Pricing environmental externality in housing sector: a review of court cases in
United Kingdom
Rita Yi Man Li, Department of Economics and Finance, Hong Kong Shue Yan
University, Hong Kong, ritarec1@yahoo.com.hk / ymli@hksyu.edu
Yi Lut Li, School of Law, City University of Hong Kong, lliyilut@yahoo.com.hk
Abstract
Air pollution, noise pollution and water seepage are some of the major environmental
externalities which adversely affect our residential environment. Previous research
reveals that property values drop when there are negative environmental externalities
nearby. In 1960, Ronald Coase suggested that there are many methods to solve the
problem of externalities apart from imposing Pigovian tax, internalization is one of
those noted in the Problem of Social Costs. In tort, the internalization of externalities
is achieved via litigation. This paper studies the residents’ possibility of getting their
compensation from pollutant generator via litigation in court.
Keywords: externalities, nuisance, United Kingdom
1. Introduction
The classical approach to externality pricing can be dated back to Pigou (1920): one
charges agents for the exteralities so that the efficient state can be created; renders this
state an equilibrium (Sandholm, 2005). Coase (1960) suggested that well-defined
property rights over the source of those who had been affected with a good regulation
environment, the environmental externalities problem can be reduced by market force.
Later, Dales also showed how the introduction of transferable property rights could
promote environmental protection at lower cost than conventional standards in 1968.
Corrective taxes and transferable property rights has developed. Due to the paucity of
actual experiences with incentive-based environmental mechanisms, until very
recently, most analyses focus on theory or on related simulations. With an increasing
use by governments of fees as well as tradeable permits to control pollution, this
began to change in the 1980's. Environmental taxes and marketable permits appear in
the policy arena. Examples include the introduction of marketable permits in the U.S.
to lower the lead content in gasoline; limit the use and production of
chlorofluorocarbons and sulfur dioxide emissions (Hahn and Stavins, 1992). Applying
Coase’s idea, Brechet and Picard (2010) propose the usage of noise licenses as the
means of the negotiation between airline companies and residents. The rationale is “to
compensate the residents for noise damage, the property rights will be assigned to
1
them.” By selling the rights in market, the residents express their willingness to accept
noise in return for monetary compensation.
2. Environmental externalities
Conceptually, the externalities problem is quite simple. In the following figure, the
marginal production cost of a good perceived by the project entity is noted as MPC.
Suppose that the production process produces a negative externality, for instance, it
emits soot which increases the maintenance costs of buildings nearby. Therefore, the
marginal social cost (MSC) is higher than the marginal production costs (as the
production process also produces an externality) and is given by the line MSC. Up to
any given level of output Q*, the total cost of production at one particular level of
output is given by the area under the curve. The difference between the areas under
the two curves gives the divergence between the private and the social costs.
Nevertheless, as the financial costs of the project does not include the externality costs;
an evaluation of the project based on MPC will underestimate the social costs of the
whole project and overstate the net benefits (World Bank, 1998).
Figure 1 Divergence between social and private costs (World Bank, 1998).
The abovementioned situation poses another problem, i.e. if producer A bears only a
fraction of the costs, he tends to produce a larger quantity of that good than those who
2
need to bear the full costs of his action imposes on B (the one who suffer).
Furthermore, if the transactions costs between the two parties were low enough, B can
pay A a sum of money to change those activities which could leave both parties better
off (Epstein, 1993).
3. Housing values and environmental externalities
Many previous studies focus on how various factors affect the price of properties,
environmental externalities are common in property price research arena (Hui et al.,
2006). In a research which was performed by Jim and Chen (2007), environmental
quality was rated the first most important criteria in home purchase decision. The
concern of pollution and its harmful effects on health are the major reason for such
criteria selection. Research shows that places with less noise pollution are preferable
and there is a significant negative relationship between airport noise and property
prices. Results are similar in case of traffic noise, for example, residents in Chicago
were willing to pay more to reduce the exposure to the pollution of particulate matter
and sulphur dioxide, i.e., people prefer to live in a place with fresher air despite the
higher cost (Hui et al., 2006). Similarly, area with less air pollution can command a
higher selling price (Li et al., 2007). In view of the possible reduction in housing
prices/value due to environmental externalities, Rosen (1974) attempted to use
hedonic pricing model to estimate the reduction in housing price. Slowly, all the
related research on reduction in housing price due to air pollution were studied base
on the same model (Table 2) On the other hand, DiPasquale & Wheaton point out that
the housing market may need years to adjust fully to an exogenous shock
(Wilhelmsson, 2000).
