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1、Econ 522Economics of Law,Dan Quint Fall 2011 Lecture 7,1,Established properties of an efficient property law system Private goods are privately owned, public goods are not Owners have maximum liberty over how they use their property Injunctive relief used when transaction costs are low,damages used
2、when transaction costs high We tried “testing Coase” through an experiment Can UW undergrads reallocate poker chips efficiently? (Cost me $124),Monday,2,Take 1: Full Information (values on nametags),Our experiment,26/28 = 93%,58,60,32,purple chip,2,purple chip,4,purple chip,4,(sorry),6,purple chip,6
3、,purple chip,purple chip,8,purple chip,purple chip,red chip,8,purple chip,purple chip,10,purple chip,purple chip,10,red chip,red chip,12,fraction of potential gains realized,actual final allocation,efficientallocation,startingallocation,3,Take 2: Private Information (values hidden),Our experiment,18
4、/24 = 75%,42,48,24,purple chip,2,purple chip,3,purple chip,3,4,purple chip,purple chip,4,red chip,purple chip,6,purple chip,red chip,6,purple chip,purple chip,8,purple chip,purple chip,8,purple chip,red chip,10,fraction of potential gains realized,actual final allocation,efficientallocation,starting
5、allocation,5,Coase works pretty well, except under asymmetric info Full info: 93% of gains achieved Private info: 75% Uncertainty: 100% Asymmetric info: 0% Comparing “uncertainty” to “asymmetric info” Sellers value was 2 X die roll, buyers value was 3 X die roll If nobody knows die roll, no problem
6、they can trade based on the expected value But if seller knows die roll, problem In strategic settings, information can have negative value the seller could be worse off for having information!,Conclusion,6,(old exam question, question by Alex Tabarrok at Marginal Revolution blog) In Virginia, the c
7、ommon law has long held that if a neighbors tree encroaches on your yard you may cut the branches as they cross the property line, but any damage the tree does to your property is your problem. Your neighbor can even sue if your pruning kills the tree. In 2007, the Virginia Supreme Court overruled t
8、his 70-year-old precedent, making it your neighbors duty to prune or cut down the tree if it is a “nuisance.” Which is better: the new rule or the old? What would the Coase Theorem say about the two rules?,Discussion question,7,Applications ofProperty Law,8,Intellectual property: broad term for ways
9、 that an individual, or a firm, can claim ownership of information Patents cover products, commercial processes Copyrights written ideas (books, music, computer programs) Trademarks brand names, logos Trade Secrets,Intellectual Property,9,Example: new drug Requires investment of $1,000 to discover M
10、onopoly profits would be $2,500 Once drug has been discovered, another firm could also begin to sell it Duopoly profits would be $450 each,Information: costly to generate, easy to imitate,up-front investment: 1,000monopoly profits: 2,500duopoly profits: 450 each,10,Solve the game by backward inducti
11、on: Subgame perfect equilibrium: firm 2 plays Imitate, firm 1 playsDont Innovate, drug is never discovered (Both firms earn 0 profits, consumers dont get the drug),Information: costly to generate,easy to imitate,FIRM 1 (innovator),Innovate,Dont,FIRM 2 (imitator),Imitate,Dont,(-550, 450),(1500, 0),(0
12、, 0),up-front investment: 1,000monopoly profits: 2,500duopoly profits: 450 each,11,Patent: legal monopoly Other firms prohibited from imitating Firm 1s discovery Subgame perfect equilibrium: firm 2 does not imitate; firm 1 innovates, drug gets developed,Patents: one way to solvethe problem,FIRM 1 (i
13、nnovator),Innovate,Dont,FIRM 2 (imitator),Imitate,Dont,(-550, 450),(1500, 0),(0, 0),up-front investment: 1,000monopoly profits: 2,500duopoly profits: 450 each,450 P,12,Comparing the two outcomes,FIRM 1 (innovator),Innovate,Dont,FIRM 2 (imitator),Imitate,Dont,(-550, 450),(1500, 0),(0, 0),up-front inv
14、estment: 1,000monopoly profits: 2,500duopoly profits: 450 each,FIRM 1 (innovator),Innovate,Dont,FIRM 2 (imitator),Imitate,Dont,(-550, 450 P),(1500, 0),(0, 0),Without patents: Drug never discovered With patents: Drug gets discovered But,13,Without patents, inefficient outcome: drug not developed With
15、 patents, different inefficiency: monopoly! Once the drug has been found, the original incentive problem is solved, but the new inefficiency remains,Patents solve one inefficiencyby introducing another,CS1,250,Profit2,500,P = 50,P = 100 Q,Q = 50,DWL1,250,CS4,050,Profit 450 x 2,P = 10,Q = 90,DWL50,Mo
16、nopoly,Duopoly,up-front investment: 1,000monopoly profits: 2,500duopoly profits: 450 each,Net Surplus = 2,750,Net Surplus = 3,950,14,First U.S. patent law passed in 1790 Patents currently last 20 years from date of application For a patent application to be approved, invention must be: novel (new) non-obvious have prac
