Coase cases: results
Case 1: Sturges v. Bridgman
(Ch. D. 852 (1879)):
Court decision: The courts had little difficulty in
granting the doctor the injunction he sought. "Individual cases of hardship may occur
in the strict carrying out of the principle upon which we found our judgment, but the
negation of the principle would lead even more to individual hardship, and would at the
same time produce a prejudicial effect upon the development of land for residential
purposes."
Coase commentary: The court's decision established that the doctor had the right to prevent the confectioner from using his machinery. But, of course, it would have been possible to modify the arrangements envisaged in the legal ruling by means of a bargain between the parties. The doctor would have been willing to waive his right and allow the machinery to continue in operation if the confectioner would have paid him a sum of money which was greater than the loss of income which he would suffer from having to move to a more costly or less convenient location or from having to curtail his activities at this location or, as was suggested as a possibility, from having to build a separate wall which would deaden the noise and vibration. The confectioner would have been willing to do this if the amount he would have to pay the doctor was less than the fall in income he would suffer if he had to change his mode of operation at this location, abandon his operation or move his confectionery business to some other location. The solution of the problem depends essentially on whether the continued use of machinery adds more to the confectioner's income than it subtracts from the doctor's. But now consider the situation if the confectioner had won the case. The confectioner would then have had the right to continue operating his noise and vibration-generating machinery without having to pay anything to the doctor. The boot would have been on the other foot: the doctor would have had to pay the confectioner to induce him to stop using the machinery. If the doctor's income would have fallen more through continuance of the use of this machinery than it added to the income of the confectioner, there would clearly be room for a bargain whereby the doctor paid the confectioner to stop using the machinery. That is to say, the 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). The basic conditions are exactly the same in this case as they were in the example of the cattle which destroyed crops. 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. Any other decision would have had "a prejudicial effect upon the development of land for residential purposes," an argument which was elaborated by examining the example of a forge operating on a barren moor, which was later developed for residual purposes. The judges' view that they were settling how the land was to be used would be true only in the case in which the costs of carrying out the necessary market transactions exceeded the gain which might be achieved by any rearrangement of rights. And it would be desirable to preserve the areas (Wimpole Street or the moor) for residential or professional use (by giving non-industrial users the right to stop the noise, vibration, smoke, etc., by injunction) only if the value of the additional residential facilities obtained was greater than the value of cakes or iron lost. But of this the judges seem to have been unaware.
Case 2: Cooke
v. Forbes (L.R. 5 Eq. 166 (1867-1868)):
Court decision: The judge commented: "... it
appears to me quite plain that a person has a right to carry on upon his own property a
manufacturing process in which he uses chloride of tin, or any sort of metallic dye, and
that his neighbor is not at liberty to pour in gas which will interfere with his
manufacture. If it can be traced to the neighbor, then, I apprehend, clearly he will have
a right to come here and ask for relief." But in view of the fact that the damage was
accidental and occasional, that careful precautions were taken and that there was no
exceptional risk, an injunction was refused, leaving the plaintiff to bring an action for
damages if he wished. What the subsequent developments were I do not know.
Coase commentary: [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 but would have to seek damages from the sulphate of ammonia manufacturer. The economic analysis of the situation is exactly the same as with the cattle which destroyed crops. To avoid the damage, the sulphate of ammonia manufacturer could increase its precautions or move to another location. Either course would presumably increase his costs. Alternatively he could pay for the damage. This he would do if the payments for damage were less than the additional costs that would have to be incurred to avoid the damage. The payments for damage would then become part of the cost of production of sulphate of ammonia. Of course, if, as was suggested in the legal proceedings, the amount of damage could be eliminated by changing the bleaching agent (which would presumably increase the costs of the matting manufacturer) and if the additional cost was less than the damage that would otherwise occur, it should be possible for the two manufacturers to make a mutually satisfactory bargain whereby the new bleaching agent was used. Had the court decided against the matting manufacturer, as a consequence of which he would have had to suffer the damage without compensation, the allocation of resources would not have been affected. It would pay the matting manufacturer to change his bleaching agent if the additional cost involved was less than the reduction in damage. And since the matting manufacturer would be willing to pay the sulphate of ammonia manufacturer an amount up to his loss of income (the increase in costs or the damage suffered) if he would cease his activities, this loss of income would remain a cost of production for the manufacturer of sulphate of ammonia. This case is indeed analytically exactly the same as the cattle example.
Case 3: Bryant v. Lefever
(4 C.P.D. 172 (1878-1879)):
... it is said, and the jury have found, that the defendants have done that which caused a nuisance to the plaintiff's house. We think there is no evidence of this. No doubt there is a nuisance, but it is not of the defendant's causing. They have done nothing in causing the nuisance. Their house and their timber are harmless enough. It is the plaintiff who causes the nuisance by lighting a coal fire in a place the chimney of which is placed so near the defendants' wall, that the smoke does not escape, but comes into the house. Let the plaintiff cease to light his fire, let him move his chimney, let him carry it higher, and there would be no more nuisance. Who then, causes it? It would be very clear that the plaintiff did, if he had built his house or chimney after the defendants had put up the timber on theirs, and it is really the same though he did so before the timber was there. But (what is in truth the same answer), if the defendants cause the nuisance, they have a right to do so. If the plaintiff has not the right to the passage of air, except subject to the defendants' right to build or put timber on their house, then his right is subject to their right, and though a nuisance follows from the exercise of their right, they are not liable.
