Before the advent of the fur trade. Indians had no reason to obtain furs in numbers beyond the small quantity required for their own use. Thus, there was no danger of depletion of the animal stock and, as a corollary, no need for property rights in land. (It is not clear, though, why the Indians did not make collective agreements to limit hunting rather than establish property rights. 18) (c) Rights to the resources of the sea: fisheries, oil, and minerals from the sea bed. For most of history, there were no property rights in the ocean's fisheries because fish were in inexhaustible supply for all practical purposes. However, certain fisheries came under strain with the introduction of trawler fleets in the late nineteenth century, and fish populations are under significantly greater pressure today because of the increased scale of, and the modern methods employed in, fishing(factory fleets, miles long nets, electronic detection of fish). In response to the need to preserve the fisheries countries have developed, through a series of treaties, property rights in the fish found their coastal waters; at present, a country enjoys such rights in an Exclusive Economic Zone(eez extending 200 miles from its coastline. This gives a country a natural incentive not to deplete its fisheries because it will then enjoy a greater catch in the future, provided that the fish in question do not tend to swim outside the eez Likewise there were no property rights established for oil and minerals from the might be commercially viable. Today, coastal countries have property rights to the action sea-bed until it became apparent, around the end of the second World War, that ext resources of the sea-bed within the EEZ, which gives them(or, more precisely companies granted licenses by them) a motive to explore, develop technology for extraction,and then to exploit oil and mineral resources(to date, principally manganese nodules). Outside the Eez, property rights to the sea-bed will be partial, governed often by an international authority according to a complex provision of a treaty on the law of e sea (d) Rights to the electromagnetic spectrum. With the invention of the radio and other means of wireless communication, the electromagnetic spectrum-the medium through which electromagnetic signals travel -- became valuable and property rights in it emerged. The main reason is that if two parties simultaneously attempt to transmit signals in the same area over the same frequency their signals interfere with each other resulting in garbled signals. In the early days of radio, this problem prompted the government to pass the 1927 Radio Act(and in 1934 to establish the Federal Communications Commission), under which it allocated exclusive rights to broadcast over particular ranges of the spectrum at particular times in particular areas. These property rights in the See demsetz 1967 cle This advantage of property rights must have outweighed the costs of enforcing the rights. It is not clear what these costs were. It is unlikely that the Indians actively policed the borders of their lands, for hat would have been inordinately expensive. Perhaps it was sufficient for a land owner to monitor the small area near his beaver lodges for strange traps and, if such traps were discovered, to lie in wait for interlopers For a brief description of the development of property rights in ocean resources, see Biblowit 1991, 79-81. See also Eckert 1979, Hanneson 1991, Scott 1988, and Sweeney, Tollison, and willett 1974 for economically oriented analysis of the subject. On the law of the sea treaty, see Agreement Relating to the Implementation of Part XI of the United Nations Convention On the Law of the Sea, with Annex, July 28.1994 Chapter 7
Before the advent of the fur trade, Indians had no reason to obtain furs in numbers beyond the small quantity required for their own use. Thus, there was no danger of depletion of the animal stock and, as a corollary, no need for property rights in land.17 (It is not clear, though, why the Indians did not make collective agreements to limit hunting rather than establish property rights.18) (c) Rights to the resources of the sea: fisheries, oil, and minerals from the seabed. For most of history, there were no property rights in the ocean’s fisheries because fish were in inexhaustible supply for all practical purposes. However, certain fisheries came under strain with the introduction of trawler fleets in the late nineteenth century, and fish populations are under significantly greater pressure today because of the increased scale of, and the modern methods employed in, fishing (factory fleets, mileslong nets, electronic detection of fish). In response to the need to preserve the fisheries, countries have developed, through a series of treaties, property rights in the fish found in their coastal waters; at present, a country enjoys such rights in an Exclusive Economic Zone (EEZ) extending 200 miles from its coastline. This gives a country a natural incentive not to deplete its fisheries because it will then enjoy a greater catch in the future, provided that the fish in question do not tend to swim outside the EEZ. Likewise there were no property rights established for oil and minerals from the sea-bed