The common law typically encompasses the law of property, the law of contacts, and the law of torts and will occupy our concern over the next three chapters as well as parts of the last chapter in this text. In this chapter we will discuss the concept of property rights and the four basic types of property: real, personal, intellectual, and public. In addition, we will look at how governments limit the use, transfer, and possession of property under the guise of regulation.
Key Economic Concepts
administrative cost cooperative game theory |
deadweight loss regulation |
Key Legal and Political Concepts
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adjudication bailee copyright eminent domain estate, subsurface estate, surface “fair market” value fair use incompatible use key money patent police power possession, adverse |
possession, constructive possession, involuntary possession, unconscious property, abandoned property, intellectual property, lost property, mislaid property, personal property, public property, real property rights public domain public nuisance |
public purpose public use regulatory taking rent control servicemark state of nature statute of limitations trade secret trademark warranty of habitability zoning |
What is the nature of property? We begin in the so-called state of nature, before government exists, with the concept of the natural right of self-ownership, first articulated by John Locke:
. . . every Man has a Property in his own Person. This no Body has any Right to but himself. The Labour of his Body, and the Work of his Hands, we may say, are properly his. Whatsoever then he removes out of the State that Nature hath provided, and left it in, he hath mixed his Labour with, and joyned to it something that is his own, and thereby makes it his Property. It being by him removed from the common state Nature placed it in, hath by this labour something annexed to it, that excludes the common right of other Men. For this Labour being the unquestionable Property of the Labourer, no man but he can have a right to what that is once joyned to, at least where there is enough, and as good left in common for others.1
Locke recognizes three principles found in the common law: first, an individual owns himself or herself and thus the violation of that individual is an abridgement of their property; second, individuals are entitled to the fruits of their labor, which is the basis for custody of real, physical, and intellectual property; and third, one can only take from the Earth in the state of nature, “at least when there is enough, and as good left in common for others.” This latter principle underscores the need, before government, to ensure that others can also use nature. When this principle cannot be handled adequately, disputes arise and an independent party adjudicates.
A standard rejoinder may be, “Why?” Why should we adjudicate such disputes? We do not convene a council to judge the merits of mere opinion, such as whether North Carolina is a better state to live in than South Carolina. We do not settle by debate the question of whether God exists. We also do not require discussion of matters of indisputable fact. You can argue that jumping out of an airplane without a parachute is a good idea but no one will believe you. We do not contravene common sense to argue that vanilla is a better ice cream flavor than mint chocolate chip (mint chocolate chip is definitely the best, there can be no debate on this subject).
The reason for law in terms of defining property, its ownership, its limitations, and its ability to be transferred is to increase wealth for all of society. Without an ability to protect property, why would we engage in productive activities? Why should I write this book if I am not compensated for its use? Why should a drug company create a life-saving drug if it cannot generate a profit? Why should I ever leave my car unattended if it can be easily stolen and if there is no mechanism to return it back to me? Indeed, why should I purchase a car in the first place?
Imagine a world lacking individual property rights and having only a collective common right. What would happen to the stock of cars that currently exists? You could take any parked car and drive it anywhere. Since no one owns anything, what is the incentive to maintain those cars? What is the incentive to put in any more gas than absolutely necessary? What would be the incentive to manufacture new cars or repair existing ones that fell into disrepair? Property rights are important for society because they provide incentives for acquisition, care, regular maintenance, and even transference of unused property in exchange for compensation.
Property acquisition is ultimately intertwined with the question, “What is property?” Property is that which one owns and ownership implies a certain bundle of rights associated with that which is owned: those being, at a minimum, a right to use, oftentimes exclusively, and a right to possess. If the property is alienable then there is also the right to sell or otherwise transfer that property to another. However, some property is inalienable, which means it cannot be transferred to another by one or more of the common arrangements by which this occurs. You are the inalienable property of yourself, preventing you from selling yourself into slavery. You cannot transfer your vote to another. In some cases, however, inalienability may be incomplete. You cannot sell your nonregenerative body organs (though you can sell your hair, your blood, your semen, and your eggs, all of which are regenerative), but you can bestow them by gift at any point in time, so long as in doing so you do not cause a guaranteed end to your own life or that it will be transferred only upon your death with the proviso that your death was not engineered to allow for such a transference. The economic rationale against inalienability in organ transplants is, of course, that it hinders the operation of a free market by reducing the supply of available donations. People end up dying because there is a shortage of available organs due to restrictions that prevent their sale. The basic argument is thus identical to one concerning rent control, which we will take up later in this chapter. On the other hand, the ability to sell an organ may lead individuals to be more likely to attempt to donate damaged organs, which generates an information asymmetry, and the potential that donated organs will be of higher quality than sold organs. We will take up this issue in more detail in Chapter 3 when we deal with warranties.
There are also certain other rights commonly associated with property, such as the right to alter, mortgage, loan, consume, or even destroy. For example, back in 2001, I created the American Review of Political Economy, an academic journal dedicated to the idea of an academic “sandbox” in which all heterodox and orthodox economic traditions could meet and exchange ideas. For a few years, due to various time commitments, I placed the American Review of Political Economy on extended hiatus. It is my property and I can do with it what I will. If I choose, I may restart it or I may decide to allow it to die. This right to decide its fate is uniquely mine. Yet this right to destroy is not extended to certain other properties that I own. I cannot do the same for my dog since the right to destroy is modifiable based on the nature of the property in question. Furthermore, if I exercise my right to kill off my academic journal, it will not preclude another from coming and starting a new journal with the same name and the same mission. The new owner will not be able to acquire my copyrights without negotiating with me, but he or she can certainly compete in that space if I choose to abandon it. The basic premise of the common law is that I should enjoy maximum liberty to do with my property what I will so long as I do not interfere with the right of others to do likewise with their property.
Locke’s insistence that our labor when combined with nature creates property is also found in ancient Roman law, which held the property of no one became owned by another the moment it was claimed through occupancy that was notorious, adversely possessive, and continuous. Each of these elements was needed to resolve a dispute that the property was actually owned since property that appeared to have no owner was subject to claim by another. Notoriety meant that the claim was open for others to see. Adversely possessive meant the property was exclusively used by the claimant and the continuous requirement meant sporadic possession was insufficient for a claim of ownership. Roman law specifically held that the property of enemies was also subject to these principles since enemies of the state enjoyed no property rights in the Republic.
This works if property is easily defined and immovable, but what happens when it lacks definite boundaries or can move? In Hammonds v. Central Kentucky Natural Gas Co., 255 Ky. 685, 75 S. W. 2d 204 (Court of Appeal of Kentucky, 1934), this was the question. A natural gas reserve was found below land leased by the Central Kentucky Natural Gas Company, but this reserve also traversed several other properties and one of those was owned by Hammonds. If natural gas were like diamonds or coal, fundamentally immovable until extracted, the owner of the subsurface estate (in this case the same person who owned the surface property) would be the owner. However, natural gas is fungible—it is impossible to determine from where the natural gas came. A better analogy would be of a feral or wild animal, as in Pierson v. Post, discussed in Chapter 1. Ownership of such resources is based not on who owns the land over which the natural resource is located but rather who first possesses the resource. Thus the decision was given in favor of Central Kentucky Natural Gas Company as opposed to Hammonds.2
Today, the principle of adverse possession allows the taking of real or personal property by another under similar conditions once the statute of limitations has run out. The economic rationale is that over time, utility derived from possession of property increases for people who adversely possesses it and declines for people who only own it nominally. This is an argument that utility is derived from use, rather than mere possession, of something. While intellectual property and public property are not subject to adverse possession, one can lose a trademark if one does not enforce the exclusive right to its use, one will lose one’s trade secret if it becomes disclosed, and one has a statutory time limit on how long one can hold a copyright or patent.
Real property is defined as land and those objects that are, for the most part, unmovable and are attached to it. Land, buildings, fences, and other structures constitute real property. Although it is true that one can move a building, it is inordinately difficult to do so. The act of moving a building alters the character of the property itself in such a way that it no longer can be thought of as the same. If I take my car from North Carolina and drive to the Mohave Desert, it is undoubtedly true it is still a car with approximately the same value in both locales. However, if I took my house and transferred it, the value of that house would drop appreciably since it no longer would be connected to any of the modern amenities that make residence in the house valuable, such as electric, water, sewer, and natural gas services. Going further, it is also possible to move the topsoil of my property to the Mohave Desert but it would be clear that doing so would not really be transporting it. All it would mean is I now have a bunch of topsoil in the Mohave Desert; the ability to grow a garden with vegetables or to have a lawn would be nonexistent because these features of my land are characteristics of the unique climate in which it naturally is found.
Eminent Domain
If a private person not directly connected to me wants my continuously used property, there is only one (legal) way with which he or she can acquire it and that is a voluntary agreement to transfer ownership. Taking the property using the barrel of a gun is theft. Taking the property through duplicitous means is fraud. There is no legal requirement I sell to another even if the price seems, to most individuals, to be more than reasonable. There are exceptions. If you cause me injury, you can be sued and compelled to provide me with monetary compensation for my loss. If I use adverse possession, which was discussed earlier, I can legally take your property. I can also take your property if it is not truly yours, as in I can have the government restore my prior property rights in a work of art poached from my house and then sold to you by the thief. If I hold a collateralized contract and you default on that contract, I can take your collateral.
In each case, there is a direct connection between the parties or (in the case of adverse possession) a lack of continuous use on the part of the owner used to the advantage of the person who seeks to acquire the property. The transfer of property is granted to provide satisfaction to an aggrieved party or based on the principle of abandonment and the subsequent claim of the property by someone else. When it comes to the government, however, no such rationale is required. It may take your property for a “public purpose” even if you are currently occupying it without you doing something for which you can be found at fault. In order to take property, all it need grant you is compensation at the current market rate under the doctrine set forth by the Supreme Court in Olson v. United States, 292 U.S. 246 (1934). Yet this is inefficient.
