D. Conflicting property rights
    --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)

    1. In theory

    Two decisions for the court:
    (1) What right to assign?
    (2) Which party to assign the right to?

   Decision 1: What right to assign?

    Common types of rights:
    common law remedies: legal or equitable (payment of compensatory damages vs. injunction) (CU100)
    "an injunction . . . is said to "enjoin" the defendant to do or to refrain from doing a specific act." (CU100)
    (1) Property right: cannot be taken without an ex ante bargain
        example: your car--someone wants to use it
        Can --> private transactions where market determines cost

    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)

    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: can be taken for ex post compensation
        example: your personal space--someone "wants to" run into your car
        Can --> litigation where court determines costs

    These rights can be used in combination

    Decision 2: Which party to assign the right to?

    The party that values the right the highest
    => place the adjustment burden on the lowest-cost avoider of damages

    Coase principle: minimize the costs of generating highest-valued uses

    2. In practice

    Alternative approaches to handling incompatible uses - worksheet

    Fontainebleau Hotel Corp.(d) v. Forty-Five Twenty-Five, Inc.(p) 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 was the remedy in this case? [appellate court reversed injunction granted by trial court]
3. May property owners use their property in ways which injure others?
4. Then what are they prevented from doing?
5. Did the court consider the combined welfare effects of the disputants?
6. What is the doctrine of "ancient lights"?
7. Is it relevant here?
8. What rights does custom in Florida grant to Fontainbleau?
9. Would you consider this a low transaction cost case or not? Why?

Illustrates easement remedy w/o liability for damages
Transaction costs may be high even in small-number cases.

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

1. What are the facts of the case?
2. What was the remedy in this case? [appellate court affirmed injunction granted by trial court]
3. What does a "balancing of equities" refer to?
4. How does it fit with the notion of optimal pollution?
5. How does it illustrate the property rights assignment rule that Coase recommends?
6. When an easement is granted, what remedy does the suggest is available to the pollutee?
7. How large were the costs at issue in each side in this case?
8. So why didn't the courts rule for the apartments?
9. Why doesn't the court accept the "stern rule of necessity" argument in this case?

    Illustrates the injunction remedy without liability for damages.
    Considers joint value: a "balancing of equities"

    Boomer (p) v. Atlantic Cement Co. (d) 26 N.Y.2d 219 (1970)

1. What are the facts of the case?
2. What was the remedy in this case? [trial court: temporary damages that could recur through "successive actions" but no injunction; appellate court reversed and granted an injunction unless defendant paid permanent damages as determined by the trial court]
3. How does the court think issues of this sort should be handled in general
4. Did the court consider combined welfare effects--a balancing of equities?
5. Was that consistent with past practice?
6. How much did the court consider the costs at stake on each side to be in this case?
7. What sort of economic cost is the cement industry investment?
8. So why consider it?
9. In theory would the cement plant necessarily have had to shut down in response to an injunction? Why or why not?
10. So why not award an injunction?
11. Why does the dissent feel that past precedents for awarding damages are not relevant to the present case?
12. How would you respond to that argument?
13. Did the court award temporary or permanent damages?
14. What adverse incentive effect does the dissent cite with respect to the assessment of permanent damages?

Illustrates easement with liability for damages
Raises the contrast between temporary and permanent damages
Expresses a preference for legislative policy for handling pollution

    Spur Industries (d) v. Del E. Webb Development (p) (1972)

1. What are the facts of the case?
2. What was the remedy in this case? [trial court decision affirmed the injunction, reversed and remanded in that plaintiff must pay damages for "coming to the nuisance"]
3. How does the court distinguish between a private and public nuisance?
4. From an economic perspective, should the difference matter?
5. What does "coming to the nuisance" mean?
6. Does the court apply it in this case? Why or why not?
7. What incentive effect results from imposing liability for damages on Del Webb?

Illustrates injunction with liability for damages
Illustrates the reciprocal nature of incentives to internalize externalities

    Legal costs include costs of (1) getting information and (2) court errors

    There is no perfect/universal set of rules--all rules face tradeoffs

    (1) Low transaction costs favor property right remedies--injunction/easement

    For private parties: Property and liability rights both --> efficient outcome
    For the courts: property rights are cheaper to administer
       Ex: difficult to determine damages when Windsong satellite strays into Orbitcom's satellite orbit. (CU105)

    "Bright line" rules: predictable and cheap
    "General rules that yield easily predictable results are sometimes referred to bright line rules (to reduce uncertainty and rent seeking); rules that require a case-by-case decision by the courts are referred to as standards. (F41)

    Ex: Coming to the nuisance.
   based on sunk costs: it is easier to relocate before building than after. (F41)
    in modern American law, courts mostly reject the doctrine.
    rejected in Spur Industries v. Del E. Webb Development (1972)
    Most states rightly reject "coming to the nuisance" doctrine (since relative values change) (P62)

    Ex: Ancient lights
    "ancient lights" in English but not US common law: could not obstruct neighbor's light in half of room closest to window if it hadn't been obstructed for 20 years. (P52)
    rejected in Fountainebleau Hotel Corp. v. Forty-Five Twenty-Five, Inc. 114 So.2d 357 (1959)

    (2) High transaction costs relative to legal costs favor damage remedies
    "Private bargaining is unlikely to succeed in disputes involving a large number of geographically dispersed people because communication costs are high, monitoring is costly, and strategic behavior is likely to occur. . . . In these cases, damages are the preferred remedy." (CU106)
    Calabresi, Guido, and A. Douglas Melamed. "Property rules, liability rules, and inalienability: One view of the cathedral." Harvard Law Review 85 (1972): 1089. (CU105)
    When there are free-rider problems (holdout or false valuations), "an argument can readily be made for moving from a property rule to a liability rule. If society can remove from the market the valuation of each tract of land, decide the value collectively, and impose it, then the holdout problem is gone. Similarly, if society can value collectively each individual citizen's desire to have a park and charge him a 'benefits' tax based upon it, the freeloader problem is gone." (LEA195)

    High transaction costs are commonplace
    Especially with large stakes: Ex: Boomer v. Atlantic Cement:
    cost to plaintiff = 185K; injunction cost to cement firm= 45M => much room to negotiate and bluff.
    "This expensive bargaining was avoided by the court's novel remedial approach, although a simple alternative would have been, by a balancing of the costs to the respective parties, to have found that the plant was not a nuisance." (P71)

    And even in small-number cases
    Fountainebleau Hotel Corp. v. Forty-Five Twenty-Five, Inc. 114 So.2d 357 (1959) <-- "spite"
    and bilateral monopoly

    (2.1) Permanent or temporary damages?

    Permanent in Boomer v. Atlantic Cement Co. 26 N.Y.2d 219 (1970)

    Advantage to permanent damages: eliminates future litigation costs
    Advantage to temporary damages: preserves incentive to innovate (Ex: pointed out in the dissent in Boomer v. Atlantic Cement Co.
    "[T]emporary damages tend to be more efficient given easily measured damages and rapid innovation. Conversely, permanent damages tend to be more efficient given costly measurement of damages and slow innovation." (CU170)

    Example: easements for overflights
    easements for overflights are hard because of incentives from alternative options (holdouts with easement purchases; no incentive to abate after eminent domain, etc.) (P63)

    (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.