Types of noise pollution
Author
Traffic noise
Traffic noise
Traffic noise
Luttik (2000),
Pennington et al. (1990)
Taylor et al. (1982)
Highway noise
Highway noise
Nelson (1982)
Gamble et al.(1974)
Airport noise
Airport noise
Airport noise
Cohen and Coughlin (2007)
Baranzini and Jos (2005)
Jon (2004)
% decrease in price of
properties
-5%
-6%
$312 per decibel in highway
areas and $254 in arterial sites
-8 to -10%
Dollar per decibel rate range
from $60 to $646
-20.8%
-1%
In the U.S., the discount in
property value is about 0.5% to
0.6% per decibel at noise
exposure levels of 75 dB or less.
In Canada, there is a drop in 0.8
% to 0.9% in property value per
decibel.
Table 1 The effect of noise pollution on housing price reduction
3
Types of air
pollutants
Author
Effects
of
air
pollution on property
prices /rent
Significance
the 0.05 level
C6H6
Amrusch 2005
Negative
Yes
RSPM
Gulati and Murty 2004
Negative
Yes
SOx
Nourse 1967 Henning and Ridker
1967
Negative
Yes
SOx
Chattopadhyay 1999
Negative
No
SOx
Li 1980; Banerjee, et al. 2004
Positive
No
Visibility
Murdoch and Thayer 1988; Graves,
et al. 1988;
Negative
Yes
NOx
Banerjee, et al. 20041
Uncertain
Uncertain
NOx
Harrison and Rubinfield
Nelson, et al. 1992
Negative
Yes
Ozone
Albers, et al. 1992
Negative
Yes
Positive
Negative
-Yes
Negative
No
Ozone
Dust/Particul
ates
Particulates
2
1978;
Murdoch and Thayer 1988
Deyak and Smith 1974; Fernando
Anderson and Crocker 1971; Clark
and Nieves 19943
Deyak and Smith 1975
at
Table 2 Effects of air pollution on property prices (Li et al., 2007)
Similar research results can also be found in case of flooding. Previous investigation
suggests that price of house located in flooding zone command a lower price than
those do not. Furthermore, insurance premium may not be able to cover such cost
(Harrison et al., 2001). Nevertheless, another study yields an opposite findings, sales
prices after the 1974 flood in both the high- and low-risk flooding areas were
significantly higher than sales prices before the flood. The differences in flood
1
Two out of the four models were positive, while one of these was significantly different from zero at
the 5% level. Among the two negative models, one was significantly different from zero at the 1%
level.
2
The authors dropped such results because nitrogen dioxide was always positive.
3
All except the model in Superfund sites were statistically significant.
4
experience did not adversely affect both the actual and perceived long-term property
values (Babcock and Mitchell, 2007).
4. Reactions to environmental externalities
There is a range of the positive reactions of proprietors to an environmental nuisance
in a residential neighbourhood. They are:
(a) Voting in the political market for a change in policy through a change in
politicians;
(b) Coasian bargaining with the polluter;
(b) “voting with one’s dollars”, selling the land interest and go, a market solution
with entry and exit;
(c) making public complaints, in the hope of helpful administrative feedback;
and
(d) bringing the matter to court.”(Li et al., 2007)
Plaintiff in United Kingdom may rely on “nuisance” to seek for air pollution
compensation in court (Westlands Estates Limited and Egremont Estates Limited v
Swilynn (HK) Limited [1985]). Nuisance, according to the learned judge in Born
Chief Co. (, can be defined as
“an act of omission which is an interference with, disturbance of or
annoyance to, a person in the exercise or enjoyment of his occupation of
land or of some right used or enjoyed in connection with land”.