Suppose you had a book given to you by your grandfather and thus it holds a lot of sentimental value such that you would never sell it for the current market price (that is not to say that you would never sell it but you would need to be compensated not only for the market price but also be paid a significant premium). I offer you $20, the current value of the book in the bookstore and you, naturally, say no. I then take your book and give you the $20 even though you do not agree to the transaction. This is theft. It does not matter I have given you money at the current market price. It would also not matter if I paid you more than the market price to compensate you for the “trouble” of reacquiring another book. Unless the transaction is voluntary, it is a form of theft. Of course, in the case of a book, you might very well ask, why do I not go and purchase the book myself from a third party? If there were truly a free market in these goods, you would be correct. Taking your goods by force implies that the “fair market price” really isn’t.
From an economic standpoint, the desirability of voluntary transactions is straightforward: the person who most values the good will receive it; we achieve allocative efficiency since there are no trades that can be made that can make both parties better off.
If I value the book at $30 and you value it at $27, I can offer you $28 and we both will be better off but if I require you to sell it to me for $20, I have enriched myself at your expense, although society as a whole is made better off since the good is now in the hands of the person who values it more. In this case, we achieve an efficient outcome but we could have accomplished the same result without violating your property rights.
On the other hand, what if you value the book at $35? In this case, the transfer from you to me is not merely a matter of an enrichment of me at the expense of you but is also a reduction in the overall social welfare of the entire society; the amount by which I am benefiting cannot compensate you for your loss and not only are we not seeing a win–win situation whereby both parties are better for it, we are in a scenario where your loss exceeds my gain—we would both be better off if you turned around and bought the book back from me for $33! Thus, in this worst case scenario, a trade can be engineered that will return us back to a point of allocative efficiency but only because I have enriched myself at your expense. However, since trades involve transaction costs, which are deadweight losses for society, such theft is inefficient.
The standard argument for eminent domain, that it is necessary so a holdout will not “unreasonably” extract payment far in excess of that which is commanded by the market, is a poor economic one. In its best case scenario, using an involuntary transaction involves getting a good for less than what a voluntary transaction would cost, but it comes at a terrible price; if we routinely violate property rights to get what we desire, what would be the desire to acquire property? If we reduce our desire to acquire property, we hamper the incentive mechanism that creates wealth in the first place. Strong property rights are the basis not only for a free society but also a wealthy one. Violation of property rights disrupts trust, the basis for all market transactions. If I cannot trust you to treat me fairly, why should I do business with you? It is the quintessential characteristic of market economies that one acquires goods in trade not by appeals to sympathy but by having a meeting of the minds based on mutual selfinterests. Self-interest, in most cases, is served best when neither party seeks to take advantage of the other since the most important attribute of an individual is his or her good name and the defining characteristic of a profitable going concern is customer goodwill. If I gain a reputation for taking property of others without just compensation, soon the only way I can acquire the property of others is in a similar manner. I will have become a thug and will have rejected even the veneer of being an honest dealer. Once I have legitimized taking by force, what right do I have to complain when a similar situation happens to me? In its worst case scenario, all of the aforementioned ills are present with the addition that the transfer is an inefficient one—not only are we reducing everyone’s welfare in the future through the destruction of goodwill, reputation, and trust but we also do so for no good reason in the present since the overall societal welfare is reduced even with regard to this one transaction. One cannot hope to save the market by destroying it.
At least some of this might be redeemable in cases where a public need was being served. The construction of an interstate highway, for example, has numerous benefits that adhere to the whole of society. However, in some cases, these benefits are tenuous at best and the takings clause may be overly broad. A series of decisions from the court have concluded that “public use” equates to “public purpose” and have allowed the government to increase its power over private owners when less extreme remedies are already available to it. For example, urban blight and slum conditions can be alleviated under the police powers of a state using nuisance laws. Various remedies can be required of property owners and failure to adhere to these after being given adequate notice and sufficient time can still lead to property condemnation. Yet in 1945, the U.S. Congress introduced the District of Columbia Redevelopment Act, to allow the district to use eminent domain to eliminate blight and engage in urban renewal. It could then transfer that property to another private entity to undertake this project. The question before the U.S. Supreme Court in Berman v. Parker, 348 U.S. 26 (1954), was whether the District of Columbia was allowed to seize a department store that itself was not slum housing or blighted but which nonetheless was in the redevelopment area and needed to be cleared for the comprehensive redevelopment plan to take effect. The Supreme Court unanimously upheld the legislation, allowing the taking, even though it ultimately led to “a taking from one businessman for the benefit of another businessman,” on the grounds that the overall project served the public purpose of eliminating slums and failing to take everything within the redevelopment area could jeopardize the entire project. Subsequently, in Hawaii Housing Authority v. Midkiff, 467 U.S. 229 (1984), the mere localized concentration of property ownership was a sufficient public purpose under the police powers act to legalize takings via eminent domain, while in Kelo v. City of New London, 545 U.S. 469 (2005), the Supreme Court held that a taking solely for the purpose of potentially expanding tax revenues and improving the local economy was a legitimate “public use” under the takings clause. Ironically, the redevelopment plan in that case eventually was shelved as the developer was unable to obtain adequate financing. After this last case struck a nerve with the public, the vast majority of states passed new legislation that limited (though often only slightly) the power of municipalities to engage in similar takings.
This can also work in reverse, whereby a property owner can force the government to purchase the property or on easement that is created by government action even though no declaration of taking occurs, through a process known as inverse condemnation. In United States v. Causby 328 U.S. (1946), the Supreme Court found that the ancient property rule of Cuius est solum, eius est usque ad coelum et ad inferos (whosoever owns land, it is theirs, from all up to Heaven and all down to Hell) was not applicable with respect to normal commercial air space but because the U.S. government was conducting flights out of a nearby air force base that were so near to the ground as to disrupt the commercial chicken farming interests (the planes were flying at an altitude of less than 100 feet over the property), the actions constituted the taking of an easement that had not previously been the government’s and for which compensation had to be paid, even though the easement reverted back to Causby when the flights ended. This particular case also serves as the basis for compensating homeowners either with cash settlements or by mitigation efforts when commercial flight paths are altered so that they affect homeowners negatively in the surrounding area where they had not previously been affected.
Incompatible Uses
When I lived in Ontario, California, the wind would often blow in my direction the powerful odor of cattle. The fact that the cattle were there first did nothing to reduce the offense that was faced by my olfactory. Similarly, if you build a tall building next to mine such that I can no longer operate my satellite dish since your building is blocking my line of sight to the southern sky, your actions have harmed my preexisting claim. These two are examples of those that are referred to as “incompatible uses” because the enjoyment of property by one individual manifestly interferes with the enjoyment of property of another in such a matter that the two uses cannot occur simultaneously without interference. Technically, this issue points to a coordination problem in which the two sides need to work out an agreement that will not lead to a conflict.
Oftentimes agreements will not be forthcoming and the government will take it upon itself to impose a solution. Under “right to farm” rules, if a farmer has operated a farm for at least 1 year without the farm being considered a nuisance, it is impossible for others to object on those grounds unless there is a substantial change in how the farm operates. The Indiana Court of Appeals ruled in Shatto v. McNulty, 590 N.E.2d 897, 898-99 (Ind. Ct. App. 1987), “People may not move into an established agricultural area and then maintain an action for nuisance against farmers because their senses are offended by ordinary smell and activities which accompany agricultural pursuits. . . . We must observe that pork production generates odors which cannot be prevented, and so long as the human race consumes pork, someone must tolerate the smell.” Yet a substantial alteration is not the mere increase or decrease in numbers of animals but rather an alteration of the type of activity would be required. In addition, once that activity has occurred for a period of at least 1 year, the right to object is forfeited (Laux v. Chopin Land Associates, Inc., 550 N.E.2d 100 [Ind. Ct. App. 1990]). In these particular cases, we see the law favors the party for whom the transaction cost would be greatest at the time that the nuisance is identified. It is far less costly from the standpoint of the consumer to decide not to rent or purchase a property because of a preexisting farm that is located adjacent to it than for the farm owner to be forced to mitigate the smell. Still, one has to wonder why we have a “right to farm” rule in the first place. Why should a farmer have a greater right under the law of nuisance than that given to a tanner or leatherier? Right to farm legislation is, at least partially, predicated on the idea that the property right ought to go to the preexisting claimant but that can be inefficient as well. If it would be easier for the farmer to mitigate the issue, why shouldn’t the farmer do just that? By granting a right that trumps the rights of future uses through the doctrine of incompatible use, it can lead to an excessive amount of farming than is socially optimal or the use of land that is suboptimal for the purpose of farming simply to establish the right not to be bothered.
A similar condition is present in the subdivision where I purchased my existing home. As we are located a mere 5 miles from an international airport, my builder installed extra installation so the noise of jets would not be heard. This noise abatement has additional benefits in that I cannot hear my neighbor’s loud music and, in the 8 years during which I have been resident here, I have never heard the sound of an airplane even though they fly directly over my property at a distance of about 4,000 feet.
