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.”

DQ32: Costs of Internalization? Costs of bargaining privately Costs of collectively creating new rules (can be very expensive) –multi-party negotiation –legislation

Demsetz : 1 st 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

Demsetz : 1 st Thesis If cost of externalities > cost of change  change in rule –Rough Approximation (Not Precise Math)

Demsetz : 1 st Thesis If cost of externalities > cost of change  change in rule –Rough Approximation (Not Precise Math) –Resulting Change in Rule Unpredictable

Demsetz : 1 st 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

Basic Demsetz Analysis: 1 st Thesis Identify decision/activity at issue

Basic Demsetz Analysis: 1 st Thesis Identify decision at issue Identify old rule/legal regime

Basic Demsetz Analysis: 1 st Thesis Identify decision at issue Identify old rule Identifyneg. externalities under old rule

Basic Demsetz Analysis: 1 st Thesis Identify decision at issue Identify old rule Identifyneg. externalities under old rule Identify change in circumstances

Basic Demsetz Analysis: 1 st Thesis Identify decision at issue Identify old rule Identifyneg. externalities under old rule Identify change in circumstances Does change increase neg. externalities?

Basic Demsetz Analysis: 1 st Thesis Identify decision at issue Identify old rule Identifyneg. externalities under old rule Identify change in circumstances Increase in neg. externalities? If new cost of externalities > cost of change  change in rule

Apply to Shaw Identify decision at issue Identify old rule Identifyneg. externalities under old rule Identify change in circumstances Increase in neg. externalities? If cost of externalities > cost of change  change in rule

DQ33: Apply to Montagnes Identify decision at issue Identify old rule Identifyneg. externalities under old rule Identify change in circumstances Increase in neg. externalities? If cost of externalities > cost of change  change in rule

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?

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

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)

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

DQ35: Apply to Development of Sexual Harassment Regs Identify decision at issue Identify old rule Identifyneg. externalities under old rule Identify change in circumstances Increase in neg. externalities? If cost of externalities > cost of change  change in rule

Demsetz First Thesis Useful description of how legal change can occur Can use to argue that legal change should occur Qs?

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

DQ36: Alternatives to Private Property State of Nature: (Can Use Power to Exclude) –Common Law re Rights among Family Members –Fairly Uncommon Today

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

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

Demsetz: Private Property More Efficient Than Communal Property 1.The members of the community will have trouble negotiating among themselves to achieve the optimal level of use of the resource.

Demsetz: Private Property More Efficient Than Communal Property 1.The members of the community will have trouble negotiating among themselves to achieve the optimal level of use of the resource. 2.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.

Demsetz Second Thesis Over Time, Process Described in 1 st Thesis Leads to More Private Property Non-Private Property = High Externalities

Demsetz Second Thesis Over Time, Process Described in 1 st Thesis Leads to More Private Property Non-Pvt Property = High Externalities High Externalities  Rule Change

Demsetz Second Thesis Over Time, Process Described in 1 st 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

DQ38 In your experience, do communities have ways of preventing anti- community behavior aside from bargaining or paying off the anti- social community members? Examples?

DQ38 If bargaining among members of a community is so difficult, how do private property systems get created at all?

WHAT TO TAKE FROM DEMSETZ Externalities Important (Want Decision- Makers to Consider Real Costs)

WHAT TO TAKE FROM DEMSETZ Externalities Important Useful Description of a Way Changes in Society Create Changes in Property Rights

WHAT TO TAKE FROM DEMSETZ Externalities Important Useful Description of Changes in Property Rights Arguments re Advantages of Private Property

WHAT TO TAKE FROM DEMSETZ Externalities Important Useful Description of Changes in Property Rights Advantages of Private Property Description of What Property Is (1 st para.) –Expectations re Rights to Act –Protection from Others’ Interference –Construct of Society/Culture

NEON: Mullett Brief Statement of the Case: Mullett … sued Bradley … for [cause of action] seeking [remedy]

NEON: Mullett Brief Statement of the Case: Mullett, original owner of an escaped sea lion, sued Bradley, who purchased it from its finder, for conversion seeking damages.

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

Mullett Brief 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)

NEON: Mullett Brief Facts (Relevant to Analysis)?