Trading as Beijing Restaurant v George Tsai and Another [1996]
The learned judge in Transco plc (formerly BG plc and BG Transco plc) (Appellants)
v Stockport Metropolitan Borough Council (Respondents) concurs that the tort of
nuisance may comprise a variety of situations. Of which nuisance by interference with
a neighbour's quiet enjoyment of his land is identified as one of the possible grounds.
Concerning air pollution nuisance proble, Teng Fuh Co Ltd v Air pollution Board and
another [2001] identifies that not just those air pollutants emissions such as sulphur
oxides are classified as air pollution, bad smell can also be one of them:
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“air pollutants…refers to 'any solid, particulate, liquid, vapour,
objectionable odour or gaseous substance emitted into the atmosphere'.
Smells that are objectionable may therefore constitute air pollutants.”
Concerning water seepage, Articles 640 and 641 of the Civil Code (which are part of
Book II, Title IV dealing with servitudes) states that
"640. Lower tenements are subjected to those which are higher, to
receive waters which flow naturally from them without the hand of man
having contributed thereto. A lower owner may not raise dams which
prevent that flow. An upper owner may not do anything that worsens the
servitude of the lower tenement.
641. An owner has the right to use and dispose of rainwater which falls
on his tenement. Where the use of those waters or the course given to
them worsens the natural servitude of flow established by Article 640, a
compensation is due to the owner of the lower tenement."
Therefore, when water flows down naturally from one landowner's land to lower land
owned by the other, the latter does not have any grounds for legal complaint. But as
soon as the owner of the higher land alters the position by building works or civil
engineering works which change the flow, there is possibility of a claim. Whether the
upper owner is liable depends on the degree to which the burden on the lower land is
raised (Daby v State of Mauritius (Mauritius) [2008] UKPC 45)
Furthermore, one can refer to the relevant in seeking for compensation. The Water
Industry 1991 Act, for example, explicitly spells out the duties and powers of water
and sewerage undertakers. The exercise of these functions is subject to control and
supervision by the Director General of Water Services (Marcic v. Thames Water
Utilities Limited). Residents can also seek compensation for flooding via the relevant
Sewerage Act.
5. Case studies in United Kingdom
To know more about the compensation which closes the gap of private production
costs and social costs in litigation within the residential area, the authors use the
keyword search “nuisance” in British and Irish Legal Information Institute database.
While previous studies on the “costs” of externalities mostly based on hedonic pricing
model analysis on the extent of fall in residential price, what it intends to study now
6
also relate to “costs” that relate to some external parties’ behavior causes nuisance
who live in the residential units but based on court cases. Similar to the cases in Hong
Kong, the number of cases available is limited. Nevertheless, despite its small in
number, it provides useful insight on how the court deals with these environmental
externalities problem.
5.1 Noise
Aircraft noise, highway and neighbourhood noise are some of the common
environmental externalities. There were three cases in the database only. 2 out of
three fail to get any compensation. The difficulty in getting compensation may be a
vivid explanation in why few people sought litigation as a method of conflict
settlement.
5.1.1 Aircraft noise
In Robertson & Ors v Manchester Airport plc [2010], Mr Adrian Robertson and Mrs
Kathleen Robertson (first claimants) and Mr Andrew Spark and Mrs Annette Spark
(second claimants), heard together, are in respect of claims for compensation made
under Part I of the Land Compensation Act 1973. They sue The Manchester Airport
Plc under the 1973 Act for compensation due to the depreciation in the value of the
claimants’ interests because of the second runway 2 (R2) at Manchester Airport. After
considering the professional valuers’ reports, the learned judge decided that the
Airport side has to pay (i) Mr and Mrs Spark (Burnside): £40,000 (for the
depreciation of 7.8%) and (ii) Mr and Mrs Robertson (Smith Lane Farm): £72,500
(for the lowering in home value of 10%).