Under English common law, if you have been able to utilize natural light for a period of 20 years, your right to that light has been established and a neighbor who obstructs that light by building a structure or planting trees can be held at fault under a nuisance claim. However, this would severely restrict the ability to develop commercial property, so it has not been adopted by the United States (Fontainebleau Hotel Corp. v. Forty-Five Twenty-Five, Inc., 114 So. 2d 357, 1959 Fla. App.). A similar ruling would likely be made with respect to satellite television reception. I can, of course, attempt to move my dish to acquire a signal. Rules established by governments and homeowner’s associations can restrict where I place an antenna provided they do not preclude me from installing it somewhere where I can acquire reception. If I cannot acquire reception except in a location which is not permitted by the government or homeowner’s association, the reason for not allowing me to locate it would have to be due to safety concerns or for historic preservation reasons under the Telecommunications Act of 1999, as amended. The reason for this makes economic sense. Preventing my neighbor from erecting a tall building that he or she is otherwise permitted to do under the law would be a grave expense for my neighbor, while moving the satellite dish would be a minor expense for me. The basic idea here is that the cost of the transaction ought to be borne by the individual who is best able to pay it. Reconfiguring a building to allow my satellite reception would be far more costly than having me move the satellite to a differing location. Of course, it would be nice for my neighbor to pay for that relocation but I cannot compel him to do so. As we can see here, the mere fact that I was here first (contrary to the right to farm statutes) does not guarantee me the right to be able to continue to enjoy my property to the same extent and without future interference.
There is an important lesson here from an economics standpoint: although it is easier to administer a law that sets out clear parameters for deciding property rights (such as a first-in-use, first-in-right system), we must consider all deadweight losses (transaction costs, administrative costs, and efficiency costs) when determining the best policy. We will consider these issues once again when we examine environmental law and the Coase theorem in Chapter 6. However, for now, we will look at a technique that has long been used to solve this incompatible use problem and that is to impose coordination on a market through a regulatory measure known as zoning.
Zoning and Land Use Restrictions
Zoning originated in San Francisco in 1867 when it passed the first land use ordinance in order to preemptively prevent the construction of slaughterhouses and other similar businesses in certain defined areas of the city as opposed to trying to cure these defects in arrears through a nuisance abatement action, while Los Angeles became the first city to designate between residential and commercial areas of a city in 1909 and the U.S. Supreme Court upheld the concept in Hadacheck v. Sebastian, 239 U.S. 394 (1915). Similar types of actions were found in several East Coast cities to prevent high-rise buildings from being constructed, which were upheld in Welch v. Swasey, 214 U.S. 91 (1909) (limits on heights of buildings do not violate the Constitution’s prohibition on takings or on the requirement for equal protection under the law).
In 1916, the first comprehensive zoning ordinance to combine these two features was introduced in New York City and, in Village of Euclid, Ohio v. Ambler Realty Co., 272 U.S. 365 (1926), the U.S. Supreme Court ruled that zoning regulations were legitimate uses of the police power of a locality so long as they were not “clearly arbitrary and unreasonable, having no substantial relation to the public health, safety, morals, or general welfare.” The economic rationale for carrying out zoning is to impose order on an otherwise disorderly market and although every major city except Houston, Texas has a zoning ordinance on its books, it is not entirely clear that these are necessary to solve the incompatible use coordination problem. Manufacturing plants typically are located in areas that have low land values since they must occupy a great deal of real estate when compared with single-family and multifamily dwellings. You rarely see such plants in the middle of cities that are typically dotted with residences, offices, and shops. Similarly, few single-family homes will be found in a shopping district, the land is simply too valuable and the owners of the residence would be hard pressed to refuse a generous offer from a potential retailer for the land. Land prices tend to reflect their use and zoning merely reinforces this existing arrangement.
Still the libertarian-minded will not find a free market nirvana in the antizoning capital of Houston. Land use restrictions still persist in the city and the municipality’s attorney can enforce through the police power of the state highly restrictive covenants, conditions, and restrictions of private landowners without requiring that these actions be brought privately as most contract signatories are required to do when attempting to enforce those provisions. Furthermore, while private contracts are usually thought of as being negotiations that inure to the benefit of all parties, restrictive covenants can be pushed through after the fact and imposed on property owners who would not wish to otherwise agree to their terms. Although aesthetic rules are not enforced in this matter, land use is, which makes for a de facto zoning code that, while not uniform throughout the city, is, nonetheless, highly restrictive in character, sometimes more so than in other cities. In addition, there are general overlaid rules of minimum lot size and minimum parking size regulations that work hand in hand to generally restrict property owner rights to a much greater extent than would appear to be the case on first glance.
The basic problem with zoning is that it transfers from individuals the right to completely enjoy their property, as these controls fundamentally restrict rights in the name of preventing negative externalities, such as locating a factory next to a residence. There are numerous other methods that are less intrusive and destructive of the right to property that are available to accomplish a similar goal, including private contracting, private negotiation, and the use of the police power of the state through nuisance ordinances. These other solutions are, contrary to zoning, either established freely between the individual parties or are imposed based on a uniform standard. On the other hand, zoning, by its very nature, can be capricious since properties in different sections of the city are treated differently even if they are otherwise similar.
The segregation of districts of a city into commercial, industrial, and residential areas is designed to reduce the juxtaposition of properties that have fundamentally incompatible uses. Yet it is unclear why this is an issue in the first instance. Zoning is about grabbing from your neighbor a portion of his rights and giving it to the community at large. Similarly, your neighbors take from you a portion of your rights. Yet if there were no zoning restrictions whatsoever, this would mean that you could do not only all that you currently are allowed to do with your property but also those things that zoning currently restricts. As such, your property’s land value, assuming everything else stays the same, would be no lower and arguably would be higher under a system where there is no zoning than a system where zoning exists.
Things are not quite as simple as this naïve argument would suggest. If there are significant negative externalities present because land owners do not take into consideration the effect of their actions on their neighbors, everyone can lose. To demonstrate this problem, we can look at zoning through the lens of cooperative game theory.
Cooperative game theory is a modeling method in which we can examine how one individual’s reactions to the actions of another individual complicates the returns each individual receives. Although everything we do is dependent in some way on the actions of others in the abstract, in many cases these activities are so far removed from each other that they are almost meaningless. A decision to run a house of ill repute in Chicago has very little to do with me, except that I might find it offensive to know that such a business is located anywhere. However, if it is located next door to me, the comings and goings of prostitutes and Johns could end up causing me serious harm as my own property values will tend to decline in the presence of such a business.
Suppose I value my property at $300,000 if I can do whatever I like with it but only $250,000 if I am limited in terms of my rights under the current zoning ordinance that exists in my area. Suppose further that you value your property the same. If it were true that the exercise of our rights could not impact our neighbors then there would be no reason to have zoning whatsoever. But suppose that, in fact, the exercise of your rights in the absence of the current zoning ordinance would lower the value that I set for my property by $100,000 and a similar conclusion is made by you with respect to me. Suppose further that the right in question in both cases is disallowed under the current zoning law. In such a case, our calculations change. If each of us is able to fully utilize our rights, we each end up valuing our properties for $200,000 rather than $300,000 because the exercise of those rights by the other party creates a negative externality for us that devalues our respective property values in our eyes. By limiting our rights, we are able to increase our valuations to $250,000 by mutually agreeing not to engage in that behavior. However, why can’t this be accomplished via standard negotiation? Certainly if we can come to an enforceable agreement that is mutually satisfactory, the benefits from zoning cannot outweigh the benefits that we receive from negotiation—or can it? The answer to that question lies in with transaction costs. While two individuals can negotiate a common agreement in most cases, groups of hundreds of different individuals may find it quite difficult to do so. Zoning, by allowing all to come together through a democratic process, binds everyone into a negotiated settlement using a voting mechanism. It may not always be the most efficient in the absence of transaction costs, but it will hopefully be close to that when transaction costs are considered. Indeed, if zoning achieves the same result as a negotiated settlement, it may be that the transaction cost reduction will be so great that it is actually a preferred solution to a negotiated one.
Zoning creates many issues that would suggest such a result cannot be achieved. It is almost always imposed within political subdivisions, such as counties and cities. Since there is some degree of substitutability between political subdivisions with respect to land, whether they are commercial or residential, zoning in one city affects the land values in another even when zoning is not present in another community. This is because zoning effectively changes the supply of land available for development with respect to any given use. If supply is relatively inelastic, reducing the supply of land for housing by stipulating a minimum lot size and mandating singlefamily housing, this will effectively raise equilibrium prices in the community; but, if other cities have relatively elastic supplies of land since they do not have as strict zoning requirements, there will tend to be an increase in demand in those cities without such a steep rise in price.
Tenancy and Eviction
When you rent a space, you expect it to be habitable and that you can enjoy its use. The first of these two expectations is covered by the implied warranty of habitability and the two are jointly codified into contracts by a covenant of habitability and a covenant of quiet enjoyment. Under the implied warranty of habitability, the landlord represents that the property meets certain standards that afford it a reasonable living standard. This was in sharp contrast to earlier common law rulings on property that afforded the doctrine of caveat emptor with regard to such transactions. Similarly, a lease contract was essentially considered a conveyance of the property for a fixed period of time and thus the renter assumed the obligations and liabilities that went along with ownership, though not all of the benefits that would normally accrue to the landlord.
Yet courts in the early years of the republic were already beginning to recognize that tenants were at a disadvantage in negotiations since the landlord had the benefit of hidden knowledge that the renter did not have. As such, if a renter discovered later the fact that the premises was not adequately maintained or if the landlord did not provide adequate protection for the tenant to be able to enjoy the space, tenants could leave a lease mid-term under the doctrine of constructive eviction. The seminal case regarding this was Dyad v. Pendleton, 8 Cow. 727 (N.Y. 1826). In that case, the tenant complained that the presence of the brothel in the building rendered continual habitation intolerable and thus demanded to be able to break the lease. The dissent to the decision noted that this could lead ultimately to a condition in which leases meant nothing since a renter could always come up with some excuse to plead constructive eviction and be let out of the lease. Furthermore, it was argued that the remedy for the tenant was obvious: call the police. Still, this case set a precedent for tenants arguing that circumstances such that the property was uninhabitable or unfit for quiet enjoyment effectively forced them to move and thus the termination of the lease was not their fault.
