Econ 522
Economics of Law
Dan Quint
Fall 2015
Lecture 9
Logistics
 Second homework due next Thursday (Oct 15)
 First midterm Monday Oct 19
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
covers through the end of property law (today’s lecture)
practice problems on website, along with answers to one
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Monday, we talked about copyright (among
other things)
 Another econ blog I like (“The Undercover Economist”) had
a post yesterday on why copyrights last way too long:


It’s worth remembering the purpose of copyright. Copyright is
justifiable because it is very hard to write The Lord of the Rings but
easy to copy it once Tolkien has written it. Copyright gives authors
and other creators some ability to stop copycats, and thus gives
them an incentive to do the creative work in the first place. The
longer intellectual property rights last, the greater that incentive is.
But there is a sharp trade-off here. In a world without copyright,
creative works could be widely shared. New ideas could be
adapted, remixed and improved. All this ensures a rapid spread of
good ideas. The longer copyright lasts, the longer that spread will
be delayed.
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Monday, we talked about copyright (among
other things)
 Another econ blog I like (“The Undercover Economist”) had
a post yesterday on why copyrights last way too long:


Because copyright terms are so long, few creative works are in the
public domain. Some are – from the works of Shakespeare,
Chaucer and Milton, to Victorian pornography or the earlier
adventures of Sherlock Holmes… Alan Moore’s League of
Extraordinary Gentlement pitched Dr. Jekyll and Captain Nemo
against Moriarty and Fu Manchu. Such remixed creativity is vastly
easier when the original material is no longer under copyright.
A recent study commissioned by the UK’s Intellectual Property
Office examined the value of the public domain, looking at the
popularity of Wikipedia entries or Kickstarter projects that drew on
art and writing in the public domain. That value is large and if more
recent work entered the public domain, it would be far larger.
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Monday, we talked about copyright (among
other things)
 Another econ blog I like (“The Undercover Economist”) had
a post yesterday on why copyrights last way too long:



So, bearing in mind that this is a pragmatic question, how long
should copyright last? The current answer is 70 years after the
death of the author – typically about a century. That is absurd.
Most books, films and albums enjoy a brief window of sales… The
truth is that 10 years of copyright protection is probably sufficient to
justify the time and trouble of producing most creative work…
Why don’t we see a more sensible system of copyright? Two
words: Mickey Mouse. That is an oversimplification, of course. But
the truth is that a very small number of corporations and literary
estates have a lot to gain from inordinately long copyright – and
since it matters a lot more to them than to the rest of us, they will
focus their lobbying efforts and get their way. Mickey Mouse will
enter the public domain in 2024 – unless copyright terms are
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extended yet again. Watch this space.
We ran out of time Monday talking about
“unbundling” of property rights
 Property (C&U): “A bundle of legal rights over resources
that the owner is free to exercise and whose exercise is
protected from interference by others”
 Can you separate these rights?

“Unbundle” them, sell some and keep others
 Usually, no – prohibition on “perpetuitites”
 Land ownership in Pennsylvania…
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Example of unbundling: Pennsylvania and
coal
 Land ownership consisted of
three separable pieces
(“estates”)

Surface estate

Support estate

Mineral estate
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Unbundling
 Free unbundling of property rights generally not allowed

Civil law more restrictive than common law
 For efficiency…
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
In general, efficiency favors more complete property rights
People would only choose to unbundle property when that
increases its value, so we should allow it?
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Unbundling
 Free unbundling of property rights generally not allowed

Civil law more restrictive than common law
 For efficiency…
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In general, efficiency favors more complete property rights
People would only choose to unbundle property when that
increases its value, so we should allow it?
But unbundling might increase transaction costs
Increases uncertainty about rights
May increase number of parties involved in future transactions
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An example (sort of) of unbundling
source: http://articles.nydailynews.com/2009-08-24/news/17934480_1_ebay-auction-crypt-marilyn-monroe
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More on
Remedies
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Remedies (review)
 Maximum liberty: owner can do whatever he/she wants,
as long as it doesn’t interfere with another’s property

When it does interfere, externality, or nuisance
 Affects small number: private externality, or private bad

Transaction costs low  injunctions preferable
 Affects large number: public externality, or public bad

Transaction costs high  damages preferable
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Types of damages
 Compensatory Damages
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intended to “make the victim whole”
compensate for actual harm done
make victim as well off as before
 Can be…
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Temporary – compensate for harms that have already occurred
Permanent – also cover present value of anticipated future harm
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Temporary versus permanent damages
 Temporary damages
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Only cover harm that’s already happened
Require victim to keep returning to court if harm continues
Create an incentive to reduce harm in the future
 Permanent damages
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Include value of anticipated future harm
One-time, permanent fix
No incentive to reduce harm as technology makes it easier
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Efficient nuisance remedies
 If a nuisance affects a small number of people (private
nuisance), an injunction is more efficient
 If a nuisance affects a large number of people (public nuisance),
damages are more efficient

