Econ 522 HW 2 Dan Quint PDF

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UW madison 522 econ hw with Dan Quint...

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1. Would you expect the transaction costs of private bargaining to be high or low in this case? Why?

I would expect the transaction costs of private bargaining to be high in this case. The transaction costs would be high in a bargaining situation because each party does not know each other’s threat points. The British do not know how much value is being lost to the Greeks by not returning the sculptures due to the ambiguity of the claim “restore unity of the monument”. The Greeks on the other hand do not know the threat to the British if they lose their Parthenon sculptures, as there are other worldly artifacts surrounding it. Another high transaction cost is that the museum has banned the act of returning the sculptures, making it difficult to trade. 2. (b) Explain the difference between the Normative Coase and Normative Hobbes approaches to property law. Given your answer to (a), which seems more appropriate in this case?

The Normative Coase approach calls for property laws to be extremely simple, with little to no transaction costs so people can bargain and reach an efficient outcome. In this case, the distribution of the law does not matter because it is configured in a way to lubricate bargaining and reach an agreement. The Normative Hobbes approach doubts that people can bargain efficiently and dodges these failures by trying to initially allocate efficiency so people don’t need to bargain. This way transaction costs become irrelevant. In this case, it seems that the Normative Hobbes approach would best fit because it is apparent that more complicated laws need to be in place to correctly allocate these sculptures. 3. (c) Suppose it were decided that Greece had a right (in the words of Calabresi and Melamed, an entitlement) to the statues. Given your answer to (a), what would you expect to be the final outcome if this entitlement were protected by each of the following remedies: injunctive relief (property rules)? damages (liability rules)? inalienability? If this entitlement was protected by property rules it would seem that the Greeks would be given back their statues, unless they choose to negotiate their injunctive relief to Britain. Inalienability states that which constitutes as inalienable cannot be bought or sold from one entity to another, hence Britain would be punished by crime . If the entitlement was protected by liability rules then Britain would be in favor as they protected the Parthenon sculptures when they would have been destroyed. However, what I really think will happen is that the British will refuse to return their sculptures and the Greeks will have insurmountable enforcement costs in which no trade will take place and Britain will remain with the sculptures.

1. (a) Explain why a rule which worked perfectly well in pre-industrial England might have been insufficient after the industrial revolution. The reason the natural flow theory of water rights was not completely successful during the transition from pre-industrial to industrial England is

because there was a higher demand for riparian rights to non-riparians than being supplied which was leading to inefficiencies. There were inefficiencies if people were not using the water and other people building industries valued the water much more. Natural Flow theory would work in post-industrial revolution if owners were allowed to sell their water or land to people who valued it more, creating efficiency.

2. (b) Coase would say that, when transaction costs are low, the initial allocation of property rights does not affect efficiency. Is that the only difference between the natural-flow and reasonable-use theories? Does the law seem to be evolving in the direction of greater efficiency? That is not the only difference between natural flow and reasonable-use theories because reasonable-use lubricates trade opposed to natural flow which creates transaction costs and barriers to trade. The reasonable-use theory creates more efficient outcomes. For example, reasonable use policy solves a dispute between two industrial companies working in the same vicinity. If one is causing a negative externality by impeding water use for the other company, this would be classified as unreasonable because both companies are relying on water.

While adverse possession rules vary from place to place, two common features are that the property must be possessed openly, with no attempt to hide it; and that the possession must be against the interests of the owners. Explain the effects of these two conditions, and what would likely happen without them.

These are two important conditions because they allow for squatters rights to have just reasoning. It is crucial that there is no attempt to hide the property and owners must be open about their possession because otherwise everyone would be claiming squatters rights trying to get land for free. In this case, Mrs. Butler was not directly open about her possession of the land because the bodies were unmarked and hidden underground. This is a great example to show that the disputed land is an advantage of the true owners property rights.

Would you characterize what the City of Detroit intends to do with this land as being the provision of a public good? A public good is both non-excludable and non-rivalrous. I understand that it would be better for the City to do what it has to do in order to retain the large tax cut from GM and the alleviation of unemployment. However, the use of a public good cannot reduce the availability of that good to other people who can access it. In this case, GM taking the facility is reducing 100 other businesses from using that land and in essence excluding the public.

(b) Justice Ryan describes the area where the taking is to occur as a “tightly-knit residential enclave of first- and second-generation Americans, for many of whom their home was their most valuable and cherished asset and their stable ethnic neighborhood the unchanging symbol of the security and quality of their lives.” If this description is accurate, does it raise any special efficiency concerns about the government’s taking this property at fair market value? Specifically, is there a particular problem here in under- compensating the residents of Poletown for their large subjective valuation on their homes and community? There is a problem here under-compensating the residents of Poletown for their large subjective valuations on their homes because it means more than just property. These people have built a community that is “a symbol of the security and quality of their lives” and the environment has sentimental value that is worth more than fair market price. (c) Evaluate the following interpretation of the Poletown decision: “The bargaining costs between GM and the neighbors are so high that, even if the valuation of GM’s desire to use their property was greater than the valuation on the neighbors’ desire to remain where they were, no bargain could have been struck. What the court is sanctioning here is a hypothetical market transaction that would have taken place but for the level of transaction costs.” This interpretation proves the Normative Coase approach that an efficient outcome is unreachable when there are high transaction costs, such as bargaining costs. The transaction costs are so high that it does not make sense for either party to partake in making a change. (d) What adverse economic incentives might this decision create for future business organizations thinking of leaving Michigan? What adverse economic incentives might it create for municipal governments in Michigan? Future businesses thinking about leaving Michigan would be more incentivized to leverage their power as an employer and tax payer to get the government to work in their favor, as the City of Detroit when through lengths to get GM to stay. This might make incentives for the municipal court to re-define what constitutes as a public good to override property rights and do what they think is best for the city with ease. (e) A more recent U.S. Supreme Court case, Kelo vs. New London, addressed the same issue and was decided in the same way as Poletown. In a dissenting opinion, Justice Sandra O’Connor writes, "All private property is now vulnerable to being taken, and transferred to another private owner, so long as it might be upgraded - i.e., given to an owner who will use it in a way that the legislature deems more beneficial to the public - in the process."

And Dana Berliner, an attorney for the homeowners forced to sell in that case, argued, "If jobs and taxes can be a justification for taking someone's home or business, then no property in America is safe. Anyone's home can create more jobs, if it is replaced by a business and any small business can generate greater taxes if replaced by a bigger one." What do decisions like Poletown and Kelo do to property rights? Would Hobbes support such decisions? Would Coase? These decisions in Poletown and Kelo make property rights not as secure or reliable as previously perceived because the agency responsible for enforcing property rights is the one taking them away. I believe that Coase would not support this decision because of the high bargaining transaction cost leading to an inefficient outcome, but Hobbes would support it because the city as a whole values the land more. (f) Therighttoclaimpropertyat“fairmarketvalue”canbethoughtofasprotecting property rights via damages rather than injunctive relief. Would the principles in Calabresi and Melamed support these decisions? Calabresi and Melamed would support these decisions because property rights via damages are a better remedy than injunction relief when the transaction costs are very high....