Transaction Costs Can Prevent Parties from Reaching Bargains that are “Efficient” (= Would Make Everyone Better Off)

Transaction Costs Can Prevent Parties from

Reaching Bargains that are “Efficient” (= Would Make

Everyone Better Off)

Demsetz : 1st 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


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


• If cost of externalities > cost of change change in rule– Rough Approximation (Not Precise Math)



– Resulting Change in Rule Unpredictable



– 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: 1st Thesis

• Identify decision/activity at issue


• Identify decision at issue

• Identify old rule/legal regime



• Identify old rule

• Identify neg. externalities under old rule





• Identify change in circumstances






• Does change increase neg. externalities?






• Increase in neg. externalities?

• If new cost of externalities > cost of change change in rule

Apply to Shaw






• If cost of externalities > cost of change change in rule

DQ33: Apply to Montagnes







DQ34Why does the author believe that

the tribes of the Southwestern U.S. did not adopt a system

similar to that of the Montagne?

DQ34Why 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

DQ34Why 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







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 1st 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


• State of Nature: (Can Use Power to Exclude)

• Communal Ownership – No one can exclude others– Often in Practice Variants on First in Time


• 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.


Over Time, Process Described in 1st Thesis Leads to More Private Property• Non-Private Property =

High Externalities


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

•High Externalities Rule Change

Demsetz Second ThesisOver Time, Process Described in 1st 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 (1st para.)– Expectations re Rights to Act– Protection from Others’ Interference– Construct of Society/Culture

NEON: Mullett BriefNEON: Mullett Brief

Statement of the Case:Mullett …

sued Bradley …

for [cause of action]

seeking [remedy]


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 BriefMullett Brief

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

Mullett BriefMullett BriefProcedural 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)


Facts (Relevant to Analysis)?

Documents

Transaction Costs Can Prevent Parties from Reaching Bargains that are “Efficient” (= Would Make Everyone Better Off)