Study Questions: Unit III

General note: It is reasonable to anticipate better results if you can make use of basic information from the specific cases you've been assigned to read to make your answers more concrete.

2.	Consider the right to exclude trespassers.
	a.	Suppose that a sudden, unexpected, severe, and life-threatening storm on a lake threatens a sailing boat with a family aboard. The boat is near an onshore dock. For each of the following cases, decide how you would rule and explain briefly, including the economic reasoning behind your decision:
		(1)	The boat owner attempts to lash the boat to the dock, but an employee of the dock owner unlashes the boat and pushes it away. As a result, the boat is destroyed, and the family is severely injured. The boat owner sues the dock owner for damages.
		(2)	The boat owner lashes the boat to the dock. As a result, the boat and dock both suffer damages, but the family avoids injury. The dock owner sues the boat owner for damages.
		(3)	A powerful wave dashes the boat against the dock, damaging both the boat and the dock. The dock owner sues the boat owner for damages.
	b.	Consider the following description of the fact of the case of Hammonds (p) v. Central Kentucky Natural Gas Co. (d) (1934):
			About 1919 the [defendant] exhausted the gas from a field of about 15,000 acres, ... most of which it had under lease. Thereafter it brought in vast quantities of gas from distant fields and put it by force through its previously drilled wells into the vacated underground reservoir, withdrawing it as desired. In recent rate litigation the company valued these holdings at $ 2,000,000. The [plaintiff] owns 54 acres within this boundary which was never leased to the company. It is not disputed that this geological dome or basin underlies her land. She brought this suit to recover a large sum for use and occupation under the idea of trespass, it being charged that the gas was placed in or under her property without her knowledge or consent.
		If you had been the judge in this case, how would you have ruled? Explain briefly, including the economic reasoning behind your decision.

3.	Consider a property owner's "absolute privileges to use and abuse the land." Suppose that the McHeftys, who own a multi-story home in a small town convert the bottom floor of their home into a bookstore. Neighbors of the McHeftys sue for an injunction to close down the bookstore. For each of the following cases, decide how you would rule and explain briefly, including the economic reasoning behind your decision:
	a.	There is a commercial district a few blocks down the street, but there are no other businesses between the McHeftys' property and the commercial district.
	b.	Several years before the McHeftys moved in, all of the homeowners on the block signed a written agreement to maintain their properties as residences only. Several properties had been sold with that provision included as a restrictive covenant. The McHeftys' deed did not include that restricted covenant.
	c.	The block had once been the property of a single homeowner who subdivided the block and included in each deed a restrictive covenant specifying that the buyer and all subsequent buyers maintain their properties as residences only. The deeds of most of McHeftys' neighbors contained that restrictive convenant, but the McHeftys' deed did not.

4.	Consider a property owner's "absolute powers to transfer" that property.
	a.	You go to a swap meet and see $500 of stereo equipment you would like to buy. You ask for and are shown a copy of the original receipt, and then you buy the stereo equipment. A few days later the police come to your house and tell you that the stereo equipment you bought was stolen, and the original owner wants it back. Consider two alternative legal rules for resolving this situation: (1) The American rule: a buyer cannot acquire title from someone who doesn't have it. (2) The European rule: a buyer can acquire title by making a reasonable inquiry that the seller has valid title.
		(1)	Under which rule do thieves receive a higher price when selling items they have stolen? Why?
		(2)	Under which rule do thieves have to work harder to steal items? Why?
	b.	Consider the transferability of restrictions on the use of property.
		(1)	Sellers sometimes omit restrictive covenants from the deeds for their property. What economic incentive can account for that?
		(2)	Suppose that the Friedmans buy a home on a subdivided lot and receive a deed that fails to include a restrictive covenant that had appeared in previous deeds to the property. Would you expect a court to be equally likely to enforce each of the following omitted restrictions? Why or why not?
			(a)	An easement that allows the homeowners of the adjacent subdivided property to use the Friedmans' driveway?
			(b)	An easement that allows the homeowners of the adjacent subdivided property to pipe their waste into a common septic tank buried under the Friedmans' property?

ID. Conflicting property rights

ID1. The economics of conflicting property rights Ronald Coase: "The Problem of Social Cost"

1.	a.	State the Coase theorem.
	b.	Explain how the Coase theorem results in the following conclusions stated by Friedman:
		(1)	"The existence of externalities does not necessarily lead to an inefficient result."
		(2)	"Pigouvian taxes do not in general lead to the efficient result."
		(3)	"The problem is not really externalities at all; it is transaction costs."