5.1.2 Highway noise
In Thomas & Ors v Bridgend County Borough Council (2010) depreciation in value
of interest in land caused by the use of a highway. The claimants allege that the values
of their homes have been diminished as a result of noise and other nuisance caused by
use of the road. They wish to claim compensation from the council under the Land
Compensation Act 1973 (the Act) but section 19(3) bars such a claim where, the road
is not adopted within 3 years of first being open to public traffic. The claimants argue
that the subsection amounts to a statutory bar on their right to compensation and as
such is incompatible with their rights under article 1 of the First Protocol to and/or
article 6 of the European Convention of Human Rights. The former provides that
every person is entitled to the peaceful enjoyment of his possessions. The judge
decided that section 19(3) of the Act is not incompatible with the rights under article 6
of the claimants in this case.
7
5.1.3 Neighborhood noise
In 1999, London Borough of Southwark and Another v. Mills and Others Baxter v.
Mayor etc of the London Borough of Camden, Mrs. Tracey Tanner and Miss Yvonne
Baxter are the tenants of the London Boroughs of Southwark and Camden. They
complain of being able to hear all the sounds made by their neighbors (they are not
unreasonably noisy). Nevertheless, the problem is the flats have no sound insulation.
Therefore, tenants can hear the neighbours' televisions, babies crying, quarrels,
coming and going, cooking and cleaning and love-making. The lack of privacy causes
tension and distress. Mrs. Tanner and some other tenants commenced arbitration
proceedings against Southwark Council based on the terms of their tenancy agreement.
The Arbitration Tribunal made an award ordering the Council to install soundproofing
under section 1(2) of the Arbitration Act 1979.
Whilst modern building regulations require proper sound insulation to be installed,
this is often lacking in older buildings. The law, however, has been settled that no
implied covenant on the part of the landlord of a dwelling house that the premises are
fit for human habitation, let alone that they are soundproof. Noise committed by the
others leading to the breach of covenant by the landlord (defendants) in providing
tenants with a quite environment was dismissed finally in this case because:
"It seems to me impossible to hold that the landlord can be liable in
nuisance for conduct which is not a nuisance on the part of the tenant…It
is too costly for every landlords of old buildings to upgrade their
properties…These cases raise issues of priority in the allocation of
resources. Such issues must be resolved by the democratic process,
national and local. The judges are not equipped to resolve them…The
landlord is obliged only to restore the house to its previous good
condition. He does not have to make it a better house than it originally
was”
In 2001, Baxter v Camden [2001] shared similar problem when the plaintiff was
trying to look for compensation. The judge at that time came into similar conclusion
and the plaintiff failed to receive any compensation.
5.2 Water externalities
5.2.1 sewer flooding
In the U.K., sewer flooding is a nationwide environmental problem, arising from the
construction of ever more houses to meet the housing need. Sewers and drains when
8
laid in the 19th century or later which was originally sufficient, can no longer satisfied
with the needs of the volume of surface water entering into the public drainage
system during heavy rain, causing misery for the people who live there. There are
6,000 properties in the U.K. suffer sewer flooding each year. The water floods into
the buildings and houses. Half of these incidents are 'one-off' causes due to blockage
or other failure in the sewage system, others occur because of overloaded sewers.
Approximately 15,000 properties are at risk of internal sewer flooding at least once
every decade. Around 15,000 to20,000 properties are affected by external sewer
flooding (Marcic (Respondent) v. Thames Water Utilities Limited (Appellants) 2003).
In Marcic v. Thames Water Utilities Limited [2003], Peter Marcic endured serious and
repeated external sewer flooding arising from overloaded sewers. They are part of
the public sewerage system laid probably in the 1930s. The surface water sewer was
constructed up to the standard then. Because of subsequent construction, however,
water sewer becomes overloaded. Finally, Thames Water agreed that it would carry
out remedy works began in April 2003 and completed in late June 2003 at a cost of
£731,000.
In Transco plc (formerly BG plc and BG Transco plc) (Appellants) v Stockport
Metropolitan Borough Council (Respondents) [2003], The leak was first discovered
on 24 September 1992, when the well of the lift shaft at Hollow End Towers was
found to be flooded. The fracture was found and repaired quickly. The cost of the
works required to restore support and cover the pipe was £93,681. Transco sued the
council to recover the cost of repair. Transco's main claim was that the council was
liable without proof of negligence under the rule in Rylands v Fletcher (1868). Yet,
the appeal was dismissed. One of the learned judge held that Property insurance is
relatively cheap and accessible; in his opinion people should be encouraged to insure
their own property instead finding opportunity to transfer the risk to others via
litigation, where heavy transactional costs involve.