And Cotton, L.J. said:
Here it is found that the erection of the defendants' wall has sensibly and materially interfered with the comfort of human existence in the plaintiff's house, and it is said this is a nuisance for which the defendants are liable. Ordinarily this is so, but the defendants have done so, not by sending on to the plaintiff's property any smoke or noxious vapour, but by interrupting the egress of smoke from the plaintiff's house in a way to which.., the plaintiff has no legal right. The plaintiff creates the smoke, which interferes with his comfort. Unless he has ·.. a right to get rid of this in a particular way which has been interfered with by the defendants, he cannot sue the defendants, because the smoke made by himself, for which he has not provided any effectual means of escape, causes him annoyance. It is as if a man tried to get rid of the liquid filth arising on his own land by a drain into his neighbour's land. Until a right had been acquired by user, the neighbour might stop the drain without incurring liability by so doing. No doubt great inconvenience would be caused to the owner of the property on which the liquid filth arises But the act of his neighbour would be a lawful act, and he would not be liable for the consequences attributable to the fact that the man had accumulated filth without providing any effectual means of getting rid of it.
Coase
commentary: I do not propose to show that any subsequent modification of the
situation, as a result of bargains between the parties (conditioned by the cost of
stacking the timber elsewhere, the cost of extending the chimney higher, etc.), would have
exactly the same result whatever the decision the courts had come to since this point has
already been adequately dealt with in the discussion of the cattle example and the two
previous cases. What I shall discuss is the argument of the judges in the Court of Appeals
that the smoke nuisance was not caused by the man who erected the wall but by the man who
lit the fires. The novelty of the situation is that the smoke nuisance was suffered by the
man who lit the fires and not by some third person. The question is not a trivial one
since it lies at the heart of the problem under discussion. 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. Although the wall-builder was
not liable legally for the nuisance, as the man with the smoking chimneys would presumably
be willing to pay a sum equal to the monetary worth to him of eliminating the smoke, this
sum would therefore become for the wall-builder, a cost of continuing to have the high
wall with the timber stacked on the roof.
The judges' contention that it was the man who lit the fires who alone
caused the smoke nuisance is true only if we assume that the wall is the given factor.
This is what the judges did by deciding that the man who erected the higher wall had a
legal right to do so. The case would have been even more interesting if the smoke from the
chimneys had injured the timber. Then it would have been the wall-builder who suffered the
damage. The case would then have closely paralleled Sturges v. Bridgman and there
can be little doubt that the man who lit the fires would have been liable for the ensuing
damage to the timber, in spite of the fact that no damage had occurred until the higher
wall was built by the man who owned the timber.
Case 4: Bass v. Gregory
(25 Q.B.D. 481 (1890))
Court decision:
(Note: It may be asked why a lost grant could not also be presumed in the case of the confectioner who had operated one mortar for more than 60 years. The answer is that until the doctor built the consulting room at the end of his garden there was no nuisance. So the nuisance had not continued for many years. It is true that the confectioner in his affidavit referred to "an invalid lady who occupied the house upon one occasion, about thirty years before" who "requested him if possible to discontinue the use of the mortars before eight o'clock in the morning" and that there was some evidence that the garden wall had been subjected to vibration. But the court had little difficulty in disposing of this line of argument: "... this vibration, even if it existed at all, was so slight, and the complaint, if it can be called a complaint, of the invalid lady.., was of so trifling a character, that.., the Defendant's acts would not have given rise to any proceeding either at law or in equity" (11 Ch.D. 863). That is, the confectioner had not committed a nuisance until the doctor built his consulting room.)
Coase commentary:
The reasoning employed by the courts in determining legal rights will often seem strange to an economist because many of the factors on which the decision turns are, to an economist, irrelevant. Because of this, situations which are, from an economic point of view, identical will be treated quite differently by the courts. The economic problem in all cases of harmful effects is how to maximise the value of production. In the case of Bass v. Gregory fresh air was drawn in through the well which facilitated the production of beer but foul air was expelled through the well which made life in the adjoining houses less pleasant. 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.General Coase comment:
Judges have to decide on legal liability but this should not confuse economists about the nature of the economic problem involved. In the case of the cattle and the crops, it is true that there would be no crop damage without the cattle. It is equally true that there would be no crop damage without the crops. The doctor's work would not have been disturbed if the confectioner had not worked his machinery; but the machinery would have disturbed no one if the doctor had not set up his consulting room in that particular place. The matting was blackened by the fumes from the sulphate of ammonia manufacturer; but no damage would have occurred if the matting manufacturer had not chosen to hang out his matting in a particular place and to use a particular bleaching agent. If we are to discuss the problem in terms of causation, both parties cause the damage. If we are to attain an optimum allocation of resources, it is therefore desirable that both parties should take the harmful effect (the nuisance) into account in deciding on their course of action. It is one of the beauties of a smoothly operating pricing system that, as has already been explained, the fall in the value of production due to the harmful effect would be a cost for both parties.