A factory pollutes a lake which is also used by 20 vacation resorts. It would cost the factory $1,000,000 a year to prevent the pollution. Each resort faces the following alternatives (remember that there are 20 resorts):

1. Operate as a resort on an unpolluted lake, making $100,000/year profit.

2. Operate as a resort on a polluted lake, making $40,000/year profit.

3. Operate as a hunting lodge, making $60,000/year profit, whether or not the lake is polluted.

Complete the following table of total net gains from the alternative options available to the factory and the 20 vacation providers:

		Factory option
		Pollute	Prevent pollution
20 vacation providers operate as...	Resorts
20 vacation providers operate as...	Hunting lodges

Which option is most efficient? Explain briefly.

For each of the following decide (1) which outcome will occur without bargaining; and (2) whether the outcome will change if bargaining occurs:

(a)

The factory has the right to pollute if it wants to.

(b)

Any resort can enjoin the pollution, so the factory can only pollute if it has permission from all the resorts.

3.	A newly opened electric company emits smoke which dirties the wash hanging at a nearby laundry which has been operating for many years. No other parties are affected by the smoke. Two options exist for eliminating the smoke damage: (1) the installation of scrubbers by the electric company, or (2) the installation of air filters by the laundry. The laundry sues to seek an injunction preventing the electric company from emitting smoke.
	a.	If the parties cannot bargain, how would you decide what court decision to recommend? Explain briefly.
	b.	How would your answer to part a change if the parties can bargain costlessly?

4.	Define a bilateral monopoly, and discuss whether it tends to make transaction costs higher or lower.

5.	Consider the following four cases discussed by Ronald Coase:
		(1) Sturges v. Bridgman (1879) - doctor v. confectioner (2) Cooke v. Forbes (1867-8) - matting mfr v. chemical mfr (3) Bryant v. Lefever (1878-9) - chimney v. wall (4) Bass v. Gregory (1890) - public (beer) house v. private house
	What was the main point that Coase tried to make in his comments about these cases?

6.	Based on Coase's analysis:, what should the courts aim to do in the assignment of property rights? Briefly explain the underlying reasoning.

7.	The diagram to the right illustrates the marginal benefit to a fishery of its water pollution and the marginal cost of the pollution for downstream farmers. The farmers file suit requesting that the fishery cease its pollution.
	a.	Suppose that transaction costs between the fishery and the farmers are low, while it is costly for the court to evaluate the sizes of the relevant benefits and costs. What legal remedies would promote an efficient outcome? Support your answer.
	b.	Suppose instead that transaction costs between the fishery and the farmers are prohibitively high, while it is feasible for the courts to evaluate the relevant benefits and costs. What legal remedies would promote an efficient outcome? Support your answer.
	d.	If a remedy included damages for the fishery's pollution would you recommend:
		(1)	Temporary or permanent damages?
		(2)	Actual or mitigated damages?
		Briefly support each recommendation.

8.	"The Baseball Players' Labor Market": Before 1976: All Major League Baseball (MLB) players were required to sign a uniform contract which included a "reserve clause" that gave team owners exclusive property rights to the use and transfer of the player under contract. Team owners could buy, sell and otherwise transfer player contracts, but players could not independently contract with other teams. Since 1976, following an arbitration decision that abolished the reserve clause, veteran players can become free agents, with full property rights over the marketing of their own services.
	a.	Consider the World According to Coase, in which transaction costs are negligible. Decide how, if at all, each of the following would be affected by the switch from the reserve clause to free agency, and briefly support you decision in each case:
		(1)	economic efficiency with respect to the allocation of playing talent across the various teams of the league.
		(2)	equity with respect to players and team owners.
		(3)	the relative competitiveness of the various teams of the league.
	b.	An empirical economics study published several years after the start of free agency reported finding that there had been a net migration of playing talent from previously high-performing teams in small cities to low-performing teams in large cities. Does this finding suggest that the baseball players' labor market illustrates the World According to Coase or not? Explain briefly.