If damages are easy to measure and innovation occurs rapidly, temporary
damages are more efficient
 If damages are difficult/costly to measure and innovation occurs slowly,
permanent damages are more efficient
 What’s done in practice for public nuisances?

temporary damages and injunction against future harm
 but…
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Boomer v Atlantic Cement Co
(NY Ct of Appeals, 1970)
 Atlantic owned large cement plant near Albany
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dirt, smoke, vibration
neighbors sued
plant was found to be a nuisance, court awarded damages
neighbors appealed, requesting an injunction
 Court ruled that…
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yes, this was a valid nuisance case
and yes, nuisances are generally remedied with injunctions
but harm of closing the plant was so much bigger than level of
damage done that court would not issue an injunction
ordered permanent damages, paid “as servitude to the land”
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Boomer v Atlantic Cement Co
(NY Ct of Appeals, 1970)
 Atlantic owned large cement plant near Albany




dirt, smoke, vibration
neighbors sued
plant was found to be a nuisance, court awarded damages
neighbors appealed, requesting an injunction
 Court ruled that…




yes, this was a valid nuisance case
and yes, nuisances are generally remedied with injunctions
but harm of closing the plant was so much bigger than level of
damage done that court would not issue an injunction
ordered permanent damages, paid “as servitude to the land”
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We’ll wrap up property law with two ways
the government limits property rights
 Government can tell you how you can or can’t use your
property

Regulation
 The government can take your property

“Eminent domain”
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Eminent Domain
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Takings
 One role of government: provide public goods

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When public goods are privately provided  undersupply
Defense, roads and infrastructure, public parks, art, science…
To do this, government needs land
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(which might already belong to someone else)
 In most countries, government has right of eminent domain


Right to seize private property when the owner doesn’t want to sell
This type of seizure also called a taking
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Takings
 U.S. Constitution, Fifth Amendment: “…nor shall private
property be taken for public use, without just
compensation.”
 Government can only seize private property for public use
 And only with just compensation

Consistently interpreted to mean fair market value – what the owner
would likely have been able to sell the property for
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Takings
 Why allow takings?
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Takings
 Why allow takings?
 Why these limitations?

why require compensation?
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Takings
 Why allow takings?
 Why these limitations?

why require compensation?
$10 MM
$9 MM
$3 MM
$1 MM
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Takings
 Why allow takings?
 Why these limitations?


why require compensation?
why only for public use?
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Takings
 Why allow takings?
 Why these limitations?


why require compensation?
why only for public use?
 The government should only take private property (with
compensation) to provide a public good when transaction
costs preclude purchasing the necessary property
through voluntary negotiations
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Poletown Neighborhood Council v Detroit
 1981: GM was threatening to close Detroit plant

Would cost city 6,000 jobs, millions in tax revenue
 City used eminent domain to condemn entire neighborhood
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
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1,000 homeowners and 100 businesses forced to sell
land then used for upgraded plant for GM
city claimed employment and tax revenues were public goods,
which justified use of eminent domain
 Mich Sup Ct: “Alleviating unemployment and revitalizing the
economic base of the community” valid public purposes;
“the benefit to a private interest is merely incidental”

Overturned in 2004 ruling (Wayne v Hathcock)
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More recent case: Kelo v. City of New London
(2005 US Supreme Court)
 Posner (Economic Analysis of Law) describes:

…Pfizer had decided to build a large research facility next to a 90acre stretch of downtown and waterfront property in New London.
The city hoped that Pfizer’s presence would attract other businesses
to the neighborhood.
The plaintiffs owned residential properties located on portions of the
90-acre tract…
It might have been impossible to develop those areas… had the
areas remained spotted with houses.
The city… solved the problem by condemning the houses.
It said, “the area was sufficiently distressed to justify a program of
economic rejuvenation.”
 Attorney arguing case:

