Law & Legal Institutions Civil Law

Legislatively enacted Inquisitorial process

Common Law Based on social norms and precedent Adversarial process Use of juries

State Courts Trial courts: “entry level” courts Appellate courts Supreme courts

Federal Courts 94 districts 13 appellate districts US Supreme Court

Law & Legal Institutions

Federal Jurisdiction:• Federal questions• Cases to which US is a party• Diversity cases

Parties Plaintiff Defendant

Burden of Proof Civil cases: preponderance of evidence Criminal cases: beyond a reasonable doubt

Verdict/Judgment Appellate decisions

Affirm Reverse Remand

Nature of a Legal Dispute

Evolution of Common Law Butterfield v. Forrester, 11 East 60 (1809)

Contributory negligence Davies v. Mann, 10 M&W 545 (1842)

Last clear chance doctrine Riggs v. Palmer, 22 N.E. 188 (1889)

Can a murderer inherit from the person whom he murdered?

Four Areas of Law Property Contract Tort Criminal

Property Law Legal framework for allocating resources

and distributing wealth Economic Goal: efficient resource allocation

Economic Theory of Property Bargaining theory (game theory) Public goods theory Externalities theory

4 Questions1. What things may be privately owned? 2. How are ownership rights established?3. What can owners do with their property?4. How are property rights protected?

Orbitcom, Inc., spent $125 million designing, launching, and maintaining a satellite for the transmission of business data between Europe and the US. The satellite is positioned in a geosynchronous orbit 25 miles above the Atlantic Ocean. Recently a natural resource-monitoring satellite belonging to the Windsong Corp. has strayed so close to Orbitcom’s satellite that the company’s transmissions have become unreliable. As a result, Orbitcom has lost customers and has sued Windsong for trespassing on Orbitcom’s right to its geosynchronous orbit.

Example 2 (p75)

Smoke from BBQ

Economics of Bargaining Peter owns a horse which he claims is worth $9,000 to

keep, and Mary covets the horse and decides she is willing to pay $11,000 for it. Mary has $15,000 inheritance income. Non-cooperative outcome: no trade Cooperative outcome: trade at mutually agreed price

Value of Cooperative Outcome = [10,000] + [11,000 + 5,000] = $26,000

Value of Non-cooperative Outcome = $9000 + $15,000 = $24,000

(threat values)

Reasonable sale price = $10,000

Cooperative Surplus = $2,000

Coase Theorem Ronald A. Coase, “The Problem of Social Cost,”

3 J. L. & Econ. 1 (1960)

Aunt Linda and the Nudist

Rifle River

Aunt Linda Nudist

Judge rules in favor of Aunt Linda

Judge rules in favor of Nudist

Fence comes down

Fence comes down(Linda pays Nudist)

2 rulings

$1500 $1000$1250

A Theorem and a Corollary

Coase TheoremIf transactions costs are low enough, then private bargaining will result in an efficient use of resources, regardless of the legal assignment of property rights.

CorollaryWhen transactions costs are high enough to prevent bargaining, the efficient use of resources will depend on how property rights are assigned.

Search costsNegotiation costsEnforcement costs

Lubricate or Allocate? Normative Coase Theorem

Structure the law so as to remove impediments to private agreements

Normative Hobbes Theorem Structure the law so as to minimize the harm

caused by failures in private agreements

Prior appropriation: “first in time, first in right”Water rights in western USHomesteading Act

Lawmaker tradeoff: IC = information cost of the court in

determining who values a right the most TC = transaction costs of private bargaining

Efficient courts would follow this rule: If IC < TC allocate legal right to the party

who values it the most If TC < IC strictly follow precedent

Lubricate or Allocate?

How are property rights protected? Remedies for violations:

Damages (legal) compensatory money payment “backward-looking”

Injunctions (equitable) an order to perform or refrain from an action “forward-looking”

Torts or contracts

Property

FlexMag v. Neighbors

FlexMag

No Wall Wall

No Insulation

Insulation

Neighbors

2000, 500 2000, 700

1600, 7001600, 800

FlexMag has D.S.: No InsulationNeighbors don’t have D.S.

