Protecting Ownership

Speakers
Dan Russell,

Release Date
August 10, 2017

Topic

Basic Economics Economics property rights
Description
    1. Property rules don’t explain everything. Sometimes, you need liability instead. Read Calabresi and Melamed’s groundbreaking paper here.
    1. Property Rules, Liability Rules, and Inalienability (essay): Guido Calabresi and Douglas Melamed distinguish between property entitlements and liability entitlements. 
    2. Property Rules vs. Liability Rules (video): Yale professor Ian Ayres explains the differences between property rules and liability rules. 
    3. Positive Rights vs. Negative Rights (video): Just as there are different types of entitlements, there are different types of rights. Professor Aeon Skoble differentiates between positive and negative rights. 

Daniel Russell: Protecting ownership. If Marshall is entitled to anything, surely he’s entitled not to have Taney break his legs. And yet, Taney can obtain a license to drive a car even though that increases the risk that he might break Marshall’s legs. So, why shouldn’t Marshall simply be able to forbid Taney to drive? Is Marshall entitled to his safety or isn’t he?
The answer is that Marshall is indeed entitled to protection from Taney but it is a further question just what the protection is that he’s entitled to. Sometimes it makes sense to protect Marshall by forbidding Taney to do something risky. But in other cases, like this one, it makes more sense to find another way to protect Marshall while also allowing Taney to take some risks.
This distinction between an entitlement and the protection of that entitlement is the distinction that Guido Calabresi and Douglas Melamed discuss in their essay, Property Rules, Liability Rules, and Inalienability. And that title refers to the three types of protection that they classify.
Let’s look at property rule protections and liability rule protections. If Marshall’s entitlement to safety is protected with a property rule, then Taney can do something that’s risky for Marshall only if he can somehow obtain Marshall’s permission to do it. All kinds of ordinary entitlements are protected this way.
Suppose Taney wants to own Marshall’s bicycle. In other words, Taney wants to transfer the entitlement to the bicycle from Marshall to himself. If Marshall’s entitlement is protected by a property rule, then Taney can have Marshall’s bicycle only if he pays whatever price Marshall will accept.
Liability rules are different. If Marshall’s entitlement to safety is protected with a liability rule, then Taney might be allowed to do something risky on the understanding that if he actually harms Marshall, he shall owe Marshall whatever compensation a court may decide. This is the rule that makes it possible for Taney to obtain a driver’s license, for instance.
So, one main difference between property and liability protections is that property protections give Marshall the right to forbid Taney to do the things that Marshall is protected from. Liability protections do not give Marshall that right.
The other main difference is that with property rules, Marshall will give up his entitlement only at a price of his own choosing. With a liability rule, Marshall has to give up his entitlement at a price of the law’s choosing.
When Taney gets a license to drive a car, Marshall’s entitlement to safety is protected with a liability rule and that’s a better arrangement for everyone than protecting him with a property rule. If Marshall were protected with a property rule instead, he could refuse to allow Taney to drive without first obtaining his permission. You can just imagine how costly it would be for Taney to go through negotiations with all the Marshalls out there. Actually, the transaction costs would be so great that driving would be impossible and, along with it, all the good things that vehicular travel and transport make possible.
So, the liability rule is not just better for Taney, it’s actually better for Marshall, too. That is what liability rules do. They create the permission to do things that bother others when that permission is what everybody would agree to, if they could afford the transactions necessary to come to an agreement. But if liability rule protections are so useful, why are there also property rule protections?
One reason is that with property rules, entitlements can move from one person to another by means of the price system. In other words, they move by bargaining. And, so, the entitlements end up in the hands of the people who most value them when bargaining isn’t too costly.
Another reason is that this way of changing entitlements saves on the administrative costs associated with courts and lawmakers. Property rule protections also keep decisions about the entitlements in the hands of people who will have to live with the consequences of those decisions, for better or worse, and who know firsthand what their preferences are. And, keep in mind that an entitlement is a right to say no and there can be tremendous value in being able to say no with finality, regardless of whether some third-party decision maker would prefer that you say yes instead.
These forms of entitlement protection each have their upsides and downsides. So, the key to determining how to protect an entitlement is the often delicate task of getting that balance right.