“If jobs and taxes can be a justification for taking someone’s
home or business, then no property in America is safe.”
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Recent example
of eminent domain
 Bruce Ratner owned the Nets from 2004-2011
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Bought for $300 MM, sold for less (80% for $200 MM)
This “loss” held up by David Stern as evidence NBA owners were
losing money, players needed to make concessions
 Recent Malcolm Gladwell article on Grantland
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Ratner didn’t want the Nets – he wanted
development rights to a 22-acre site in Brooklyn
Buying it all up would be difficult
Seizure a la Kelo would be possible, but
politically unpopular
If plans included a basketball stadium, becomes
clear-cut case for eminent domain
Even if Ratner took a “loss” on the team, he got
what he wanted out of the deal
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Regulation
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Multiple forms of public ownership
 Open Access
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
Anyone free to use the resource
Leads to overutilization (Tragedy of the Commons)
Example: oyster beds
 Unanimous Consent
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Opposite of open access – multiple owners must all agree to any
use of the resource
Leads to underutilization
Example: empty storefronts in post-Communist Moscow
“Anti-commons” caused by existing intellectual property
 Political Control/Regulation
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Third form of public ownership: political
control/regulation
Dividing the mountain pasture among individual owners
would require fencing it, which is prohibitively expensive.
Instead, the highland pasture is held in common, with each
village owning different pastures that are separated by
natural features such as lakes and mountain peaks.
If each person in the village could place as many sheep as
he or she wanted in the common pasture, the meadows
might be destroyed and eroded by overuse.
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Third form of public ownership: political
control/regulation
In fact, the common pastures in the mountains of Iceland
have not been overused and destroyed, because the
villages have effective systems of governance.
They have adopted rules to protect and preserve the
common pasture. The sheep are grazed in common
pasture in the mountains during the summer and then
returned to individual farms in the valleys during the winter.
The total number of sheep allowed in the mountain pasture
during the summer is adjusted to its carrying capacity.
Each member of the village receives a share of the total in
proportion to the amount of farmland where he or she
raises hay to feed the sheep in the winter.
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Similar to how Iceland maintains fishing stock
 Open access would lead to overfishing, deplete fishing
stock
 Government of Iceland decides how much fish should be
caught in total each year
 People own permits which are right to catch a fixed fraction
of each year’s total
 Permits are property – can be bought, sold, etc.
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Regulation
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Regulation: Pennsylvania Coal v. Mahon
 1800s: PA Coal purchased mineral and
support estates, Mahon owned surface
 1921: Kohler Act prohibited “mining of
surface estate
anthracite coal in such a way as to cause
the subsidence of, among other things,
support estate
any structure used as a human
habitation.”
mineral estate
 PA Coal sued government, claiming the
regulation was same as seizing their land
(without compensation)
 “…While property may be regulated to a
certain extent, if regulation goes too far
it will be recognized as a taking.”
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Regulation: Pennsylvania Coal v. Mahon
 1800s: PA Coal purchased mineral and
support estates, Mahon owned surface
 1921: Kohler Act prohibited “mining of
surface estate
anthracite coal in such a way as to cause
the subsidence of, among other things,
support estate
any structure used as a human
habitation.”
mineral estate
 PA Coal sued government, claiming the
regulation was same as seizing their land
(without compensation)
 “…While property may be regulated to a
certain extent, if regulation goes too far
it will be recognized as a taking.”
36
Regulation: Pennsylvania Coal v. Mahon
 1800s: PA Coal purchased mineral and
support estates, Mahon owned surface
 1921: Kohler Act prohibited “mining of
surface estate
anthracite coal in such a way as to cause
the subsidence of, among other things,
support estate
any structure used as a human
habitation.”
mineral estate
 PA Coal sued government, claiming the
regulation was same as seizing their land
(without compensation)
 “…While property may be regulated to a
certain extent, if regulation goes too far
it will be recognized as a taking.”
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Regulation: Pennsylvania Coal v. Mahon
 1800s: PA Coal purchased mineral and
support estates, Mahon owned surface
 1921: Kohler Act prohibited “mining of
surface estate
anthracite coal in such a way as to cause
the subsidence of, among other things,
support estate
any structure used as a human
habitation.”
mineral estate
 PA Coal sued government, claiming the
regulation was same as seizing their land
(without compensation)
 “…While property may be regulated to a
certain extent, if regulation goes too far
it will be recognized as a taking.”
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Blume and Rubinfeld, “Compensation for
Takings: An Economic Analysis”
 Support compensation for regulatory takings

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

Shifting burden of regulation from owners of affected property to all
taxpayers
Equivalent to selling everyone insurance against harmful regulation
If such insurance were available, people would buy it
But it’s not available, for usual reasons insurance markets may fail




adverse selection
moral hazard
So government should provide it instead…
…by paying compensation for regulatory takings
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Blume and Rubinfeld, “Compensation for
Takings: An Economic Analysis”
 Support compensation for regulatory takings




Shifting burden of regulation from owners of affected property to all
taxpayers
Equivalent to selling everyone insurance against harmful regulation
If such insurance were available, people would buy it
But it’s not available, for usual reasons insurance markets may fail




adverse selection
moral hazard
So government should provide it instead…
…by paying compensation for regulatory takings
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Zoning
 Zoning laws

Distinguish industrial areas from residential areas
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Zoning
 Zoning laws

Distinguish industrial areas from residential areas
 Nollan v California Coastal Commission (US Sup Ct, 1987)


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Nollans owned coastal property
Asked for permit to expand building, which would diminish view
Commission: donate a public walking path, and you get permit
Supreme Court: such a deal only legal if there is clear connection –
a nexus – between the harm being done and the remedy
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Zoning
 Zoning laws

Distinguish industrial areas from residential areas
 Nollan v California Coastal Commission (US Sup Ct, 1987)




Nollans owned coastal property
Asked for permit to expand building, which would diminish view
Commission: donate a public walking path, and you get permit
Supreme Court: such a deal only legal if there is clear connection –
a nexus – between the harm being done and the remedy
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Property law: the big-picture question
 What are benefits and costs of…



having property rights at all?
expanding property rights to cover more things?
introducing an exception/limitation to property rights?
 When will benefits outweigh the costs?
End of material on first midterm
 Up next: contract law
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