3.	Airplanes make noise that disturbs residents of homes near the flight path. Suppose that the airline can, at some cost, reduce the noise to an insignificant level. Home owners can get the same reduction by soundproofing their homes. For simplicity ignore the possibility of different levels of noise reduction--there either is or is not a noise problem. There is one airline; it owns the airport. There are 2,000 homes near the flight path. Reducing noise costs the airline $1 million dollars a year. Sound proofing costs $400/year for each house. Airport noise (if there is neither soundproofing nor noise reduction by the airline) reduces the value of each house to its owner by $600/year
	a.	What is the efficient outcome? How did you decide? (Note: your outcome should specify whether or not (1) the airline reduces its noise and (2) the home owners install soundproofing.)
	b.	Suppose that it is not possible for the airline to bargain with homeowners. Indicate and explain briefly what outcome would occur under the property right assignments reached in each of the following cases:
		(1)	Fontainebleau Hotel Corp. v. Forty-Five Twenty-Five, Inc. (1959)
		(2)	Estancias Dallas Corp. v. Schultz (1973)
		(3)	Boomer v. Atlantic Cement Co. (1970)
		(4)	Spur Industries v. Del E. Webb Development (1972)
	c.	Do any of your answers in part b depend on whether the airline is assessed actual versus mitigated damages? Explain briefly.

4.	In cases of conflicting uses, it is possible to assign a property right with or without liability for damages. Does economic analysis suggest that assigning liability for damages increases or decreases the likelihood of a achieving an efficient final outcome? Explain.

5.	Briefly describe the difference between each of the following options, and discuss the efficiency issues at stake:
	a.	Temporary versus permanent damages.
	b.	Actual versus mitigated damages.

6.	In Boomer v. Atlantic Cement Co. (1970), did the court assign temporary or permanent damages? Do you agree with the court's choice? Why or why not?

7.	A tuberculosis sanatorium is built in a residential area. Property values decline because the residents fear contagion from the patients in the sanatorium. Their fear has no scientific basis. Should the sanatorium nonetheless be deemed a nuisance if the fall in residential property value is greater than the increase in the value of the parcel of land used for the sanatorium?

8.	Consider the following information from a lawsuit decided in 1982: The plaintiff is the owner of a residence built in 1979. The residence has a solar system which includes collectors on the roof to supply energy for heat and hot water. After the plaintiff built his solar-heated house, the defendant purchased the lot immediately to the south of the plaintiff's lot and commenced planning construction of a home. When the plaintiff learned of defendant's plans to build the house he advised the defendant that the proposed location of the defendant's house would substantially and adversely affect the integrity of the plaintiff's solar system. Plaintiff requested defendant to locate his home an additional several feet away from the plaintiff's lot line. Plaintiff and defendant failed to reach an agreement on the location of defendant's home, and defendant started construction. The plaintiff filed a complaint claiming entitlement to "unrestricted use of the sun and its solar power" and demanding an injunction against construction of the defendant's house. If you were the judge in this case, would you have granted the injunction? Why or why not?

9.	Consider Prah v. Maretti (1982), the conflicting use case dealing with solar energy panels that was adapted for mock trial #1.
	a.	What precedent assigned in class was most helpful for the defense? What made it helpful for the defendant?
	b.	In a mock trial, counsel for the plaintiff applied the "balancing of equities" principle from Estancias Dallas Corp. v. Schultz (1973). Discuss how the principle could be applied to Prah v. Maretti.

10.	a.	Consider a physical taking of private property for public use with fair market value paid as just compensation. What economic problem related to simply purchasing the private property is this remedy designed to address?
	b.	In what key respect does Poletown Neighborhood Council v. City of Detroit (1981) depart from the standard criteria that a taking must satisfy?
	c.	Prospective purchasers, generally of real estate, sometimes use false names in purchasing. Does this form of deceit have a potentially productive function, or, like other forms of fraud, should it be forbidden?

11.	Consider the Kelo v. City of New London (2005) case.
	a.	What sorts of efficiency issues do you think the Kelo case illustrates?
	b.	What sorts of equity issues do you think the Kelo case illustrates? (Tip: consider the dissent by Thomas.)
	c.	Economist Alan Blinder recommends that we try to be hard-headed instead of soft-headed when it comes to efficiency and soft-hearted instead of hard-headed when it comes to equity. How do you think the Kelo decision fares with respect to these two criteria? Explain your decision.

12.	The Endangered Species Act empowers the federal government to designate habitats of endangered species. Once such a habitat is designated, the owner of the land containing the habitat may not use the land in a way that endangers the habitat.
	a.	What sort of taking does a habitat designation illustrate?
	b.	Would you expect that compensation is paid if the designation diminishes the commercial value of the land? Explain briefly.
	c.	What incentives result from: (1) requiring compensation? (2) forbidding compensation?
	d.	One stated rationale for the Act is that rare species may have important human pharmacological or nutritional applications. Does economic reasoning suggest that the Act would be necessary for this purpose? Why or why not?

