 2 800 300 200 3 500 300 500

Suppose the laundry has a right to clean air and TC>0. Damages or Injunction?




Bargaining 1 1000 200 2 800 300 200 3 500 300 500

Suppose the laundry has a right to clean air and TC>0. Damages or Injunction?

If TC > IC, then Damages


The Misplaced House

• I build my house two feet over my neighbor’s property line. Do we want injunctive relief or damages?

Property Right is Clear but:

TC > IC?


The Misplaced House

• I build my house two feet over my neighbor’s property line. Do we want injunctive relief or damages?


TC > IC?

Common sense says the house should stay, but we want to

lubricate the bargaining


The Errant Satellite

• A satellite crosses over the boundary of another satellite and interferes with that person’s broadcasting. Do we want injunctive relief or damages?


TC > IC?


The Gas Line

• A landowner's right to exclude a neighbor’s gas line. Do we want injunctive relief or damages?


TC > IC?


The Defective Transmission

• A new car owner’s right to have the defective transmission replaced by the seller. Do we want injunctive relief or damages?


TC > IC?


The Defective Transmission

• A new car owner’s right to have the defective transmission replaced by the seller. Do we want injunctive relief or damages?


TC > IC?

Here you may want to give damages to avoid

flood of lawsuits


The Polluter

• A right to be free from air pollution by a nearby factory. Do we want injunctive relief or damages?


TC > IC?


The Polluter

• A right to be free from air pollution by a nearby factory. Do we want injunctive relief or damages?


TC > IC?

The negotiations between thousands of neighbors and the

plant could be very costly


End

©2004 Charles W. Upton

Law and Economics-Charles W. Upton How Property Rights are Protected.

Documents

protected slide

protected laundry

injunction slide

electric company free

damages backward relief

efficient iffi tc ic

judicial system

injunction decision