until it became apparent, around the end of the second World War, that extraction might be commercially viable. Today, coastal countries have property rights to the resources of the sea-bed within the EEZ, which gives them (or, more precisely, companies granted licenses by them) a motive to explore, develop technology for extraction, and then to exploit oil and mineral resources (to date, principally manganese nodules). Outside the EEZ, property rights to the sea-bed will be partial, governed often by an international authority according to a complex provision of a treaty on the law of the sea.19 (d) Rights to the electromagnetic spectrum. With the invention of the radio and other means of wireless communication, the electromagnetic spectrum -- the medium through which electromagnetic signals travel -- became valuable and property rights in it emerged. The main reason is that if two parties simultaneously attempt to transmit signals in the same area over the same frequency, their signals interfere with each other resulting in garbled signals. In the early days of radio, this problem prompted the government to pass the 1927 Radio Act (and in 1934 to establish the Federal Communications Commission), under which it allocated exclusive rights to broadcast over particular ranges of the spectrum at particular times in particular areas. These property rights in the 17See Demsetz 1967. 18 This advantage of property rights must have outweighed the costs of enforcing the rights. It is not clear what these costs were. It is unlikely that the Indians actively policed the borders of their lands, for that would have been inordinately expensive. Perhaps it was sufficient for a land owner to monitor the small area near his beaver lodges for strange traps and, if such traps were discovered, to lie in wait for interlopers. 19For a brief description of the development of property rights in ocean resources, see Biblowit 1991, 79-81. See also Eckert 1979, Hanneson 1991, Scott 1988, and Sweeney, Tollison, and Willett 1974 for economically oriented analysis of the subject. On the law of the sea treaty, see Agreement Relating to the Implementation of Part XI of the United Nations Convention On the Law of the Sea, with Annex, July 28, 1994. Chapter 7 - Page 12
spectrum generally took the form of nontransferable licenses of limited duration that might be renewed. Inability to transfer licenses and the cost and other disadvantages of the licensing and renewal process has led over the years to dissatisfaction with the allocation of the spectrum. Recently, lotteries and auctions have begun to be employed to allocate rights to parts of the spectrum, where these rights have limited transferability (e) rights to extraterrestrial bodies and outer space. One can expect that as uses for extraterrestrial bodies and for outer space become apparent, property rights in them will be established There is now a"Moon Treaty" that commits signatories to establish an international regime to govern the exploitation of the natural resources of the moon (but postpones allocation of property rights ) Also of note is discussion of (and some claims for) property rights to the geostationary orbit, the band of space 22, 300 miles above the equator where satellites travel at the same speed as that at which the earth rotates and therefore maintain a fixed position relative to the earth This is the most valuable orbit for communications satellites, yet the orbit is a scarce resource, principally because of electronic interference between satellites that are too close to one another See Coase 1959, De Vany et al. 1969, and, more recently, Andrews 1995, McAfee and McMillan 1996. mcmillan 1994 and settani 1994 2 Agreement Governing the Activities of States on the Moon and Other Celestial Bodies, Dec 18 1979,art.1l(5),18LLM.1434 See Kosmo 1988, Roberts 2000, and Staple 1986 Chapter 7-Page 13
spectrum generally took the form of nontransferable licenses of limited duration that might be renewed. Inability to transfer licenses and the cost and other disadvantages of the licensing and renewal process has led over the years to dissatisfaction with the allocation of the spectrum. Recently, lotteries and auctions have begun to be employed to allocate rights to parts of the spectrum, where these rights have limited transferability. 20 (e) Rights to extraterrestrial bodies and outer space. One can expect that as uses for extraterrestrial bodies and for outer space become apparent, property rights in them will be established. There is now a “Moon Treaty” that commits signatories to establish an international regime to govern the exploitation of the natural resources of the moon (but postpones allocation of property rights).21 Also of note is discussion of (and some claims for) property rights to the geostationary orbit, the band of space 22,300 miles above the equator where satellites travel at the same speed as that at which the earth rotates and therefore maintain a fixed position relative to the earth. This is the most valuable orbit for communications satellites, yet the orbit is a scarce resource, principally because of electronic interference between satellites that are too close to one another.22 20See Coase 1959, De Vany et al. 1969, and, more recently, Andrews 1995, McAfee and McMillan 1996, McMillan 1994, and Settani 1994. 21Agreement Governing the Activities of States on the Moon and Other Celestial Bodies, Dec. 18, 1979, art. 11(5), 18 I.L.M. 1434. 22See Kosmo 1988, Roberts 2000, and Staple 1986. Chapter 7 - Page 13
