lecture 6.ppt - Econ 522 Economics of Law Dan Quint Fall...

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Econ 522 Economics of Law Dan Quint Fall 2019 Lecture 6
2 Coase: absent transaction costs, if property rights are complete and tradable, we’ll get efficiency through voluntary negotiation So we can always get efficient outcomes “automatically”… …provided there are no transaction costs But… Demsetz: more complete property rights are costly, it’s not always worth it And: what about when there are transaction costs? Property law – our story so far
3 Search costs Bargaining costs Asymmetric information/ adverse selection Private information/not knowing each others’ threat points Uncertainty about property rights/ threat points Large numbers of buyers/sellers – holdout, freeriding Hostility Enforcement costs Different types/sources of transaction costs
4 Design the law to minimize transaction costs “Lubricate private bargaining” (Normative Coase) Design the law to minimize dependence on bargaining Or, minimize losses due to bargaining failures Or, aim to allocate rights efficiently (Normative Hobbes) Two approaches we could take
When transaction costs are low (and info costs are high), design the law to facilitate voluntary trade When transaction costs are high (and info costs are low), design the law to allocate rights efficiently without bargaining When is each approach best?
6 Calabresi/Melamed: three types of remedies Injunctive relief (property rule) – violations prohibited without prior permission, punished severely, but tradable Damages (liability rule) – violations compensated Inalienability – violations punished, not tradable Starting thinking about details of efficient property law system
7 When transaction costs are low , use injunctive relief Either rule will lead to efficient allocation (Coase)… …but injunctions are cheaper to implement (court doesn’t have to assess level of harm) When transaction costs are high , use damages If bargaining is impossible, damages more efficient outcomes (Example: polluter can choose to pollute and pay when that’s more efficient than preventing the damage) Agrees with principle from earlier TC low : design law to facilitate trade (normative Coase) TC high : design law to not rely on bargaining (normative Hobbes) Starting thinking about details of efficient property law system
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