More movement toward tenant rights occurred in the middle part of the last century as indoor plumbing, electrical wiring, and other hidden aspects of a residence made it difficult for renters to know what was in proper working order. This alternation led to a greater risk being carried by landlords and rents accordingly rose as more and more requirements were laid at the feet of those who would rent properties to others. Still, this can be considered as a mitigation of transaction costs and the transfer of risk also afforded landlords an incentive to keep their properties in rentable condition. When the warranty of habitability is breached, the law affords various remedies for the tenant. First, if the tenant has given the landlord adequate notice of a minor defect and the landlord has done nothing to remedy the situation, the tenant may initiate the repair at his or her own expense and then deduct that expense from the next month’s bill.
Second, one can apply to place rent into escrow until corrections are made. If the length of time for corrections is unwarranted, courts can authorize payment be made to the tenant as compensation for reduction in use from which he or she was enjoined.
The most drastic remedy is receivership where the court appoints a third party to oversee repairs and collect rent to be used toward correction of defects. In some cases, where the cost of such remediation is particularly high, the receiver can seek additional loans against the property that will create new first liens and forcing existing lenders into a position of subordination, even without their consent. This creates powerful incentives against landlords since these actions can make it difficult for them to raise money for other ventures and because the receiver has no responsibility to the landlord to merely bring the properties up to standards or to do so in a less costly manner. Instead, the receiver may engage in actions that harm the financial interest of the landlord since the receiver owes his or her allegiance to only the tenants and the courts.
These remedies would not be effective unless they could be made into a credible threat. If the landlord could terminate the lease without cause or in retaliation for undertaking such remedies, few would come forward to challenge the condition of the rental property. At the same time, there are laws that are designed to protect the landlord. Security deposits may be required and landlords are permitted to deduct from the security deposit the cost of repairs due to actions undertaken by the tenant that exceed normal wear and tear. While tenants are expected to be able to enjoy their covenant of quiet enjoyment, such that the landlord cannot come at all hours of the night, a tenant who bars a landlord from enacting necessary repairs cannot turn around and complain when those repairs are not done in a timely manner.
There are other methods whereby a landlord can seek to end a rental contract but these usually fall under the category of “just-cause eviction.” A tenant who materially breaches the contractual terms including, but not limited to, failing to pay rent, engaging in willful destruction of the property, or engaging in behavior that is inconsistent with the rules and regulations of the premises may be evicted prior to the end of the lease. In addition, changing circumstances for the landlord or a violation of housing codes by the tenant may cause a cancelling of the lease. Various reasons may differ from jurisdiction to jurisdiction but the San Francisco Just Cause Eviction Ordinance found in Section 37.9 of the City and County Ordinances provides a good overview. In that city, a rental agreement may be terminated unilaterally by the landlord and eviction procedures may be instigated (usually with a requirement of having provided prior written notification and an opportunity for the tenant to address the issue) whenever the tenant:
1. fails to pay rent on time, habitually pays the rent late, or frequently writes checks to the landlord with insufficient funds in the account from which they are drawn;
2. violates a lawful obligation or covenant of tenancy and fails to correct this violation;
3. continues to engage in a nuisance or allows a nuisance to continue that causes harm to the building, the residents, or the landlord;
4. uses or allows the unit to be used for an illegal purpose;
5. refuses to renew the lease under substantially similar terms after the previous lease agreement has run its course;
6. refuses to grant the landlord lawfully required entry to the unit; or
7. attempts to transfer tenancy rights to a subtenant not approved by the landlord at the conclusion of a rental period.
In addition, under the same ordinance, the landlord may evict for the following reasons of his own design provided they are undertaken in “good faith” and “without ulterior motive”:
1. if he or she wishes to utilize the space for his or her own personal enjoyment or the enjoyment of an immediate relative for a period not to be less than 3 years;
2. for converting the residences to condominiums;
3. to demolish the unit or building;
4. to temporarily evict for the purposes of conducting repairs and improvements;
5. to rehabilitate the property; or
6. to remove from the rental market altogether all units in a building.
Each of these provisions is designed to preserve for the landlord certain basic rights associated with ownership and allow for enforcement of the rental contract or lease. Some of these may seem obvious since a tenant who fails to follow the lease terms or who fails to pay rent no longer has rights to inhabit the housing unit. If we allowed squatters to continue to reside, it would be equivalent to legalizing trespassing in general and would preclude development of any rental market. Other provisions, such as prohibiting the use of a unit for an illegal purpose or creation of a nuisance protect the landlord from reputational or financial harm. The presence of drug dealing in all of its various manifestations can cause a landlord to lose ownership of the building under asset forfeiture laws. The dismantling of smoke detectors in violation of the law could result in substantial property damage, while a provision that would not allow a landlord to take rental property off the market entirely could effectively require landlords to lose money in perpetuity under rent control laws, which will be discussed in the next section.
Rent control is a restriction on a landlord’s ability to freely set rental prices. While habitability laws raise costs, rent control reduces revenues, transforming a monopolistically competitive market into one fraught with price controls. Like all price ceilings, it does nothing for the market when not effective (Figure 2.1) but, contrary to intuition, it also does some harm:
Figure 2.1 Ineffective rent control
At first, this graph may seem counterintuitive, especially for economics majors who are used to seeing a deadweight loss (the blackened triangle region), an increase in price (from P1 to P2), and a reduction in quantity (from Q1 to Q2) only for effective price controls. However, the mere existence of such controls creates problems since there are costs associated with managing and enforcing controls even when they are ineffective. Thus, in reality, since these costs are imposed typically on the landlord side of the ledger in the form of higher property taxes to pay for general government, there will be a small reduction in quantity and a small increase in price in cases where price controls are above the market rate. Thus, merely trying to appear to do something to benefit tenants actually backfires as the supply curve shifts from S1 to S2. Of course, when rent control is “effective,” the situation is even worse (Figure 2.2).
Figure 2.2 “Effective” rent control
Although price declines from Pc to PM, quantity of housing supplied declines from Qc to Q2, while the quantity of housing demanded increases from Qc to Q1. The net effect of this rule is to enrich renters who currently rent at the expense of those who wish to rent (as well as the expense of those who are forced out of the apartments as landlords take rental properties off the market). In addition, since price ceilings limit the ability of landlords to recoup substantial investments, there may be a “race to the bottom,” leading to quality deterioration of the housing market until it reaches the mandated minimums associated with the aforementioned habitability laws. There is another effect that is often not discussed when examining these controls and that is the higher administrative costs associated with maintaining a rent control ordinance. These costs are ordinarily passed on to the renters from the landlords who are nominally responsible for them in the form of higher initial rents, increases in deferred maintenance, or the confiscation of larger portions of the security deposit when the rental period comes to a close.
This is because rent control in many jurisdictions is not a permanent ceiling on rents but rather is one that restricts the rate of increase on existing rents. This is what is known as vacancy decontrol laws and are designed to give incentives for landlords to continue to rent properties, but the hidden danger is that such attempts to deregulate the market on a temporary basis harm transient residents such as college students, while protecting long-term residents, since landlords will often try to raise rents to a position such that they will be able to acquire more up front to mitigate the reduction in freedom to raise rental prices later. Similarly, laws may be instigated to limit the ability of landlords to convert existing dwelling to condominiums or demolish them entirely and the presence of rent control oftentimes signals more stringent just-cause eviction laws. Other limitations that are usually imposed at the same time are rules that regulate the amount of money that can be held as a security deposit. In Japan, for example, there is the phenomenon of “key money” that requires the payment of a nonrefundable fee in order to obtain the key to the apartment. Such tactics are merely methods by which the base rent can be lowered while simultaneously ensuring that the overall cost is higher than advertised.
“Possession is eleven points in the law and they say that there is but twelve” goes an ancient Scottish proverb.3 Possession is the predominant way we ascribe ownership to personal property, given it is conveyed often without title. There are seven different types of legal possession (including adverse possession, discussed earlier) that may be ascribed for personal property. The first, and most familiar, is simple possession—ownership of an object is presumed when one has possession of it. Ownership is conveyed when one receives an item via gift or by trade, but not by theft. The presumption one owns that which one has in one’s possession is an important legal principle because it sets forth the ability to engage in various transactions with that article.
A second type of possession is when I hand over an object to a third party for them to convey or to repair. I still own the object in question and the third party is simply acting as a bailee for my good and must take proper care of it since he or she is personally liable for its safety. This creates a powerful incentive to exercise proper care over the object in question. When I hand over goods to United Parcel Service (UPS) for shipment, they are still my property until they are conveyed to the party to whom I am sending them. Similarly, when I hand over my wedding band for resizing, the jeweler acts as a bailee with respect to my ring. It does not flow from my ownership to his simply because he is now in possession of it. Yet this must not be taken too far. A bailee is only liable to the extent that he or she personally knows or should reasonably know the value of the object in question. If I leave my keys with a valet to take care of my car, the car is the responsibility of the valet. If something happens to it while it is in his possession, he is liable for it. However, if I leave a sum of money in the glove box the same level of care and liability does not apply to that money since the valet is not aware of it being in his possession while he cares for my car. If, on the other hand, the valet sees the money in the car, that knowledge affords him no protection against liability but instead transfers the liability from me to the valet since he now possesses knowledge of the value of the contents of the glove box.
A third type of possession is referred to as constructive possession. When I loan or hand the object over to a bailee, I still constructively possess it, even if it is not currently within my control. Thus if the bailee loses it or sells it without permission, I still have ownership over the good and this means that I can recover the good in question from the third party who now possesses it. This is a good reason not to trust people who offer to sell you something for far below its value—they might not have legal title to the object in the first place.