Chapter 8 DIVISION OF PROPERTY RIGHTS Having considered the general reasons for the existence of property rights, I now examine a number of topics about property rights, beginning in this brief chapter with the dvantages and disadvantages of their division 1. Division of rights described The bundle of property rights in a thing may be partitioned in a variety of ways: into various rights that are enjoyed contemporaneously; into rights that are enjoyed only unde certain contingencies; into rights that are enjoyed only at certain times. Further possessory rights and rights to transfer them may be separated from each other. Consider the following examples of division of property rights (a) An owner of land may not hold complete possessory rights, in that others may enjoy an easement, that is, the contemporaneous right of passage upon his land, such as along a path or on a private road Others may also have the right, known as a profit, to take something from the land such as timber oil or minerals (b) The provisions of a will may stipulate that the disposition of property will depend upon various contingencies, such as whether grandchildren have been born, whether a child is still alive, or whether a person has obtained an education (c) The common rental arrangement constitutes a division of property rights over time, in which many of the rights are held by the renter during the rental period but not before or after that period (d) The sale of property or its donation are occasions at which all rights associated with ownership pass to the buyer or recipient from that moment on e)Under the trust relationship, the trustee holds title to property for the benefit of another. The beneficiary may enjoy the use of property but generally will not have the right to sell or transfer it, so that possessory rights and rights to transfer are divided. For instance, an orphaned child may live in a house but an adult trustee, such as a relative may decide whether or not to sell 2. Social Advantages and disadvantages of division of possessor The division of possessory rights may be socially valuable when different parties derive different benefits from them because, other things being equal, gains can then be achieved if rights are allocated to those who obtain the most from them this will be so for instance, if the absentee owner of forest land gives hikers the right to pass through his property or if the owner of a home at a summer resort rents it to someone during the winter when the owner would not much want to use it There are several types of disadvantages of division of possessory rights, or of too fine a division of the rights The first concerns the observation that certain minimal transportation and related costs must be borne in order to enjoy possessory rights in a thing. To benefit from use of land(to hike on it, to harvest timber from it), one must generally travel to the land and perhaps convey equipment to it. These costs are not worth For an economically-oriented survey of division of property rights, see Stake 2000
Chapter 8 DIVISION OF PROPERTY RIGHTS Having considered the general reasons for the existence of property rights, I now examine a number of topics about property rights, beginning in this brief chapter with the advantages and disadvantages of their division.23 1. Division of Rights Described The bundle of property rights in a thing may be partitioned in a variety of ways: into various rights that are enjoyed contemporaneously; into rights that are enjoyed only under certain contingencies; into rights that are enjoyed only at certain times. Further, possessory rights and rights to transfer them may be separated from each other. Consider the following examples of division of property rights. (a) An owner of land may not hold complete possessory rights, in that others may enjoy an easement, that is, the contemporaneous right of passage upon his land, such as along a path or on a private road. Others may also have the right, known as a profit, to take something from the land, such as timber, oil, or minerals. (b) The provisions of a will may stipulate that the disposition of property will depend upon various contingencies, such as whether grandchildren have been born, whether a child is still alive, or whether a person has obtained an education. (c) The common rental arrangement constitutes a division of property rights over time, in which many of the rights are held by the renter during the rental period, but not before or after that period. (d) The sale of property or its donation are occasions at which all rights associated with ownership pass to the buyer or recipient from that moment on. (e) Under the trust relationship, the trustee holds title to property for the benefit of another. The beneficiary may enjoy the use of property but generally will not have the right to sell or transfer it, so that possessory rights and rights to transfer are divided. For instance, an orphaned child may live in a house but