Lueck 8 Miceli-Property Lato link between 'property law and property rights' is firmly established. This chapter will develol (e.g, contracts, torts) the literature has become so specialized that the connection to the caseg this link by examining property rights generally and property law in particular. Yet, much of th analysis in this chapter is applicable to topics elsewhere in the handbook, though in many conomics of property rights might seem faint The economic analysis of property law is substantially less well developed than the economic analysis of contract law or tort law(for example, there is no generally applicable model), and this chapter reflects this state of the discipline. The economics of property rights, however, developed but mostly without a focus on property law. The disconnection between the Demsetz's(1998)recent entry"Property Rights"in the The New Palgrave Dictionae pl economics of property rights and the economics of property law is longstanding. For example, Economics and the Law makes absolutely no mention of property law, and much of the economics of property rights literature remains ignorant of property law. Similarly, property law scholarship often is ignorant of economics. This is not to say there has not been important work in property law with strong economic underpinnings(e.g, Ellickson 1993, Epstein 1985 Heller 1998, Merrill 1986, Rose 1990), but it is clear that economics has not yet penetrated property law as it has penetrated contract and tort law. While it is common for courses in contract law and tort law to be taught using economics as the guiding framework, an economics- based course in property law is almost unheard of. In part, this chapter seeks to break down this division by bringing the two literatures together 1. 2. Property Rights, Transaction Costs, and the Coase Theorem The economics of property law begins with Coase( 1960), who provides a property rights externalities as a source of market failure requiring government intervention to force the en perspective on the problem of externalities, or social cost. Prior to Coase, economists viewed responsible party to curtail the harmful activity. Consider Coase's famous example of the rancher and farmer with adjacent plots of land. The rancher's cattle stray onto the farmer's land causing crop damage. If the ranchers profit, r(h), and the amount of crop damage, d(h), are functions of the rancher's herd size, h, then the first-best optimal herd size, h*, maximizes r(h) -d(h). That is, h"solves r (h=d (h). This is also the choice that would be made by a single party acting as both the farmer and rancher, Coase's'sole owner' solution. First-best then is synonymous with the zero transaction cost outcome. With separate parties, however, and the absence of a contract between the farmer and the rancher or some type of government intervention(a tax, fine, or regulation), the rancher would choose the herd size to maximize r(h). This results in too many cattle because the rancher adds cattle until (h)=0, which implies h> h*. Thus, the rancher must pay a tax(or face liability) for the damage from straying cattle, or he will expand his herd beyond the efficient(first-best)size s The main exception to this is a deep theoretical literature on takings which is examined in section 8 Merrill and Smith(2001)note this also An exception is Dwyer and Menell (1998) Another important, though little known early property rights contribution is that of Alchian (1965) We assume that <0 and d 20, ensuring a unique optimumLueck & Miceli – Property Law 2 link between ‘property law’ and ‘property rights’ is firmly established. This chapter will develop this link by examining property rights generally and property law in particular. Yet, much of the analysis in this chapter is applicable to topics elsewhere in the handbook, though in many cases (e.g., contracts, torts) the literature has become so specialized that the connection to the economics of property rights might seem faint. The economic analysis of property law is substantially less well developed than the economic analysis of contract law or tort law (for example, there is no generally applicable model), and this chapter reflects this state of the discipline. The economics of property rights, however, is well developed but mostly without a focus on property law.3 The disconnection between the economics of property rights and the economics of property law is longstanding. For example, Demsetz’s (1998) recent entry “Property Rights” in the The New Palgrave Dictionary of Economics and the Law makes absolutely no mention of property law, and much of the economics of property rights literature remains ignorant of property law.4 Similarly, property law scholarship often is ignorant of economics. This is not to say there has not been important work in property law with strong economic underpinnings (e.g., Ellickson 1993, Epstein 1985, Heller 1998, Merrill 1986, Rose 1990), but it is clear that economics has not yet penetrated property law as it has penetrated contract and tort law. While it is common for courses in contract law and tort law to be taught using economics as the guiding framework, an economics￾based course in property law is almost unheard of. 5 In part, this chapter seeks to break down this division by bringing the two literatures together. 1.2. Property Rights, Transaction Costs, and the Coase Theorem The economics of property law begins with Coase (1960), who provides a property rights perspective on the problem of externalities, or ‘social cost.’6 Prior to Coase, economists viewed externalities as a source of market failure requiring government intervention to force the responsible party to curtail the harmful activity. Consider Coase’s famous example of the rancher and farmer with adjacent plots of land. The rancher’s cattle stray onto the farmer’s land causing crop damage. If the rancher’s profit, π(h), and the amount of crop damage, d(h), are functions of the rancher’s herd size, h, then the first-best optimal herd size, h*, maximizes π(h)−d(h). That is, h* solves π′(h)=d′(h). 7 This is also the choice that would be made by a single party acting as both the farmer and rancher, Coase’s ‘sole owner’ solution. First-best then is synonymous with the zero transaction cost outcome. With separate parties, however, and the absence of a contract between the farmer and the rancher or some type of government intervention (a tax, fine, or regulation), the rancher would choose the herd size to maximize π(h). This results in too many cattle because the rancher adds cattle until π′(h)=0, which implies hr > h*. Thus, the rancher must pay a tax (or face liability) for the damage from straying cattle, or he will expand his herd beyond the efficient (first-best) size. 3 The main exception to this is a deep theoretical literature on takings which is examined in section 8. 4 Merrill and Smith (2001) note this also. 5 An exception is Dwyer and Menell (1998). 6 Another important, though little known early property rights contribution is that of Alchian (1965). 7 We assume that π″<0 and d″>0, ensuring a unique optimum