13.	A decade ago, the Sherman family planted eight small redwood trees on their own side of a property line that they share with the Prius family. Five years later, the Prius family installed a solar energy system on their roof which originally supplied nearly all of the electricity consumed by the family. At that time, and periodically since, the Prius family has tried to persuade the Sherman family to cooperate in re-landscaping the area between their houses to ensure the integrity of the solar energy system, but the conversations yielded no mutually satisfactory results. The Shermans' redwood trees have since grown so tall that they shade a considerable portion of the solar panels, substantially reducing their effectiveness. The Prius family recently filed a lawsuit asking the court to require the Shermans to prune their redwood trees so that they do not cast shadows on more than 10 percent of the solar panels at any time.
	a.	Decide whether you think each of the following cases would better support the plaintiffs (the Prius family) or the defendants (the Sherman family), and explain why:
		(1)	Fountainebleau Hotel Corp. v. Forty-Five Twenty-Five, Inc. (1959).
		(2)	Estancias Dallas Corp. v. Schultz (1973).
		(3)	Boomer v. Atlantic Cement Co. (1970).
		(4)	Spur Industries v. Del E. Webb Development (1972).
		(5)	Prah v. Maretti (1982).
	b.	If you were the judge, how would you rule? Support your decision.

14.	Consider the following passage from the article, "Long Beach OKs soundproofing for airport neighbors' homes," which appeared in the Los Angeles Times on October 8, 2009:
			"For dozens of people who live near the Long Beach Airport, ... ear-numbing flyovers that have become a daily reality are about to get a little less agonizing. The City Council adopted a plan late Tuesday to soundproof houses most affected by aircraft noise. "An increase in flights -- particularly louder military planes -- in recent years prompted airport officials to offer soundproofing for neighboring homes. About two dozen homeowners along the southern end of the main flight path will be eligible for acoustic windows, attic insulation and other soundproofing measures, airport spokeswoman Sharon Diggs-Jackson said."
	a.	Under the Blackstonian bundle of land rights, what remedy would be available to the home owners described in the article, and why?
	b.	How would you describe the legal remedy that is actually being applied in this case?
	c.	Which case covered in class do you think best applies to this situation? Briefly explain your decision.
	d.	How would you rank the efficiency of the remedy that is being applied to this situation compared to strict adherence to Blackstonian land rights? Briefly explain your decision.

15.	For sixty years, the family of Robert Blue has owned Bernard Luggage, a retail business at the corner of Hollywood and Vine. Recently, the Los Angeles Community Redevelopment Agency has declared the area "blighted" and moved to evict business owners such as Robert Blue to make way for the construction of a luxury hotel and 150 luxury apartments. Suppose that Robert Blue files suit to seek an injunction against the acquisition of his commercial establishment.
	a.	Which case(s) covered in class do you find most applicable to this situation? Explain briefly.
	b.	If you were the judge in this case, would you grant the injunction? Carefully explain and justify your decision, including the impact of your decision on economic incentives.

IA. The economics of property rights

1.	Answer the following questions about property rights.
	a.	What are some of the benefits and costs of a system of property rights?
	b.	Under what circumstances does the establishment of a system of property rights make economic sense?
	c.	What role does technology play in the economic feasibility of a system of property rights?

IB. Acquiring property rights

1.	Consider bright-line rules:
	a.	What is a bright-line rule?
	b.	What economic purpose is served by bright-line rules?
	c.	Briefly describe some examples of bright-line rules.

IC. Exercising property rights

1.	Ownership of a piece of land is really ownership of a bundle of rights related to that land.
	a.	What rights make up the "Blackstonian" bundle of land rights?
	b.	How does each right help promote efficient use of a piece of land?

ID2. Conflicting property rights and the law a. Incompatible uses

1.	The law protects some entitlements (such as my ownership of my car) with a property right, and others (such as my right not to have people run into my car) with a liability right.
	a.	Briefly explain the difference between the two kinds of rules.
	b.	What are the advantages of each?
	c.	How should we decide which to use in specific cases?

IE. Intellectual property

1.	Suppose that patent and copyright protection were eliminated.
	a.	Would creative endeavor cease? Why or why not?
	b.	Would efficiency necessarily decrease? Why or why not?

2.	Historically, the U.S. government has awarded property rights to broadcast frequencies to the parties which submit the most persuasive request. Studies indicate that the resulting allocation of broadcast frequencies has been approximately the same as would be expected if the government were to switch to a system in which it auctioned off the property rights to broadcast frequencies to the highest bidder. If so, would you expect any impact on efficiency of a switch by the government to an auction system? Explain why or why not.