an adult trustee, such as a relative, may decide whether or not to sell it. 2. Social Advantages and Disadvantages of Division of Possessory Rights The division of possessory rights may be socially valuable when different parties derive different benefits from them because, other things being equal, gains can then be achieved if rights are allocated to those who obtain the most from them. This will be so, for instance, if the absentee owner of forest land gives hikers the right to pass through his property or if the owner of a home at a summer resort rents it to someone during the winter when the owner would not much want to use it. There are several types of disadvantages of division of possessory rights, or of too fine a division of the rights. The first concerns the observation that certain minimal transportation and related costs must be borne in order to enjoy possessory rights in a thing. To benefit from use of land (to hike on it, to harvest timber from it), one must generally travel to the land and perhaps convey equipment to it. These costs are not worth 23 For an economically-oriented survey of division of property rights, see Stake 2000. Chapter 8 – Page 1
if the rights enjoyed are too limited(no one would make a long trip in order t hike along a mere fifty foot path) A second disadvantage of division of possessory rights is that division may lead to the chance of more than one individual wishing to exercise the same rights and thus of disputes. If many individuals have the right to use a person's backyard swimming pool at different times, the odds of different people wishing to use the pool simultaneously will increase. Although this difficulty should not arise if the division of property rights is unambiguous, as a practical matter that may not be so(watches may disagree) a third disadvantage of division of possessory rights is that one person's use may conflict with another's, that is, give rise to a detrimental externality. If a farmer gives an right, trample the farmer's crops. These problems would not arise if possessory nigh i easement for right of passage on his land to someone, this person may, in exercising could be completely specified and enforced, for then the right to engage in the problematic behavior would not be granted The farmer would not give the person with the easement the right to trample his crops. But to determine whether a person with an easement does or does not trample the crops might be difficult(perhaps he could claim that animals trampled the crops). Hence, in effect, giving a person an easement may mean that the person is obtaining also the right to trample crops a closely related disadvantage of division of possessory rights is that it may result in the failure to obtain benefits from the coordinated use of property; one person rights may not do things that could aid another in his use of property because the first obtains no gain for himself from doing so. If a person has the right to use a farmer's land as pasture for his cattle, he could help the farmer by distributing manure so as to efficiently fertilize the farmer's land; but he might not do so because he may see no gain in it. (By contrast, if the farmer grazes his own animals, he will naturally have motive to use manure appropriately to fertilize his land. )As with the previously mentioned disadvantage of conflicting use this disadvantage would not arise if possessory rights were completely specified and enforced, for then beneficial actions, like distributing manure, could be required Another disadvantage of division of rights arises when the division is long-lasting e as an easement allowing passage over land may be - and the property is sold. At that he, the cost of the transaction will rise somewhat, because the buyer will need to understand the nature of the division of rights (or will wish to investigate the possibility that others have a right in the property of which he is not aware) 3. Social Advantages and Disadvantages of Separation of Possessory rights from the Rights to Transfer Possessory rights One would suppose that it is typically socially desirable for possessory rights and the rights to transfer them to be held by the same party, as the usual expectation is that the holder of possessory rights has both the knowledge and the motive to make good decisions about the transfer of the rights. The holder of possessory rights will typically have the requisite knowledge to decide about transfer because he will be familiar with the characteristics of the thing and will naturally know its value to himself. And he will generally have a socially desirable incentive to decide whether to transfer a possessory right because he will lose the benefit of his possessory right if and only if he decides to 2On externalities, see generally chapter 10 Chapter 8-Page 2
