Propey is perhaps the most fundamental area of the common law. It is also basic to economics in that property rights are essential for exchange. In this chapter and the next, I develop an economic analysis of property law. This chapter focuses on the legal protection of property rights, the transfer of property rights between private individuals (both voluntary and involuntary), and the law with regard to incompatible property rights (or externalities).
I begin the analysis with the fundamental distinction between property rules and liability rules, which forms the basis for much of the economic analysis of property. The key to the distinction is the interaction between consent as the basis for mutually beneficial exchange and the transaction costs associated with obtaining consent. Consensual exchange is governed by property rules, and nonconsensual exchange is governed by liability rules. Thus, property rules ensure that exchanges are Pareto-efficient (i.e., both parties are made at least as well off), but if transaction costs are high, they may preclude some efficient exchanges from being completed. In that case, liability rules can facilitate exchange by removing the requirement of consent and replacing it with a coerced exchange according to terms set by the court.
With this distinction in mind, I first examine the problem of controlling external costs associated with incompatible, or overlapping, property rights. I. consider the efficiency of several methods, including money damages, taxes, subsidies, zoning, and covenants. I then turn to the legal rules governing land transfer between private individuals. I first consider the merits of different methods for protecting and transferring title to land, especially in relation to the possibility of past errors or fraud in the line of title. I then examine situations in which involuntary transfer of land, for example under the statutory doctrine of adverse possession, might be economically desirable.