Econ 522
Economics of Law
Dan Quint
Spring 2010
Lecture 8
Logistics
 This week:

HW1 due Friday, 5 p.m.
 Next week:

First midterm Wednesday in class
1
Last week…
 Applications of Property Law…

Intellectual property


Types of public ownership, when to privatize a resource


Boundary maintenance costs vs. cost of congestion/overuse
Fugitive property


What it is, what problem it solves, what other problems it creates
First possession versus tied ownership rules
Proving property rights
 Today…


More on remedies
Limitations and exceptions to property rights
2
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
3
Types of damages
 Compensatory Damages



intended to “make the victim whole”
compensate for actual harm done
make victim as well off as before
 Can be…


Temporary – compensate for harms that have already occurred
Permanent – also cover present value of anticipated future harm
4
Temporary versus permanent damages
 Temporary damages


Require victim to keep returning to court if harm continues
Create an incentive to reduce harm in the future
 Permanent damages


One-time, permanent fix
No incentive to reduce harm as technology makes it easier
5
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…
6
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”
7
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”
8
Limitations/Exceptions to
Property Rights
9
One limitation: ways to give up (or lose)
property rights
 Adverse Possession (“squatter’s rights”)



If you occupy someone else’s property for long enough, you
become the legal owner, provided:
1. the occupation was adverse to the owner’s interests, and
2. the owner did not object or take legal action
10
One limitation: ways to give up (or lose)
property rights
 Adverse Possession (“squatter’s rights”)



If you occupy someone else’s property for long enough, you
become the legal owner, provided:
1. the occupation was adverse to the owner’s interests, and
2. the owner did not object or take legal action
11
One limitation: ways to give up (or lose)
property rights
 Adverse Possession (“squatter’s rights”)



If you occupy someone else’s property for long enough, you
become the legal owner, provided:
1. the occupation was adverse to the owner’s interests, and
2. the owner did not object or take legal action
 Estray statutes – laws governing lost and found property
12
Another limitation: determining what
happens to your stuff after you die
 Owners today control who inherits their property

Wasn’t always the case
 Limitations on who inherits lead to…

Circumvention costs
13
Another limitation: determining what
happens to your stuff after you die
 Owners today control who inherits their property

Wasn’t always the case
 Limitations on who inherits lead to…


Circumvention costs
Depletion costs
14
Another limitation: determining what
happens to your stuff after you die
 Owners today control who inherits their property

Wasn’t always the case
 Limitations on who inherits lead to…


Circumvention costs
Depletion costs
 Restrictions I place on how they can use it


Impossible  circumvention and depletion costs
Allowed  difficult to maintain efficiency in changing circumstances
15
Another limitation: determining what
happens to your stuff after you die
 Owners today control who inherits their property

Wasn’t always the case
 Limitations on who inherits lead to…


Circumvention costs
Depletion costs
 Restrictions I place on how they can use it





Impossible  circumvention and depletion costs
Allowed  difficult to maintain efficiency in changing circumstances
“Restraints on alienation”
Common law generally prohibits perpetuities
Restrictions limited to “lives-in-being plus 21 years”
16
Another limitation: Private Necessity
 Property rights generally protected by injunctive relief,
BUT…
 Ploof v. Putnam (Sup. Ct. of Vermont, 1908)




Ploof sailing with family on Lake Champlain, storm came up
Tied up to pier on island owned by Putnam
Putnam’s employee cut the boat loose, Ploof sued
Court sided with Ploof: private necessity is an exception to the
general rule of trespass
 In an emergency, OK to violate someone else’s property
rights; still must reimburse them for any damage done 17
Another limitation: Private Necessity
 Property rights generally protected by injunctive relief,
BUT…
 Ploof v. Putnam (Sup. Ct. of Vermont, 1908)




Ploof sailing with family on Lake Champlain, storm came up
Tied up to pier on island owned by Putnam
Putnam’s employee cut the boat loose, Ploof sued
Court sided with Ploof: private necessity is an exception to the
general rule of trespass
 In an emergency, OK to violate someone else’s property
rights; still must reimburse them for any damage done 18
Another limitation: Inalienability
 Three ways to protect an entitlement:



as property (through injunction)
by liability rule (through damages)
through inalienability
 Lots of things that can’t be bought/sold:



organs
sex
heroin



children
atomic weapons
human rights
 Arguments in favor of inalienability…
19
Another limitation: Unbundling
 Property: “a bundle of rights”
 Can you unbundle them?

Separate them, sell some and keep others
 Usually, no


Prohibition on perpetuities
I can’t separate the right to own/live on my land from the right to sell
it or turn it into a golf course
 But in some instances, yes…
20
Pennsylvania and coal
 Land ownership consisted of
three separable pieces
(“estates”)

Surface estate

Support estate

Mineral estate
21
Unbundling
 Free unbundling of property rights generally not allowed
under common or civil law
22
Unbundling
 Free unbundling of property rights generally not allowed
under common or civil law
 Efficiency: allow unbundling when it increases the value
of the property?


But if re-bundling the rights is costly, maybe not
Unbundling  uncertainty about rights  harder to trade
23
Two other limitations on property rights
 The government can take your property

“Eminent domain”
 And the government can tell you what you can or can’t do
with it

Regulation
24
Takings
25
Takings
 One role of government: provide public goods



When public goods are privately provided  undersupply
Defense, roads and infrastructure, public parks, art, science…
To do this, government needs land

(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
26
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
27
Takings
 Why allow takings?
28
Takings
 Why allow takings?
 Why these limitations?

why require compensation?
29
Takings
 Why allow takings?
 Why these limitations?

why require compensation?
$10 MM
$9 MM
$3 MM
$1 MM
30
Takings
 Why allow takings?
 Why these limitations?


why require compensation?
why only for public use?
31
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
32
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



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)
Similar case, Kelo v. City of New London (2005 US Sup Ct)
33
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



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)
Similar case, Kelo v. City of New London (2005 US Sup Ct)
34
Regulation
35
Regulation
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.”
37
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.”
38
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.”
39
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.”
40
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, so government should provide it
41
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, so government should provide it
42
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, so government should provide it
43
More on regulation
 Zoning laws

Distinguish industrial areas from residential areas
44
More on regulation
 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
45
More on regulation
 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
46
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
 HW1 due Friday, 5 p.m.
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