bearing if the rights enjoyed are too limited (no one would make a long trip in order to hike along a mere fifty foot path). A second disadvantage of division of possessory rights is that division may lead to the chance of more than one individual wishing to exercise the same rights and thus of disputes. If many individuals have the right to use a person’s backyard swimming pool at different times, the odds of different people wishing to use the pool simultaneously will increase. Although this difficulty should not arise if the division of property rights is unambiguous, as a practical matter that may not be so (watches may disagree). A third disadvantage of division of possessory rights is that one person’s use may conflict with another’s, that is, give rise to a detrimental externality.24 If a farmer gives an easement for right of passage on his land to someone, this person may, in exercising his right, trample the farmer’s crops. These problems would not arise if possessory rights could be completely specified and enforced, for then the right to engage in the problematic behavior would not be granted: The farmer would not give the person with the easement the right to trample his crops. But to determine whether a person with an easement does or does not trample the crops might be difficult (perhaps he could claim that animals trampled the crops). Hence, in effect, giving a person an easement may mean that the person is obtaining also the right to trample crops. A closely related disadvantage of division of possessory rights is that it may result in the failure to obtain benefits from the coordinated use of property; one person with rights may not do things that could aid another in his use of property because the first obtains no gain for himself from doing so. If a person has the right to use a farmer’s land as pasture for his cattle, he could help the farmer by distributing manure so as to efficiently fertilize the farmer’s land; but he might not do so because he may see no real gain in it. (By contrast, if the farmer grazes his own animals, he will naturally have the motive to use manure appropriately to fertilize his land.) As with the previously mentioned disadvantage of conflicting use, this disadvantage would not arise if possessory rights were completely specified and enforced, for then beneficial actions, like distributing manure, could be required. Another disadvantage of division of rights arises when the division is long-lasting -- as an easement allowing passage over land may be -- and the property is sold. At that time, the cost of the transaction will rise somewhat, because the buyer will need to understand the nature of the division of rights (or will wish to investigate the possibility that others have a right in the property of which he is not aware). 3. Social Advantages and Disadvantages of Separation of Possessory Rights from the Rights to Transfer Possessory Rights One would suppose that it is typically socially desirable for possessory rights and the rights to transfer them to be held by the same party, as the usual expectation is that the holder of possessory rights has both the knowledge and the motive to make good decisions about the transfer of the rights. The holder of possessory rights will typically have the requisite knowledge to decide about transfer because he will be familiar with the characteristics of the thing and will naturally know its value to himself. And he will generally have a socially desirable incentive to decide whether to transfer a possessory right because he will lose the benefit of his possessory right if and only if he decides to 24On externalities, see generally chapter 10. Chapter 8 – Page 2
transfer it, and will gain from whatever is given in the transfer There are, however, circumstances in which separation of rights to transfer possessory rights from the possessory rights themselves is beneficial. One such circumstance arises when the holder of the possessory rights does not have the knowledge or the intellectual ability to decide about transfer, such as when a child owns property and an adult trustee has the right to decide whether to sell the property because he can make better decisions than the child could. Another major circumstance in which separation of possessory rights and rights of transfer may be beneficial occurs when the holder of possessory rights does not have a proper incentive to transfer them. For example, suppose that Alpha rents a room in Betas house. Alpha would not have the motive to consider appropriately the character of another tenant(such as whether he would make noise), so that it may be best for Alpha not to have the right to sublet his 4. The Socially Optimal Division of Property Rights, Their Actual Division, and the It will be socially desirable for property rights to be divided when, but only when, the accompanying advantages outweigh the disadvantages One would expect the actual division of property rights by private parties generally to reflect the socially optimal division. The fundamental reason is that when the transfer of certain rights would be socially desirable, there will typically exist a mutually beneficial private exchange involving the rights. If, for example, a lar equipped to cut down his timber and someone else is, there will be a price at which the landowner will be willing to sell his timber rights and the other person will be willing to purchase them Furthermore, the law tends to aid the division of property rights that parties wish Individuals are generally able to divide property rights as they please by means of contracts. Thus, the landowner might arrange for another party to enjoy timber rights