Beyond Coase: emerging technologies and property theory.

Author:Yoo, Christopher S.

INTRODUCTION I. EXAMPLES OF NEW PROPERTY RIGHTS A. Spectrum 1. Shannon's Law and the Cumulative Nature of Interference 2. Geographic Discontinuities 3. Interference from Transmission on Other Frequencies B. The Internet 1. The Cumulative Nature of Interference 2. Geographic Discontinuities C. Electric Power 1. The Cumulative Nature of Interference 2. Geographic Discontinuities II. KEY IMPLICATIONS FOR PROPERTY THEORY A. Interdependencies: The Key Determinant of the Boundaries of Property B. The Complexity of Identifying Sources of Interference C. The Intractability of Attributing Harm 1. The "Substantial Factor" Test 2. Enterprise Liability III. IMPLICATIONS FOR THE CHOICE OF PROPERTY FORM A. Well-Defined Property Rights B. Spectrum Commons 1. Ostrom and Governing the Commons 2. Heller and The Tragedy of the Anticommons 3. The End of Scarcity versus Shannon's Law C. Bargaining as an Alternate Solution D. The Persistence of Use Restrictions CONCLUSION INTRODUCTION

In 1959, Ronald Coase published his landmark paper on the Federal Communications Commission (FCC) that would forever change the study of property rights. (1) The primary focus of Coase's article was to critique the FCC's then-current approach to allocating spectrum, in which the FCC designated frequencies exclusively for particular uses (e.g., AM radio, television broadcasting, radio astronomy), divided those bands into individual licenses, and then conducted hearings to determine to whom the Commission should assign operating licenses created within those bands. These restrictions were thought necessary to prevent the chaos that occurs when multiple people attempt to use the same frequency simultaneously as well as to limit the interference that particular uses impose on adjacent frequencies. (2)

Coase offered two trenchant criticisms of the prevailing regime. First, he argued that the public would be better served if the FCC stopped relying on administrative processes to allocate spectrum and instead relied on auctions to determine who should receive licenses. (3) Second, he asserted that the government need not predetermine spectrum uses in order to prevent interference. The government needed only provide a clear definition of the rights encompassed within each license and to permit the license holders to reallocate interference rights as they saw fit. (4) Although Coase recognized that spectrum usage exhibited unusual interdependencies, he expressed confidence that the parties could address such complexities through artful structuring of transactions and general legal principles. (5)

Coase's article on the FCC soon took on "iconic significance for law and economics scholars." (6) When pressed to expand on his vision of how market transactions could address externalities without direct regulation, Coase responded with The Problem of Social Cost, (7) which laid out what would become known as the Coase Theorem. (8) This work is often described as the most-cited article of all time in both law and economics, (9) served as one of the justifications for awarding Coase the Nobel Prize, and has become "the starting point of most modern discussions of the economics of property rights." (10)

Coase's impact on spectrum policy was equally dramatic. The FCC conducted its first spectrum auction in 1994, (11) and, with only a few designated exceptions, current law now requires that the FCC allocate all future licenses via auction. (12) But the FCC has yet to fully embrace the second half of Coase's vision, which calls for replacing use restrictions with property rights. The FCC has taken limited steps toward allowing licensees to include secondary uses of spectrum so long as they do not interfere with the designated primary use, (13) despite criticisms that it would do better to permit flexibility in primary uses instead. (14) The agency also followed the 2002 recommendation of the Spectrum Policy Task Force (15) to seek comment on a proposal to replace use restrictions with a concept it called the "interference temperature" (16) before abandoning the idea as unworkable in 2007. (17) The FCC's National Broadband Plan does not mention the need for a comprehensive metric for interference, opting instead for tweaks to the existing regime of use restrictions. (18) Restricting licenses to predetermined uses essentially requires the FCC to rezone spectrum and relocate the incumbents before any new uses for spectrum can emerge. I believe that the incomplete reception of Coase's ideas provides some fundamental insights into new forms of property arising in an increasingly high-tech world. In particular, this incomplete reception suggests that the complex interdependencies that Coase downplayed may play a more important role than he initially thought.