A fourth type of possession is involuntary possession. For example, if you have cocaine delivered to your doorstep that you neither ordered nor wanted, you can be considered to be involuntarily possessing of it. Similarly, if you find a diamond ring on the sidewalk, you cannot claim ownership of the ring. In the case of illegal goods (such as in the first case), this creates a powerful incentive to report it to the police so that you might not be considered at fault. This is especially true if you come into possession of something for which possession is considered a felony. Take, for example, the case of viewing a website that contains child pornography. Since mere possession of child pornography (even for an instant, such as in your Internet cache) has strict liability, one cannot deflect one’s responsibility by closing the browser—or can one? In United States v. Stulock, 308 F.3d 922 (8th Cir. 2002) the court ruled that merely having a picture on your computer is not evidence of possession since you do not have control over the contents of your computer in total. Viruses and malware can seize control of your computer and bring up material that you had no desire to possess and, in fact, you might not actually have viewed. Similarly, in Barton v. State, 648 S.E.2d 660 (Ga.App. 2007), the Georgia Court of Appeals ruled that a person must take an affirmative action to save or download an image beyond merely viewing something that then goes automatically into the cache to be convicted of possession of child pornography. This makes perfect sense. If you walk down the street and, while walking, view a pornographic picture, in no way does that mean that you now are in possession, or control, of it. However, if you snap a photo of that picture, you have now conducted a conscious act to possess and control the material in question.
The fifth type of possession is similar to involuntary possession and deals with that which happens after one finds a lost, unclaimed, mislaid, or abandoned object. If the item in question is lost in a public place and the original owner of the object cannot be found after a reasonable period in which the item in question is held for the owner and for which proper notification of finding such an item is made (usually by turning it in to the relevant authorities), the item in question goes to the finder of the object. In the case of a finding of an item in a private location, the item goes to the owner of the private space. A private location, however, does not mean a location that is owned by a private person but rather a location in which members of the public are not free to enter or exit without obtaining permission. Thus, a shop, though owned by a private individual, is considered a public location. In Bridges v. Hawkesworth, (1851) 21 L.J.Q.B. 75, 15 Jur. 1079, Bridges found paper currency in an envelope on the floor of Hawkesworth’s shop. When Bridges returned some 3 years later and discovered that the original owner of the currency could not be located, he demanded the currency be turned over to him as the finder of the object, while Hawkesworth claimed that since the currency had been found in his shop, he held the superior claim. The court awarded the currency to Bridges. On the other hand, sometimes ownership is easy to determine. The contents of a lost wallet that contains an identification card is presumed to be the property of the individual for whom the card is present. The idea is to create an incentive to return the item to the rightful owner.
Unclaimed financial property to which the owner’s name is attached (stocks, bonds, bank accounts, insurance proceedings) is turned over to the state, which advertises in a newspaper of record the property contents so the owner may come forward to make a claim. Property not claimed after a lengthy period becomes the property of the state through the principle of escheat.
Mislaid property, which differs from lost property, in that the original owner walked away from it after first deliberately placing it somewhere is treated in a similar manner to lost property although, in this case, the item in question is turned over to the owner of the premises and is held by that owner until the rightful owner of the object in question returns. If the rightful owner does not return to claim ownership, the item’s ownership is transferred to the owner of the establishment where the item was mislaid. The reason for this rule is that the individual who mislays an item is likely to return to the scene of where he or she mislaid the object. For example, if I leave my wallet at a Wal-Mart counter, it would be reasonable to assume once I realize I have mislaid it that I would return to Wal-Mart to claim my wallet rather than expect me to go to the police, which would be the case if I had merely dropped it somewhere in a location where the object was not obviously mislaid.
Then we have the concept of abandoned property, such as the proverbial treasure trove. To qualify as abandoned property, it must be clear that either (1) the object in question was deliberately abandoned (such as a car that does not run and that has been left for some time) or (2) that the object in question, while not deliberately abandoned, has been effectively abandoned because a significant time period has lapsed since the object was concealed or buried such that it is no longer reasonable to assume that the original owner will return to claim it. Thus treasure that has been buried for over a century qualifies as abandoned property just as a wrecked car may be. However, something that was buried 5 years ago is not a treasure trove since the original owner may come back to claim it. Abandoned personal property, especially certain types of abandoned property, such as shipwrecks and cars, may be forfeited to the state, under the principle of escheat in some jurisdictions. However, usually the personal property will belong either to the individual who finds it or to the owner of the real property on which the object is found. This latter principle is designed to reduce the incentive for engaging in trespass.
The final type of possessing is unconscious possession, which occurs when one of three different scenarios presents itself: (1) when there is no awareness that an item is within one’s control; (2) when one knows one has an item within one’s control but has no idea what that item actually is; or (3) when a person has an item within one’s control but thinks the item is something other than what it is. In Hannah v. Peel, 1 K.B. 509 (1945), the owner of a house, who had never taken actual possession of it and in which an expensive broach was found, was found to have no superior claim to the broach than the finder of the object stationed in the house after it was commandeered by the Royal Artillery during the Second World War. The finder, Hannah, had properly turned the broach over to the authorities and, after the statute of limitations had passed for lost objects, had been awarded the broach and subsequently sold it. The fact that Peel, the owner of the house, had no knowledge of the broach in question and the broach was not attached to the house physically meant it was considered lost personal property. While the standard rule is that lost personal property goes to the owner of the private space in question, this is based on the assumption the lost property belongs to the owner. Since Peel had never taken possession of the house, this could not have been the case and the broach went to Hannah, the finder of it.
Intellectual property is property produced by original thought and includes inventions, creative works, ideas, and nomenclature or a symbol of a distinctive type recognizable as indicative of a specific good or service of a particular individual or company or directly representative of that individual or company. Intellectual property law covers not only physical possession of a good but all such representations, derivative works, and items that naturally flow from it. Intellectual property does not cover facts or naturally occurring characteristics that rightly belong to all nor does it cover prior work appropriated from the public domain, that reservoir of ideas that are common and available to all due to their passing into common knowledge or the expiration of their related protective status. Thus, while a physical book may be conveyed indefinitely from party to party and owned without prejudice against the party in possession of it, the right to copy that physical book resides with the original author of the manuscript for the period of time allotted by law. After the right to copy (copyright) has expired, while no one can take control of any physical item in question, the right to reproduce that work passes to the public domain so that all might benefit. For example, the story of Mulan is an ancient Chinese poem first transcribed some 1,500 years ago but the Disney film version is nonetheless protected by copyright. Individuals may freely use the term Mulan and create stories that feature this character. However, distinctive elements in the story that are unique to Disney, such as the creation of Mushu the dragon, or the illustrative representation of Mulan as expressed by the animators, are covered by copyright. In addition, changes that Disney made to the original character, such as changing her last name to Fa from the original Hua may be protected under intellectual property rules.
Intellectual property rights (IPR) are monopoly rights of one form or another. The greater the period of duration at the time the IPR is granted along with the greater the scope, the greater the incentive to engage in the creation process. At the same time, this must be balanced by the fact that longer IPR durations and scopes carry with it significant negative results as well. There is less incentive to engage in cost reductions and combine elements found in one IPR with those found in another. To give a concrete example, when the game Dungeons & Dragons came into existence in 1974, the initial game contained references to hobbits and ents, which are particular to the world created by J. R. R. Tolkien in The Hobbit and The Lord of the Rings. As such, this caused legal troubles for the fledgling enterprise and in future editions, changes were made so that they would be called halflings and treants, respectively. Even in cases where the intellectual property originates with one producer, this does not mean that combinations are always possible. Marvel Entertainment, now owned by Disney, currently is riding high with its The Avengers universe but had previously sold off the film rights to Spiderman (now owned by Sony Pictures Entertainment), the X-Men (20th Century Fox), and the Fantastic Four (20th Century Fox), so certain crossover stories that replicate actions in the comics are not possible (Spiderman/Fantastic Four or Spiderman/The Avengers) without crosslicensing agreements between the various studios. On the other hand, Quicksilver and the Scarlet Witch, both of whom originated in the X-Men series, are members of the Avengers and both Marvel and 20th Century Fox can apparently utilize them separately, albeit with restrictions. Since all mutant rights went to the 20th Century Fox, nothing can be stated in the Avengers about the mutant father of both Avengers, Magneto, or the backstory that both are mutants. However, their Avenger compatriots, Captain America and Iron Man, cannot be mentioned in the X-Men films.4
Patents
A patent is a legal monopoly granted by the government to allow the sale and manufacture of an invention that is substantively different in use than other inventions. Patents typically last for 20 years from the date of application, although drug patents have a concurrent period of exclusivity that may extend beyond the patent date or run out prior to it. Patents are awarded based on the “first-to-file” for it and thus even if someone else invents a technology, if they are not the first ones to file, they can effectively be barred from profiting from it. This places smaller companies that lack financial and legal resources at a distinct disadvantage but it also places the United States on the same legal footing as the rest of the world. At the same time, however, an inventor who has not filed a patent but, nevertheless, has published the idea is able to utilize a 1-year grace period before being forced to file for the actual patent. This differs from the practice in Europe where prior disclosure would invalidate a subsequent patent application by any party.
A patent must be novel, nonobvious, useful, completely described in the patent application so it can be reconstructed by another skilled individual, and each patent claim attached to the patent must be clear and specific, so as to be not overly broad. These limitations balance the ex ante benefit of patent protection, the creation of new technologies, with the ex post cost of patent protection, the creation of monopolies that prohibit additional incremental innovation by third parties. A patent, since it has a specific guaranteed expiration to its longevity, may not suffer as badly in terms of efficiency losses as other monopolies as there is a built-in incentive for the monopolist to continue to improve the technology, so as to lessen the ability of future entrants to compete against the initial patent holder. Even though the patent eventually expires, improvements on the initial design that meet the patent standard can be protected and thus while others can compete using the initial design and make improvements on it, they will be prohibited from adding the later patented enhancements until those later patents also expire.