FlexMag v. NeighborsNon-Cooperative

OutcomeCooperative

Outcome

FlexMag Neighbors Surplus FlexMag Neighbors

1. Polluter’s Rights 2000 700 0 2000 700

2. Neighbors’ right to damages

1700 800 200 1800 900

3. Neighbors’ right to injunction

1600 800 300 1750 950

Normative Hobbes: only rule 1 is efficient

Coase Theorem: choice of rule doesn’t matter

Calabresi and Melamed (1972) If TC are low, then injunctions are efficient

For private bads If TC are high, then damages are efficient

For public bads

What can be privately owned? Private goods: rival and excludable Public goods: non-rival and non-excludable

Conclusion: Private goods should be privately owned Public goods should be publicly owned

Free rider problem

What may owners do with their property? Externality exception to maximum liberty

doctrine

What Can Be Privately Owned? Information Economics

How is information different from other goods? It’s (usually) a public good

Under-provision remedies Government supply or subsidy Charitable contribution Trade secrets protection (contract law) Intellectual property law

Patents Copyrights Trademarks Weather Forecasting?

Patent Law Legal monopoly rights for 20 years

Non-obvious Practical utility Not commercialized 1 year prior to application

Number of Patents Issued per year in US

Suppose that an investment of $100,000 in research yields a pioneering invention that has no commercial value. A subsequent investment of $50,000 in development yields an improvement to the pioneering invention that has commercial value of $1 million. An efficient patent law would grant the patent to:

1 2 3 4 5

a) The pioneerb) The developerc) Equal rights to bothd) Neither of them

Broad: encourages fast, duplicative fundamental research

Narrow: encourages slower, complementary developmental research

R&D is a “joint product” Unified R&D efforts? What would Coase say?

Patent Law: Breadth

Little stand-alone value

Large stand-alone value

Tradeoff: innovation v. dissemination

Patent Law: Duration

duration

$

MB

MC

D*

One size fits all?

Germany: petty patents

Orphan drugs Prizes?

Business methods?

Copyright Prevents unauthorized copying of the

products of expressive activity Breadth

Fair use Sony Betamax case: “time-shifting” vs “archiving”

Duration Life of artist + 70 years

Why limit duration? Tracing costs exist

Why has duration increased? Copying costs have fallen

Is resale of art the same as reproduction of art?

France requires a resale royalty be paid to original artist (or heirs)

California requires resale royalty by paid to artist (while living)

“Droit de suite”

Pt = $ 1,000Pt+n = $10,000

Trademarks Signal of product quality Duration of TM left to owner

Tradenames that have become generic?

Anti-commons? Common property is subject to the

“tragedy of the commons” Corrective: assign private property rights

Excessive ownership rights Leads to under-use

DNA patents and the public domain?

Open source computing

Privatize when cost of administering boundaries is less than cost of congestion

When should unowned resources become owned?

How are Property Rights Established?

Oil

Hammonds v. Central Kentucky Natural Gas Co (1934)

How are Property Rights Established? Fugitive Property

First possession: property doesn’t belong to anyone until someone extracts it

Tied ownership: fugitive property is tied to something else that is easier to establish

How are Property Rights Established?

Oil

How are Property Rights Established? Fugitive Property

First possession: property doesn’t belong to anyone until someone extracts it

Simple to administer Encourages inefficient pre-emptive investments

Tied ownership: fugitive property is tied to something else that is easier to establish

Costly to administer Encourages efficient use of resource

Stack Island

Louisiana

Mississippi

thalweg

What can be done to prove ownership? Paper titles for cars Deeds for property Branding Livery of seisin

Stolen goods? US: thief can not give good title

Buyers bear risk of verification Europe: thief can give good title

Original owners bear risk of verification

Liability should fall on those who can bear the risk at lowest cost