Oral hearings--format

D. Conflicting property rights
1. The economics of conflicting property rights

    Key lessons from the Coase theorem:

    (1) When transactions costs are zero, the Coase theorem applies and bargaining can work better than a Pigouvian solution.

    It won't matter for efficiency how property rights are assigned, the Nike rule applies: "just do it."

    Example of simple rules:
    "Polluter pays"
    "Deep pocket pays"

    (2) When transactions costs are nonzero, efficiency can depend on how rights are assigned

    With transactions costs, "the initial delimitation of legal rights does have an effect on the efficiency with which the economic system operates. One arrangement of rights may bring about a greater value of production than any other. But unless this is the arrangement of rights established by the legal system, the costs of reaching the same result by altering and combining rights through the market may be so great that this optimal arrangement of rights, and the greater value of production which it would bring, may never be achieved." (Coase 8)

According to Coase, the law provides an option for handling high transaction cost situations

    What should be the guiding principle for the courts?

    Courts should aim to
    (i) assign property rights so as to maximize combined net benefits
            --entitlements to highest-valued user
            --liability to lowest-cost avoider of damages
    (ii) lower transaction costs
    "The Coase Theorem suggests that the law can encourage bargaining by lowering transaction costs." (CU 96)

    General Coase perspective: Aim for the best achievable outcome in a less-than-perfect world

    "A ... feature of the usual treatment of the problems discussed in this article is that the analysis proceeds in terms of a comparison between a state of laissez faire and some kind of ideal world.... A better approach would seem to be to start our analysis with a situation approximating that which actually exists, to examine the effects of a proposed policy change, and to attempt to decide whether the new situation would be, in total, better or worse than the original one. In this way, conclusions for policy would have some relevance to the actual situation." (Coase 22)

    Any final questions/comments?

    Note:

    Example: sparks and crops (used by Pigou to illustrate logic of assessing damages)
    Irony to Coase: "The example used by Pigou refers to a real situation. In Britain, a railway does not normally have to compensate those who suffer damage by fire caused by sparks from an engine....
    "In the real world, Pigou's example could only exist as a result of a deliberate choice of the legislature.... The only circumstances in which compensation would not be paid would be those in which there had been government action. It is strange that Pigou, who clearly thought it desirable that compensation should be paid, should have chosen this particular example to demonstrate how it is possible 'for State action to improve upon `natural' tendencies.'" (Coase 13-14)

    Coase commentary handout
    (1) Sturges v. Bridgman (1879) - doctor v. confectioner
    What efficiency effect hinges on the court decision?
    "[T]he circumstances in which it would not pay the confectioner to continue to use the machinery and to compensate the doctor for the losses that this would bring (if the doctor had the right to prevent the confectioner's using his machinery) would be those in which it would be in the interest of the doctor to make a payment to the confectioner which would induce him to discontinue the use of the machinery (if the confectioner had the right to operate the machinery).... With costless market transactions, the decision of the courts concerning liability for damage would be without effect on the allocation of resources. It was of course the view of the judges that they were affecting the working of the economic system--and in a desirable direction."

    (2) Cooke v. Forbes (1867-8) - matting mfr v. chemical mfr
    Sturges v. Bridgman ruled for plaintiff; here for the defendant--what difference does it make?
    "[T]he situation is essentially the same as that found in Sturges v. Bridgman, except that the cocoa-nut fiber matting manufacturer could not secure an injunction...."

    (3) Bryant v. Lefever (1878-9) - chimney v. wall
    Who caused the smoke nuisance?
    "Who caused the smoke nuisance? The answer seems fairly clear. The smoke nuisance was caused both by the man who built the wall and by the man who lit the fires. Given the fires, there would have been no smoke nuisance without the wall; given the wall, there would have been no smoke nuisance without the fires. Eliminate the wall or the fires and the smoke nuisance would disappear. On the marginal principle it is clear that both were responsible and both should be forced to include the loss of amenity due to the smoke as a cost in deciding whether to continue the activity which gives rise to the smoke. And given the possibility of market transactions, this is what would in fact happen."

    (4) Bass v. Gregory (1890) - public (beer) house v. private house
   How relevant is the "doctrine of lost grant" to the economic problem presented by the case?
    "The economic problem was to decide which to choose: a lower cost of beer and worsened amenities in adjoining houses or a higher cost of beer and improved amenities. In deciding this question, the "doctrine of lost grant" is about as relevant as the colour of the judge's eyes. But it has to be remembered that the immediate question faced by the courts is not what shall be done by whom but who has the legal right to do what. It is always possible to modify by transactions on the market the initial legal delimitation of rights. And, of course, if such market transactions are costless, such a rearrangement of rights will always take place if it would lead to an increase in the value of production."

2. Conflicting property rights and the law

    a. Incompatible uses (externalities)

    External cost = "nuisance" in law

    The market solution: assign property rights & allow bargaining
    The market problem: transaction costs
      Coase applies as long as TC < value of transaction (P51)

    Court options for rights to assign
    (1) Equitable relief: Property right: cannot be taken without an ex ante bargain
    example: your car--someone wants to use it
    only a judge, not a jury, can award equitable relief
    Can --> subsequent bargaining where the market determines values

    (1.1) Easement: Right to encroach on someone else's property rights
            Ex: Aircraft: Permission to fly over your land (F125)
                Trains: Permssion to throw sparks (F125)

    (1.2) Injunction: Right to block someone's encroachment on your property rights
        Ex: Sturges v. Bridgman: doctor's injunction against confectioner operating his machinery

    (2) Liability right: Right to receive ex post compensation for damages
        example: your personal space--someone "wants to" run into your car
        Can --> litigation where the court determines values

    These rights can be used in combination
    Alternative approaches to handling incompatible uses - worksheet

    Fontainebleau Hotel Corp.(d,app) v. Forty-Five Twenty-Five, Inc.(p,res) 114 So.2d 357 (1959) -- Eden Roc will be harmed by Fontainbleau (name misspelled in citation title in Lexis-Nexis)

1. What are the facts of the case?
2. What is the doctrine of "ancient lights"?
3. Did the court consider it relevant? Why or why not?
4. May property owners use their property in ways which injure others?
5. Then what are they prevented from doing?
6. Would you consider this case one of low or high transaction costs? Why?

Illustrates the remedy of easement without liability for damages
    (although, strictly speaking, Eden Roc was mistaken about what was included in its property rights)
Discusses (and dismisses) the doctrine of "ancient lights"
Clarifies the limit on the "absolute right to use" property
Illustrates how transaction costs may be high even in small-number cases.

    Estancias Dallas Corp.(d,app) v. Schultz (p,res), 500 S.W. 2d 217 (1973)

1. What are the facts of the case?
2. What does a "balancing of equities" refer to?
3. How does it relate to what Coase recommends as a rule for the assignment of property rights?

    Illustrates the remedy of injunction without liability for damages.
    Considers the comparative impact on both parties of alternative equitable remedies: a "balancing of equities"
    Observes that a nuisance can be permitted legally only if it is associated with public (i.e., external) benefits.