One problem that can occur is when two different firms have patents that cannot be developed into viable commercial products without each other. In such cases, firms might decide to cross-license the patents so that both can develop the technology or one might decide to license their patent to the other company. These activities will be mutually advantageous and need to be allowed and the patent system provides an opportunity to make these transactions by endowing the individuals with property rights in their respective inventions. One issue, however, is that these licensing agreements might end up extending the requirement to pay royalties for far longer than the initial patent application originally specified. While this might seem to be unfair to the company that is licensing the technology, one might also want to think about the other firm. There is no compelling reason why one company should license the technology over the other and by writing a contract that extends the licensing term forever, this is not an unreasonable clause due to the rapidly diminishing future value of payment in the present value. Consider a payment that is to be made 20 years hence when interest rates are 5 percent per annum. In such a case, a $100 payment at that future time is worth just $37.69 today. However, perhaps more importantly from the competition standpoint is that a company that licenses its technology might have an increased incentive to stay out of the business in the future since they would be trading a payment without assumption of risk of loss (the royalty payment) for a variable return that might not pan out if it entered the market. This, of course, can be codified as part of the agreement and allow the firm paying the licensing fee to stop payment if the first that is doing the licensing begins to compete in the same market.
Patents can be infringed upon by government fiat under a compulsory licensing scheme; in the United States such actions are rare and usually limited to Department of Defense projects that are deemed necessary for national security purposes (although the U.S. government has threatened to use this policy to force drug company Bayer to lower the price of its antibiotic, ciprofloxacin, in the aftermath of the 2001 anthrax attacks).5
Patents become more important the more competitive the industry as companies seek to differentiate themselves and thus create monopoly rents, but they are also less likely to occur in perfectly competitive industries since such underdeveloped capital markets frequently shy away from endeavors that require a great deal time and money for the initial investment and for which the probability of success is low. On the other hand, successful inventors can utilize their monopoly profits as a means of funding the research and development of other inventions. Thus, although patents can lead to sloth, they can also lead to more inventions, making it difficult to determine whether, on balance, the patent system works to retard or encourage innovation.
Trade Secrets
A trade secret allows a company to protect an invention without describing the nature of the invention. A trade secret, by revealing little information about the product or work process, can theoretically last forever. It is also costless insofar as government filing fees are concerned, but it does require secrecy to ensure the trade secret is not to be exposed to others. There is law that protects a trade secret from improper disclosure such as theft or by employees violating nondisclosure agreements. However, this protection vanishes as soon as someone else discovers the process independently. Famous examples of trade secrets are the recipe for Coca-Cola, Google’s search engine algorithm, and Kentucky Fried Chicken’s 11 secret herbs and spices.
A trade secret is an example of that which economists refer to as “hidden information.” In most cases, hidden information reduces the value of a product that is the object of the transaction but, in the case of a trade secret, hidden information actually increases it. To understand why, one must understand the nature of hidden information itself. Hidden information typically reduces the value of the object because it becomes discoverable after the transaction and that information results in a negative value to the recipient. On the contrary, a trade secret does not become discoverable after the transaction, although it too will result in a negative value to the recipient once discovered. The key difference is that for both the recipient and the giver, the trade secret itself is the value of the product.
Suppose you have a fatal disease with no known cure, but I promised one for you anyway that consisted of something that could do you no harm whatsoever. As such, I have deceived you about the true worth of the “cure” but that doesn’t matter to you. What I have provided is almost as valuable: hope. That hope that it is a cure can actually cause you to become cured as a positive outlook is an amazing cure for much of that which might ail you. The “placebo effect” in medicine is so powerful that even if you know it is placebo, it can actually help you. For example, although I have often tried to count calories and limit eating, I have often found that the only effective way for me to lose weight is to go on a “fad diet” that does much the same thing but supplements it with special pills that medical science states are completely ineffective. Even though I know this intellectually, my body still sheds the pounds but only when I am taking those pills!
A similar aspect is found in taste tests. When researchers swapped labels of Coke and Pepsi products, they found 22 out of 30 college students who drank Coke poured from a Pepsi bottle and Pepsi poured from a Coke bottle incorrectly identified the product as being the one with the listed label.6
The irony is the best way to “profit” indefinitely from a trade secret for someone who is a small proprietor may not be to keep it a secret for yourself but rather to license it to a third party. After all, when a trade secret is generally known, it can be copied by those not privy to the original trade secret without providing consideration to the originator. A trade secret has no continuing value unless it has been licensed to others before the trade secret expired. In Warner Lambert Pharm. Co. v. John J. Reynolds, Inc., 178 F.Supp. 655, 665-66 (S.D. N.Y. 1959), aff’d 280 F.2d 197 (2nd Cir. 1960), Warner Lambert Pharmaceuticals sought to end its continuing royalty payments for the license to the formula in Listerine mouthwash after the formula became well known in the industry. They argued that they no longer had to pay since they had nothing of value. However, since the licensing contract for as long as Listerine continued to be manufactured and had no clause for cancellation when the formula no longer was a secret, the court ruled that the payments had to continue.
Trademarks and Servicemarks
A trademark is a word, phrase, symbol, or other distinctive expression that is uniquely identified with a particular product or company. In the case of a service, a trademark is referred to as a servicemark. Trademarks and servicemarks are designed to promote trust in customers by distinguishing the product or service from competitors and can only be applied for when they are used in commercial activity. They continue in force so long as the owner continues to utilize it in business operations and cease to exist when the product or service is no longer offered for sale. Trademarks can be limited to certain geographic regions and, since they are designed to reduce confusion, they may be restricted to certain product categories. The trademark of Delta is associated with airlines, faucets, and dental plans, among others. Since there is no likelihood of confusion between Delta Faucets and Delta Airlines, there is no issue of trademark confusion. Trademark confusion instead prevents competitors from utilizing your trademark space as their own. The law prevents PepsiCo from slapping a Coca-Cola label on Pepsi and selling it as Coke. Trademarks also serve to prevent others from engaging in “reverse passing off,” taking your product and turning around and claiming it for your own. Thus, PepsiCo cannot purchase quantities of Coca-Cola, relabel them, and proceed to claim they are selling Pepsi. Unlike other protections, trademarks and service marks persist for as long as the company utilizes it in business, though a registered trademark does have to be renewed in the due course of time.
Trademarks are valuable properties that must be defended for them to be considered of worth. Xerox, Kleenex, Scotch tape, and Coke do not want to go the way of aspirin and thus vigorously defend their trademarks against competitors and misuse by retailers by insisting that others use the term “photocopy,” “facial tissue,” “cellophane tape,” and “cola” unless they are referring to their specific products. Under Coca-Cola Co. v. Overland, Inc., 692 F.2d 1250, 1252 (9th Cir. 1982), restaurant owners who substitute Pepsi for Coke without informing the customer are guilty of trademark infringement. Woe be it for the bar that serves you a “Rum and Coke” if they pour Pepsi instead! So have pity on the poor restaurateur who quickly tells you that they do not serve Coke but would you like a Pepsi. She or he is merely trying to avoid an expensive lawsuit.
However, it is possible to regain a trademark, even after it has been lost due to a court challenge that finds that your trademark is now generic. In 1983, after a 10-year protected battle between General Mills Fun Group, which then owned Parker Brothers, and San Francisco State University economics professor Ralph Anspach over his use of the term Anti-Monopoly for his trust-busting board game, the Supreme Court denied certiorari to the appeal by General Mills and left the decision that invalidated the Monopoly trademark in Anti-Monopoly, Inc. v. Gen. Mills Fun Group, Inc., 684 F.2d 1316 (9th Cir. 1982). The reason for the invalidation was that there was no clear connection between monopoly and the manufacturer of it, Parker Brothers. People bought Monopoly because it was Monopoly, not because of the company that produced it. The immediate reaction was pandemonium among manufacturers who worried that their valued trademarks would vanish if people associated their trademarks with their products rather than the companies that produced them. This resulted in the Trademark Clarification Act of 1984 that established that the connection only need to be with the specific product that was manufactured, rather than the company itself, thus restoring the traditional delineation that a mark became generic when it became synonymous with competing products as well, although that law contained an addendum that ensured the judgment would not allow Parker Brothers to continue to pursue its legal case against Professor Anspach.7
Trademarks are used to buttress claims that can be made under other intellectual property laws, such as copyrights. However, they cannot be used to extend the life of an expired intellectual property. Thus, in Dastar Corp. v. Twentieth Century Fox Film Corp., 539 U.S. 23 (2003), the U.S. Supreme Court ruled that one cannot use trademark to trump copyright expiration. In that case, Dastar Corporation had taken Crusade in Europe, an Emmy-award winning television show produced by Fox and airing on ABC, and had edited and re-released it as World War II Campaigns in Europe, listing itself as the producer. Although the original book, Crusade in Europe, had its copyright renewed by Doubleday in 1975, the film studio had not chosen to renew the copyright on the television series. In 1988, Fox once again acquired the rights to Crusade in Europe and allowed other companies to release the series, collecting licensing fees in the process. Fox turned around and sued, accusing Dastar of engaging in “reverse passing off,” a prohibition under the Lanham Act, that entails claiming the work of another as your own. However, once an item passes into the public domain, it is for the public to use and the mere fact that a trademark exists cannot be used to afford greater protection. The case was remanded to the Court of Appeals to deal with whether Dastar had violated the underlying copyright in the book, which remained in effect and the court found against Dastar on that matter.
Unlike patents, trademarks need not be registered, although registration does carry with it certain additional legal benefits. An unregistered trademark is denoted by the superscript ™, while a registered trademark uses an R with a circle around it, designated as®. Using the registered trademark symbol without having actually registered it with the Patent and Trademark Office and receiving final approval of that trademark via its placement on the trademark registry, is a federal crime. While unregistered trademark have common law protections, registration carries with it statutory benefits, including enhanced standing to sue, an ability to prevent others from obtaining websites under that name and cybersquatting, and the possibility of deterring others from using the same term by its conspicuousness on the federal registry.