This Article explores these key differences and their implications for property theory. Part I identifies the interdependencies that characterize modern forms of property. It begins by examining the key technical characteristics of spectrum before examining the interdependencies in two other emergent technologies: the Internet and the distribution grid for electric power. Part II discusses the key policy implications of those interdependencies, specifically the need to develop tools to identify sources of congestion and to allocate harm among them, and it rejects some of the bases developed under the common law to deal with the problems of multiple causation. Part III examines the policy implications for the various forms of property. It begins with the now-traditional debate between property rights and commons, taking each in turn. It also considers the possibility of having a market maker span different individual properties. Part IV examines the academic literature to identify justifications for the persistence of use restrictions in light of these interdependencies.


    Coase recognized that spectrum involved "interconnections between the ways in which frequencies are used" that could "raise special problems not found elsewhere or, at least, not to the same degree," such as the fact that certain sources of radio emissions could cause interference across multiple frequencies and over long distances. (19) Coase also acknowledged that "[i]t may be costly to discover who it is that is causing the trouble." (20) He nonetheless downplayed the significance of this point, averring that market transactions augmented by traditional notions of tort and property law would suffice to allocate spectrum efficiently. (21) That said, he conceded that the issue was ultimately an empirical question that "only experience could show." (22)

    The failure of true spectrum property rights to emerge suggests that the aspects that Coase downplayed in his analysis may be more important than he believed. The first Section of this Part analyzes the interdependencies that characterize spectrum usage. The following two Sections explore similar problems arising with respect to the Internet and the electric power grid. This analysis makes clear that modern forms of technology create interdependencies that are more complex than previous forms of property. In particular, sources of interference are more cumulative, more unpredictable, more geographically discontinuous, and more variable than is typically the case with real property. Moreover, the information needed to address these problems tends to be decentralized and only locally available, which both inhibits any entity from possessing the information necessary to optimize usage and makes enforcement difficult.

    1. Spectrum

      Spectrum is unusual in that a wide variety of factors affects its available capacity. Its efficiency varies with the time of day, the season of the year, and the weather. (23) Moreover, different frequencies vary in their ability to penetrate buildings and foliage, diffract through obstacles, and refract over the horizon. In addition, every wire and device that involves electric current generates some degree of interference. All of these factors are environmental qualities rather than property rights that need to be defined legally. They tend to operate within the same band of frequencies as the original transmission. They are also stable relative to the period of time of particular transmissions. Other limitations are the result of the physics of wave propagation. These give rise to interference that changes rapidly over time and across small changes in location in ways that can be difficult to predict.

      1. Shannon's Law and the Cumulative Nature of Interference

        One of the most fundamental, yet frequently overlooked, principles of wave-based communications is Shannon's Law. Shannon's Law holds that the maximum error-free capacity of any bandwidth-limited channel depends on the signal-to-noise ratio. (24) The louder the background noise, or the weaker the primary signal, the lower the total capacity. (25)

        Although the formal proof of this principle is somewhat complex, the intuitions underlying this insight are relatively simple. Consider a conversation at a cocktail party. As the background noise increases, guests have to speak more slowly and loudly in order to be intelligible, thereby lowering the effective throughput rate for communication. One guest's increase in speaking volume is perceived by all of the other guests as noise, who then must respond by increasing their volume and slowing their communication rate. Once the total number of speakers passes a certain threshold, any further communication becomes completely impossible.

        For our purposes, the fact that capacity is a function of signal-to-noise ratio makes different people's use of the spectrum highly interdependent. Because each person's signal is perceived as noise by everyone else, every person's attempt to communicate necessarily reduces the capacity available to others transmitting in the same area. Indeed, as the density of people using a wireless network increases, the...

To continue reading