during a specified period according to a contract. Also, individuals are often able to effect mutually desirable division of property rights, and over long periods, through recognized devices of property law, including, as mentioned, easements, profits, and trusts. However, the law places various limitations on division of property rights. The general forms of property rights that individuals are permitted to hold are restricted. For instance, time shares in real estate were not an allowed form of property until relatively recently. Some commentators suggest that certain such limitations are socially desirable because they simplify sales transactions or because they prevent excessive fragmentation PThis example may be expressed generally Division of possessory rights may, as discussed ve, be associated with problems of conflicting use and of coordination. If so, it may be beneficial not to allow a holder of some of the rights to transfer them to another because this may worsen the problems puzzle for economic thinking because they apparently hinder desirable division of tigh y rights Present a See Rudden 1987, who also emphasizes that restrictions on the form of proper Sales transactions might be eased by a limitation in property rights because, as noted in section 2, a buyer would then not have to interpret a new form of property right, or would not worry about or investigate the possibility of a hidden interest in the property that he is buying. Thus, if time shares are not allowed, a buyer of property need not concern himself with their meaning or ascertain whether some Chapter 8-Page 3
transfer it, and will gain from whatever is given in the transfer. There are, however, circumstances in which separation of rights to transfer possessory rights from the possessory rights themselves is beneficial. One such circumstance arises when the holder of the possessory rights does not have the knowledge or the intellectual ability to decide about transfer, such as when a child owns property and an adult trustee has the right to decide whether to sell the property because he can make better decisions than the child could. Another major circumstance in which separation of possessory rights and rights of transfer may be beneficial occurs when the holder of possessory rights does not have a proper incentive to transfer them. For example, suppose that Alpha rents a room in Beta’s house. Alpha would not have the motive to consider appropriately the character of another tenant (such as whether he would make noise), so that it may be best for Alpha not to have the right to sublet his room. 25 4. The Socially Optimal Division of Property Rights, Their Actual Division, and the Law It will be socially desirable for property rights to be divided when, but only when, the accompanying advantages outweigh the disadvantages. One would expect the actual division of property rights by private parties generally to reflect the socially optimal division. The fundamental reason is that when the transfer of certain rights would be socially desirable, there will typically exist a mutually beneficial private exchange involving the rights. If, for example, a landowner is not equipped to cut down his timber and someone else is, there will be a price at which the landowner will be willing to sell his timber rights and the other person will be willing to purchase them. Furthermore, the law tends to aid the division of property rights that parties wish. Individuals are generally able to divide property rights as they please by means of contracts. Thus, the landowner might arrange for another party to enjoy timber rights during a specified period according to a contract. Also, individuals are often able to effect mutually desirable division of property rights, and over long periods, through recognized devices of property law, including, as mentioned, easements, profits, and trusts. However, the law places various limitations on division of property rights. The general forms of property rights that individuals are permitted to hold are restricted.26 For instance, time shares in real estate were not an allowed form of property until relatively recently. Some commentators suggest that certain such limitations are socially desirable because they simplify sales transactions27 or because they prevent excessive fragmentation 25This example may be expressed generally. Division of possessory rights may, as discussed above, be associated with problems of conflicting use and of coordination. If so, it may be beneficial not to allow a holder of some of the rights to transfer them to another because this may worsen the problems. 26 See Rudden 1987, who also emphasizes that restrictions on the form of property rights present a puzzle for economic thinking because they apparently hinder desirable division of rights. 27Sales transactions might be eased by a limitation in property rights because, as noted in section 2, a buyer would then not have to interpret a new form of property right, or would not worry about or investigate the possibility of a hidden interest in the property that he is buying. Thus, if time shares are not allowed, a buyer of property need not concern himself with their meaning or ascertain whether some Chapter 8 – Page 3