This book is copyrighted. I have spent a lot of time and effort writing its contents and my copyright allows me, as the author, to assign rights to my publisher, Business Expert Press, to print this book and provide me with the opportunity to earn royalties. My copyright also means that you, as the reader, cannot take the material that I have written and wholesale redistribute it on the Internet via a file-sharing service. You only have the right to the copy that you legally purchase and no additional rights come with that. Since my publisher is a very innovative one, if you are a university student or faculty member, you can download a copy of this book from your university library if your library has purchased the e-book collection. However, you may not redistribute this copy to others outside your university. Each individual must acquire their copy in the same legal fashion, either by directly purchasing it or by downloading from their own university library. So if one of your friends wants a copy of this and your library subscribed to the BEP Digital Library, tell them to go pick up a copy at no cost. However, if your friend from another university wants it, tell them to get their library to subscribe. As for those without university access, there is always Amazon.
This is far from the first book ever written on economics of law and it will not be the last. Copyright only exists to protect the original expression of an idea rather than the underlying idea itself. Copyright covers more than simply the entirety of a work but also substantial portions of it and provides for the copyright holder alone the right to create or license derivative works. The characters in Star Trek are protected by copyright; so if you want to write a short story detailing a romantic encounter between Sulu and Uhura, you would need the permission of Paramount Studios or one of their licensees, in order to publish it.
While copyright used to have several technical rules that could cause a company to lose protection if it did not meet these (including a requirement to prominently state that the product was copyrighted through proper noticing), this no longer is the case. Everything has copyright as soon as it is conceived and implemented in a fixed tangible form. This can cause issues because an undated manuscript has copyright from date of initial creation but if it is undated it may be difficult to establish the date of creation. While this is partially remedied by the copyright act’s rule that copyright exists for life of author plus 70 years, it does not cover the case in which the work is created anonymously or as a work for hire. Registration is still useful because without it the copyright holder has no standing to file a lawsuit. Registration that occurs within 3 months of publication also provides the opportunity to receive statutory damages, which may be assessed regardless of actual damages and can rise to $150,000 per incident depending on the willfulness of the violation.
If copyright did not exist, there would be little incentive for publishers to contract with authors since they could take our intellectual efforts and duplicate them without additional cost. But this incentive would be short lived because the authors would have little incentive to create the material that publishers could sell. Similarly, without copyright, the only reason people would even purchase from publishers would be if the price was so low that duplication by the individual was not practical. In any case, since there was no monetary incentive for authors, fewer new works would be created. This does not mean that there would be no works created because authors may receive benefits that are not relayed by publishers (for example, my university considers the publication of books such as this in its allocation of annual raises) but, truth be told, the opportunity to earn royalties does induce me to write more books than I otherwise would be inclined to do. Thus, copyright allows for all parties to benefit by encouraging the creation of new works. It is, according to Lord Macaulay in a speech to the UK Parliament in 1841:
a tax on readers for the purpose of giving a bounty to writers. . . . I admit, however, the necessity of giving a bounty to genius and learning. In order to give such a bounty, I willingly submit even to this severe and burdensome tax. Nay, I am ready to increase the tax, if it can be shown that by so doing I should proportionally increase the bounty. My complaint is, that my honourable and learned friend doubles, triples, quadruples, the tax, and makes scarcely any perceptible addition to the bounty.8
This latter point is often missed. It isn’t the fact that copyright entails a transfer of funds from readers to authors that ought to be a problem but rather that the returns to authors are often nonexistent as we steadily expand the term of copyright and no surer is this fact than when we extend the term of copyrights already in existence. Indeed, the net result can actually be a reduction in new works when we extend copyright protection ad infinitum.
To understand why, let us consider the prohibition on derivative works unless licensed from the original author. I cannot create new stories surrounding the characters in Hogwarts since it is part of the creative output of J. K. Rowling, the creator of the Harry Potter books. However, I can create new stories featuring Sherlock Holmes and Dr. Watson, so long as I do not utilize elements that are derived from the 10 Sherlock Holmes stories that are still under copyright, at least according to the ruling in Leslie S. Klinger v. Conan Doyle Estate Ltd., (7th Cir., No. 14-1128, 6/16/14):
There are the early Holmes and Watson stories, and the late ones, and features of Holmes and Watson are depicted in the late stories that are not found in the early ones . . .. Only in the late stories for example do we learn that Holmes’s attitude toward dogs has changed—he has grown to like them—and that Watson has been married twice. These additional features, being (we may assume) “original” in the generous sense that the word bears in copyright law, are protected by the unexpired copyrights on the late stories. But Klinger wants just to copy the Holmes and Watson of the early stories, the stories no longer under copyright.
The net result, if the Conan Doyle Estate had been successful in its lawsuit, would be to provide 135 years of copyright protection (extending back as far as the publication of the first Sherlock Holmes story, “A Study in Scarlet” in 1887) for its cannon until the final Sherlock Holmes story enters the public domain in 2022 (or at least until Disney gets around to having Congress extend copyright yet again). By continuously extending copyright, items that would normally fall into the public domain do not do so and the ability to utilize these common elements in new stories without first tracking down and obtaining permission for use from the original copyright claimant becomes impossible. Without the public domain, many iconic films and books of recent years could not have been made. If the Greek pantheon had been under copyright, there would be no Percy Jackson series from the creative pen of Rick Riordin. If Snow White, Cinderella, Alice in Wonderland, Pinocchio, or The Jungle Book were under copyright the eponymous animated films of one Walt Disney could have been placed in jeopardy and the myriad of changes that the studio made to the beloved characters and stories may not have been allowed by the original copyright owners.
In Eldred v. Ashcroft, 537 U.S. 186 (2003), the Supreme Court considered the question of whether Congress could extend copyright retroactively on works that were already under copyright. The plaintiffs argued that retroactive copyright extension failed for three reasons.
First, that it plainly violated the Constitution that enumerated the power of Congress “[t]o promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries” since a copyright extension could allow Congress to continually extend copyright for a de facto perpetuity, which is clearly Constitutionally prohibited.
Second, the extension violated First Amendment free speech protections because it constrained the use of older materials in the preparation of new materials. They noted that there was no incentive created with respect to the creation of older materials when one extends copyright: one cannot go back into the past and create new works at an earlier date in anticipation of copyright extension at a later date. The sole incentive is for the creation of new works. When incorporating old materials into new works, only the original copyright holder has the right to create derivative works on items that otherwise would have gone to the public domain and this unfairly constrains competition and innovation, as well as free speech. This is contrary to First Amendment protections as it constrains the speech of parties not privy to the original copyright and who were anticipating the release into the public domain of previously copyrighted works based on the original date under which copyright was supposed to lapse. However, the Court of Appeals for the District of Columbia ruled and the Supreme Court demurred on this rationale, relying on the 6-3 Supreme Court ruling in Harper & Row, Publishers, Inc. v. Nation Enterprises, 471 U. S. 539 (1985), that since copyright only protected the actual expression of an idea, not the idea itself, it was not an undue limitation on First Amendment rights.
Third, that materials in the public domain are subject to the public trust doctrine, which requires that there be a clear public benefit before the government releases such materials from their purview into private hands. Indeed, the plaintiffs argued that this required that there be a quid pro quo not unlike what we see in trade. A mutually beneficial trade would occur if, in moving materials from the public domain back into private hands, the public, through its representative government, receives a benefit that is at least equal to the loss that it incurs when materials are privatized. This harkens back to one of the basic principles of economics—trade can never be welfare-reducing with respect to the entities engaged in it, while a transfer without compensation has no such guarantee. Although a transfer without compensation of something of value (such as that occurs when material is transferred from the public domain back to the original copyright owners after copyright had initially expired or is extended from when it was expected to expire) always leaves the individual recipient no worse off than before, it also always leaves the individual who is deprived of his or her property in a position that is no better than before.
In Eldred v. Ashcroft, 537 U.S. 186 (2003), the Supreme Court, in a 7-2 decision, decided that copyright could last for any period short of “forever,” prior copyright acts had similarly made extensions of copyright on existing works, and American authors would be placed at an unfair disadvantage to not allow this extension since the European Union had already extended it for their authors and would not provide equitable treatment for American authors if the United States did not act in a similar manner to protect European authors. This latter idea can once again be examined through the lens of economic theory.
Essentially, the European Union was offering a positive externality to American authors as enticement to protect European authors. Since such protections were already afforded to European authors in Europe, publishers that took previously copyrighted works from Europe that were now in the public domain could only sell them to American customers. Furthermore, the rights of American publishers in Europe were similarly limited to the standard that held earlier. The United States could receive the benefits in Europe if they approved a copyright extension for European authors but that would create an uneven playing field since American authors would not receive this benefit. This would create an incentive for American authors to have their copyright held by European publishers. To combat this threat, American authors would need a similar extension. By extending copyright in the United States to match Europe, the United States gained more favorable copyright treatment abroad, making this a de facto trade agreement just as much as a raid on the public domain. Thus, the U.S. public did receive a benefit from the extension independent of the original authors, though this was not the argument that the Supreme Court provided.
One significant difference between copyright and other intellectual property rights is the notion of “fair use.” Fair use constitutes a limited exception to the basic intellectual property rights granted to a copyright holder and is not a blanket license to eviscerate those rights. Section 107 of the Copyright Act enumerates examples of activities that might constitute fair use (including research, scholarship, teaching, news reporting, comment, and criticism); it goes further to list a four-element test to act as a guide in determining whether the use of the work is infringing:
1. the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes;
2. the nature of the copyrighted work;
3. the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and
4. the effect of the use upon the potential market for or value of the copyrighted work.
