III. Property
D. Conflicting property rights
    1. Incompatible uses
    b. In practice (cont'd.)
    (2) High transaction costs relative to legal costs favor damage remedies
    (2.2) Actual or mitigated damages?

    mitigated damages: damages remaining after cost-effective steps to avoid damages
    the core of the critique by Coase--these get overlooked in Pigouvian approach

MB polluter = train emitting sparks     MC pollutee = farm with wheat     MC' = farm with clover

    Advantage to actual damages: lower information costs
    but no incentive to reduce costs--why switch to clover w/ 100% damages paid?
    Advantage to mitigated damages: provides an incentive to reduce costs

    Ex: Friedman -- base damages on clover, not wheat.

    Ex: Spur Industries v. Del E. Webb Development (1972)
    Entitlement to shutdown or relocation costs reduces optimal location incentives (P63)

    (3) High transaction costs and legal costs favor Pigouvian approach

    There is still a major role for the Pigouvian approach.
    Many of our most substantial externality problems are not litigated, they are legislated.
    Ex: court recognized this in Boomer v. Atlantic Cement

    Note 1: a liability right provides an incentive to report the tort.
        liability right = a Pigouvian tax + compensation + incentive for private enforcement.
    Note 2: with low transaction costs, Pigouvian approach can lead to too much abatement, since failure to compensate leaves room for side bargains.

    2. Takings

    commonly known as eminent domain

    Conflicting property rights dispute now is typically between a private and public party rather 2 private parties

    a. basic analysis

    U.S. Constitution, 5th amendment: "nor shall private property be taken for public use, without just compensation." (CU174)

    (i) "private property" = a particular piece of property owned by a particular person (CU175)

    Why not include taxes as takings?
    What problem would the government have then?

    (ii) "taken"

    Why not just make the government buy it?

    Government typically does make offers first
    "In general, the government should only take private property with compensation to provide a public good when transaction costs preclude purchasing the necessary property." (CU177)

    Advantage: avoids holdout problem
    the seller's version of the free rider
    "a good economic argument for eminent domain. . . is that it is necessary to prevent monopoly." (P55)

    Disadvantage: risk of under-valuing property to its owner

    (iii) "for public use"

    Private parties face the holdout problem too.
    Ex: "the developers of a new baseball stadium in Denver purchased all the land except for the property or one 'holdout,' whom the newspaper called 'the guy who owns first base.'" (CU177)
    1994: A trust held by the Cowperthwaite family was awarded total compensation of $ 2,375,036. The decision by arbitrator Mitchel B. Johns, a former Denver judge, is binding and cannot be appealed.

    Why not for private use too?

    Risk of rent seeking

    (iv) requires "just compensation"

    "fair market value"

    to finance just compensation requires "the government must take, without compensation, from the taxpayer." (P59)

    So what is the net efficiency gain of requiring just compensation?

    "[T]he requirement of compensation can be viewed as a device to channel government finance into taxes and away from takings." (CU175)
    Advantages: Government internalizes policy costs and spreads risks (CU178)
    Disadvantage: Reduces private sector incentives for careful investment planning

    Poletown Neighborhood Council v. City of Detroit 410 Mich. 616 (1981)

1. What are the facts of the case?
2. What did the Supreme Court of Michigan decide?
3. In his dissent, Justice Ryan describes the area of the taking as "tightly-knit residential enclave of first- and second-generation Americans." If so, then what sort of under-compensation risk could result?
4. In what key respect does this case push the envelope of the takings clause?
5. Does the court discuss any sort of public good or public use at stake here?
6. How do we usually handle problems of the sort discussed by the court?
7. What economic incentives does this decision risk creating for other businesses?

Illustrates taking for a debatable public purpose
    Father-in-law as city attorney for Santa Fe Springs did the same for city redevelopment but expressed discomfort about doing it

    b. Regulation versus taking

    Ex: Taking: government takes 10% of your property for a drainage ditch
Regulation: Government blocks your residential development of wetlands property and your property value falls 10%.

    Pennsylvania Coal Co. v. Mahon 260 U.S. 393 (1922) -- Justice Holmes: The general rule at least is, that while property may be regulated to a certain extent, if regulation goes too far it will be recognized as a taking. (LEA226)
    Only says that such a line might exist without saying where it goes, or why it matters." (LEA220)
    Prior, physical invasion was necessary for such a 'taking' to occur. (LEA226)

1. What are the facts of the case?
2. What did the Supreme Court decide?
3. Why is this case considered a regulatory taking rather than a physical taking?
4. How did the plaintiffs, the Mahons, justify the voiding of existing real estate contracts?
5. Would the Mahons have received any advantage from such a contract at the time it was made?
6. Was there an unavoidable threat to human life at stake here? Why or why not?
7. Does the court claim that compensation for regulatory behavior is always required?
8. Why compensate in this case?
9. In his dissent, what approach does Brandeis recommend in deciding on what use of land is efficient?

Extends takings to include regulation

    Keystone Bituminous Coal Association v. DeBenedictis 480 U.S. 470 (1987)

1. What are the facts of the case?
2. What did the Supreme Court decide?
3. How does the outcome differ from Pennsylvania Coal v. Mahon?
4. How does the Pa. law under litigation differ regarding what property is explicitly protected?
5. About how much coal was estimated to be affected by the Pa. law?
6. Why does that matter?

Exempts substantial regulation from compensation requirement

    present status: compensation is not paid for regulations (CU178)

    regulation takings are costly to compensate because of broad impact. 
    Also, gov't does not charge landowners for beneficial impacts from regulations. (P58)

    Advantage: incentive for cautious private investments
    Disadvantage: incentive for excessive government regulation (CU181)

    Zoning

    In theory, zoning reduces a nuisance

    Zoning is not compensated--which avoids an incentive to create nuisances. (P59)
    "[I]n reality, zoning is a highly political institution"--lots of rent seeking. (CU186)