Property Rules vs. Liability Rules Interests of property owners may conflict Interests of property owners may conflict E.g., cement factory and neighbors: E.g., cement factory and neighbors: Right to clean airRight to clean air right to pollute/manufactureright to pollute/manufacture

Who has the right? Who has the right? How should it be protected? How should it be protected? Property ruleProperty rule Entitlement ruleEntitlement rule Inalienability ruleInalienability rule

Property Rule Consent of owner required for transfer Consent of owner required for transfer Home or land ownershipHome or land ownership Sale Sale Rental Rental Injunction against nuisance or trespass Injunction against nuisance or trespass Personal property – watch, carPersonal property – watch, car Sale Sale Rental Rental Theft punishable by criminal law Theft punishable by criminal law Value of right decided in market transaction Value of right decided in market transaction

Liability Rule Consent of owner not required for transfer Consent of owner not required for transfer Eminent domainEminent domain Boomer v. Atlantic CementBoomer v. Atlantic Cement Damage to car in accidentDamage to car in accident Value determined by courts/legal system Value determined by courts/legal system

Inalienability Rule No transfer permitted No transfer permitted Selling self into slaverySelling self into slavery Selling organsSelling organs Selling babiesSelling babies

What is the most efficient rule? Property rule where cost of allocating rights by market transactions is low Property rule where cost of allocating rights by market transactions is low Liability rule where cost of allocating rights by litigation is low Liability rule where cost of allocating rights by litigation is low

Property rule is inefficient where transaction costs are high Property rule is inefficient where transaction costs are high Group of farmers own land and neighbors want to purchase it for a parkGroup of farmers own land and neighbors want to purchase it for a park Go to example Go to example