This is not a checklist nor does any individual element preclude or dictate a finding of infringement or fair use. For example, parodies, which act as commentaries on the original work, are considered a fair use under Campbell v. Acuff-Rose Music, 510 U.S. 569 (1994) even though their patterning may be substantially similar to the original and they might significantly reduce the marketability of the copyrighted work. As the Supreme Court noted, “there is no protectable derivative market for criticism. The market for potential derivative uses includes only those that creators of original works would in general develop or license others to develop.” This is even true in the case in which the parody is a commercial product designed to make money for the parodist. At the same time, photocopying an entire textbook and providing it to students for free would not constitute fair use, even if done by a nonprofit educational institute.
In Sony Corporation of America v. Universal City Studies, Inc. 464 U.S. 417 (1984), also known as the Betamax case, the U.S. Supreme Court ruled that using a VCR to record live television broadcasts for the purposes of watching them at a more convenient time constituted “fair use,” although the exception was a narrow one because copying these same programs for archival purposes was an infringing activity. This established the principle that a technology that had a substantial and widely used noninfringing use could not be held liable for damages associated with contributing to copyright violations.
In A&M Records, Inc. v. Napster, Inc. 239 F.3d (9th Cir. 2001), In re Aimster Copyright Litigation, 334 F.3d 643 (7th Cir. 2003), and MGM Studios, Inc. v. Grokster, Ltd., 545 U.S. 913 (2005), various peer-to-peer file-sharing companies were found to be contributory in infringement activities even though they each denied having constructive knowledge of such infringement owing to various privacy safeguards that were in place. In each case, they were found to have based their business models on the infringing use and had not demonstrated that their products were widely used for noninfringing uses.
The last point to be made on copyright deals with compulsory licensing, which requires musicians to allow their songs to be played over the air in exchange for a payment fixed by law. In addition, local over-the-air stations were to be paid based on a compulsory fee basis by cable companies for retransmission of over-the-air broadcasts. In Am. Broad. Cos. v. Aereo, Inc. 573 U.S. ___ (2014), (Docket No. 13-461), the U.S. Supreme Court held that the retransmission of over-the-air signals by Aereo, Inc. without payment of either compulsory or negotiated fees to the original broadcasters was an infringement as an unauthorized public performance.
For the Economist: Optimal Duration of Patents and Copyrights
The case for having copyrights and patents at all is because incentives matter and having a legal framework for a corresponding monopoly on one’s intellectual endeavors causes increases in the quantity and quality of such efforts. The longer the time period during which intellectual property is protected, the more such property will be created, albeit with diminishing returns.
The period of duration for intellectual property rights differs, from an economic perspective, based on the harm caused by denying others the right to produce the product. That harm, the marginal social cost of patent protection, may be measured by taking into account the amount of time that it would take for another person to come up with the invention (in the case of the patent) in the absence of such legal protection as well as the cost of the monopoly that is granted since the monopoly can command a higher price as a result.
Assuming a copyrighted product and a patented product of equal social benefit, we would find that the patented product almost certainly has a lower social cost initially since competitors cannot as easily enter the market with a similar invention, as it must be both novel and nonobvious. It would take considerable effort to reverse engineer the design in the absence of patents and, in fact, it could be that the product would remain so secretive in its operation that its effective duration would be closer to that of a trade secret. In addition, a copyrighted product is oftentimes characterized by monopolistic competition rather than pure monopoly with a corresponding lower social cost. We can represent this tradeoff between social cost and social benefit by means of a graph with the social cost sloping upward, representing the idea that an increase in duration of monopoly (and monopolistically competitive) rights will carry with it a corresponding increase in social cost. The social benefit declines over time since increased investment activity in patent and copyright development has diminishing returns with respect to patent and copyright duration (Figure 2.3).
Figure 2.3 Optimal duration of patents and copyrights
Since the welfare reduction from a pure monopoly over a monopolistically competitive product is larger than the cost associated with a new invention, the optimal copyright term (C*) is usually much longer than the optimal patent term (P*), especially since the granting of a patent requires divulgence of the operation of the item in question such that others can duplicate the effort. Thus, it is actually quite possible that granting a patent will speed up innovation not only for the inventor but also for those who seek to duplicate the effort after the patent expires since the marginal cost of reverse engineering is dramatically reduced owing to the publication of the patent itself. Indeed, if, in the absence of the patent, the inventor would have been able to hide the nature of the invention sufficiently from those who would seek to duplicate it for as long of a period or longer than the time allocated to the patent itself or if the development of a similar technology in the absence of the publication of the patent would have been cost-prohibitive, the granting of a patent will actually be welfare-enhancing for the inventor’s eventual competitors.
A government can regulate for a variety of reasons. Traditionally, the rationale fell under the police power of the state. Businesses that interfered with the health, safety, and comfort of others could be regulated in order to ensure that they did not become a public nuisance.
In Muglar v. Kansas, 123 U.S. 623 (1887), it was held that the regulation of the manufacturing of alcoholic beverages fell within the police power of the state to advance the health and safety of its community and thus were a legitimate exercise of state prerogative. As this regulation did not harm any other potential business interest but merely prohibited a certain very specific type of business, it was unlikely to cause significant harm to the underlying value of the property.
Pennsylvania Coal Company v. Mahon, 260 U.S. 393 (1922) established the principle of regulatory taking. In contrast to eminent domain, which transfers control of a property to the government, onerous regulations could serve as a “taking” requiring compensation under the 5th Amendment when it significantly reduces the value of the property as a result. However, a key consideration was that the regulation in the case interfered with a preexisting contract between the parties that Mahon had sought to break. In 1878, Mahon had purchased the surface estate but Pennsylvania Coal had maintained the support estate allowing it to mine coal and Mahon had accepted the risk associated with building over the potential mining location. This unbundling of rights had resulted in a lower price being paid than would otherwise have occurred had the support estate also been part of the contract. In 1921, the Commonwealth of Pennsylvania had passed a regulation that prohibited mining that could cause harm to the surface estate and Mahon sued to prevent Pennsylvania Coal from extracting the coal and weakening the surface supports. In its decision, the Supreme Court ruled “We are in danger of forgetting that a strong public desire to improve the public condition is not enough to warrant achieving the desire by a shorter cut than the constitutional way of paying for the change.’ Essentially, if Mahon had wanted to ensure that his property would not be harmed by mining, he should have purchased the support estate as well. By prohibiting Pennsylvania Coal from mining coal, the government was, in essence, transferring effective control of the support estate to Mahon without Mahon having to pay for it and without compensating Pennsylvania Coal for the loss.
In contrast, Penn Central Transportation Co. v. New York City, 438 U.S. 104 (1978) was a case that found New York City’s Landmarks Preservation Law to be Constitutional and not a regulatory taking. In that case, the owners of Grand Central Station had wanted to build an office building on the land since it found that it could not make a profit otherwise. However, the Supreme Court ruled that the restriction did not inhibit the original use nor did it interfere with the primary purpose that had initially been envisioned for the property. Thus, in sharp contrast to the Pennsylvania Coal case, no regulatory takings occurred as it did not interfere with any currently-in-force contract or preapproved business use at the time the property last changed hands. Thus, there was no reduction in value, merely a denial of an increase in value that would have been a purely pecuniary gain to the owners.
Still, the regulatory power of the state is not absolute and it must consider the cost of compliance. Under Michigan v. EPA, 576 U.S. _____ (2015), 14-46, 14-47, and 14-49, the Supreme Court ruled that government agencies must consider the costs of regulation before pursuing regulatory action as opposed to only considering how to mitigate costs after deciding to engage in the regulatory action in the first place. Specifically, the Environmental Protection Agency was found to be overstepping its bounds when it issued new rules designed to regulate mercury and other emissions from coal-fired plants since it failed to consider those costs before deciding to regulate, even though it did consider costs at a later stage in the rulemaking process.
1. Why is it socially optimal to provide time limits on copyrights and patents but not on trademarks?
While a patent establishes a monopoly over an idea and a copyright establishes one over the expression of an idea, a trademark merely acts to associate a particular product with a producer and creates no such monopoly interest. Moreover, attempting to ascertain who the owner of a patent or a copyright is for the purposes of trying to request permission to license or use the work can entail significant costs that are immediately and completely eliminated once the patent or copyright expires. In the case of a trademark, however, the ownership is clear since it only lasts as long as it is used and its connection to a particular company’s product does not preclude others from providing exactly the same product provided the item in question also does not have copyright or patent protection. Finally, while patents and copyrights preclude competition for the length of their registered terms, trademarks actually enhance competition by allowing competitors to clearly identify themselves in the marketplace and thus build up reputations that serve as indicators of quality, thus reducing transaction costs for consumers.
2. In Brenner v. Manson, 383 U.S. 519 (1966), the Supreme Court ruled that “a patent is not a hunting license” and held that “a process patent in the chemical field, which has not been developed and pointed to the degree of specific utility, creates a monopoly of knowledge that should be granted only if clearly commanded by the statute.” Why was the Supreme Court ruling nonsensical from an economics perspective?
If the process patent had some use, it would have been granted a monopoly, and that monopoly would have value to the degree that the process patent has usefulness. The fact that usefulness could not be demonstrated would suggest that the monopoly itself was, at the time the application was made, quite worthless. Therefore, granting the process patent would entail granting a worthless monopoly, which is hardly something over which to worry.
1. North Carolina’s General Statutes 136-44.51 states
After a transportation corridor official map is filed with the register of deeds, no building permit shall be issued for any building or structure or part thereof located within the transportation corridor, nor shall approval of a subdivision . . . be granted with respect to property within the transportation corridor.
Discuss whether this constitutes a regulatory taking and whether property owners should be able to file for inverse condemnation.
2. Why might it make more sense to read the obituaries rather than the classifieds when looking for an apartment in a rent-controlled area?