2.	Briefly describe each of the following, and indicate if/when it is accepted under U.S. common law.
	a.	"First in time, first in right."
	b.	"Doctrine of ancient lights."
	c.	"Coming to the nuisance."
	d.	"Doctrine of necessity."
	e.	"Balancing of equities?

3.	A man discovers the entrance to a large scenic cave on his property. The cave runs under other people's property as well.
	a.	What are the two common legal options for assigning property rights to the cave?
	b.	How would you recommend that the property rights be assigned in a case like this? Support your decision.

4.	"Possession is nine-tenths of the law" - or not. Answer each of the following questions for the examples below:
		(1)	Does the possessor have the property right? Why or why not?
		(2)	What possibly inefficient incentives can arise as a result of the way the property right is assigned?
	a.	The possessor of oil pumped from directly beneath a well located on the possessor's property from a pool of oil that spreads to several adjacent properties.
	b.	The possessor of oil pumped by "slant drilling" in which a well located on the possessor's property is drilled at an angle to access a pool of oil that underlies an adjacent property.
	c.	U.S. Gypsum, the possessor of timber it had harvested on Stack Island, located within its property line (Houston and Baker v. United States Gypsum Co. (1981)).

5.	For each of the following cases, indicate what rule for assigning property rights is supported by the decision, and briefly explain how you decided.
	a.	Pierson v. Post (1805)
	b.	Houston and Baker v. United States Gypsum Co. (1981)
	c.	Fontainebleau Hotel Corp. v. Forty-Five Twenty-Five, Inc. (1959)

2.	A railroad runs through farming country; there is one railroad company and a hundred farmers. The railroad's locomotives throw sparks which sometimes start fires, doing $100,000 worth of damage each year. The railroad company could prevent the fires by installing spark arresters on its locomotives at a cost of $50,000/year. The farmers could prevent the fires by switching from wheat to clover, costing them $70,000/year in lost income.
	a.	What is the efficient outcome? How did you decide?
	b.	No transactions are possible between the farmers and the railroad. Decide which of the following will result in the efficient outcome, and explain briefly.
		(1)	The railroad is free to throw sparks.
		(2)	The railroad must pay the farmers damages for the fires caused by its sparks.
		(3)	The railroad must pay a fine to the government for the damage due to the fires caused by its sparks.
	c.	Repeat part b, assuming that transactions are possible and costless.

2.	Under current law, copyrights are given easily and protect for a long time; patents are much harder to get and protect for a much shorter time. Does this difference make sense? Why or why not?

1.	a.	What two common legal options could the court have used to assign property rights in Hammonds v. Central Kentucky Natural Gas Co. (1934)?
	b.	What method of acquiring ownership was illustrated by Houston and Baker v. United States Gypsum Co. (1981)?
	c.	What right in the "Blackstonian" bundle of land rights was at issue in Ploof v. Putnam (1908)?
	d.	As illustrated in Vincent v. Lake Erie Transport Co. (1910), what economic efficiency purpose is served by assessing damages against a defendant whose conduct is not negligent or blameworthy?
	e.	A man discovers the entrance to a large scenic cave on his property. The cave runs under other people's property as well: What are the two common legal options for assigning property rights to the cave?

2.	Consider the case [insert name of any assigned case].
	a.	What were the basic facts of the case?
	b.	What key lesson(s) or conclusion(s) come out of the case?
	c.	What incentives or consequences does the outcome of the case create?
	d.	Do you agree with the outcome of the case? Why or why not?

3.	Social scientists, including economists, have developed an increasing understanding of the substantial importance that individuals attach to equity (fairness). This question concerns the interaction of efficiency and equity within the realm of law and economics.
	a.	According to Cento Veljanovski of London's Institute of Economic Affairs, "[I]n the ideal market setting law can pursue non-economic objectives without any sacrifice of economic efficiency." Some observes have pointed out, for example, that if the conditions of the Coase theorem are met, then the legal system can be used to help redistribute wealth. Do you think this assertion is consistent with the Coase theorem? Why or why not?
	b.	Economist Alan Blinder recommends that we try to be hard-headed instead of soft-headed when it comes to efficiency and soft-hearted instead of hard-hearted when it comes to equity. How do you think the decision reached in Kelo v. City of New London (2005) fares with respect to these two criteria? Explain.