In RHM Bakeries (Scotland) Ltd v Strathclude Regional Council [1985], a sewer in
the occupation and control of the defender had collapsed, flooding of their premises
occurred. The said sewer did not effectively drain the street. The pursuers claim
reparation from the defenders for the sustained damage of £10,250 as the defenders'
failure in duties to them based on the three aspects:
(1) Nuisance at common law,
9
(2) Breach of the defenders' statutory duty under section 2 of the Sewerage (Scotland)
Act 1968, and
(3) Compensation under section 20 of the said Act.
The judge agrees that with the pursuers’ claim of £10,250.
In Ritoodoise Daby v. The State of Mauritius Respondent [2008], there was a claim
for very large damages for loss as a result of the construction of a trunk road by the
Ministry of Works of Mauritius. In this case, the appellant put forward a case which
both the Court of Civil Appeal and the judge regarded as exaggerated. He initially
claimed damages for nearly twenty times what he had received for the land 135,000 in
compensation for the compulsory acquisition (for the construction of the truck road
and other work included drainage). He sought to revise his claim to nearly fifty times
of that sum based on an estimation of using 300,000 cu ft of topsoil for land
reinstatement. Nevertheless, the appellant failed to seek for the aforesaid money as
compensation as the judge found that the case was based on incorrect factual
assertions: the existence of natural watercourses had been repeatedly denied. Besides,
the filling-in of an artificial canal, a notion shown to be physically impossible, was
repeatedly asserted.
In case of water related nuisance, majority of cases in United Kingdom rest on
flooding and the related public works. This is in sharp contrast to cases in Hong Kong
where majority are water seepage cases. Further, despite the fact there are
15000-20000 properties which suffered from flooding in Hong Kong cases finally
ended up in court are rare. While the sufferer can obtain repairmen in Marcic v.
Thames Water Utilities Limited [2003], in Transco case, the judge explicitly stated
that “property insurance is relatively cheap and accessible” so that the application for
compensation failed and that the previous compensation. The only case which the
claimant succeeded was £10,250. This sum of money, however, is very little in view
of the heavy costs of lawyer and legal proceeding costs. All these explain why there
were a few cases in spite of the large number of properties suffer in the U.K.
5.3 Others (Air and noise)
In Allen v Gulf Oil Refining Ltd, the appellants have installed this refinery on land
immediately adjoining the village and extending over more than 400 acr. It is alleged
by the plaintiff that the operation of the refinery causes a nuisance of bad smell, noise
and vibration. Since it could not be prevented by the use of due diligence, it was held
that the polluter were not liable for the said nuisance.
10
6. Conclusion
Environmental externalities which include noise, air and flooding adversely affect the
everyday life of the occupants. Previous research shows that the value of these
affected property drops. Yet, seeking compensation from the court is not easy. Many
of these fail. The few lucky and rare cases, however, may only be able to seek for a
small amount as compensation. Under common law regime where judge made law is
an important source of reference, there is no doubt as to where we can only observe a
few cases in the database over the past few decades. Summary of the court cases are
shown in the following Table.
11
Type of nuisance, case
number and date
Plaintiff and
defendants
Noise
[2010] UKUT 370 (LC)
7-10 Sept
Court case detail background
Results
Robertson &
Ors
v
Manchester
Airport plc
Mr Adrian Robertson and Mrs Kathleen Robertson (first claimants) and Mr
Andrew Spark and Mrs Annette Spark (second claimants), claims for
compensation made under Part I of the Land Compensation Act 1973 for
compensation due to the depreciation in the value of the claimants’
interests because of the second runway 2 (R2) at Manchester Airport.
The Airport side has to pay (i) Mr and Mrs
Spark (Burnside): £40,000 (for the depreciation
of 7.8%) and (ii) Mr and Mrs Robertson (Smith
Lane Farm): £72,500 (for the lowering in home
value of 10%).
Noise
[2010] UKUT 268 (LC)
12-Jul
Thomas
Ors
Bridgend
County
Borough
Council
&
v
The claimants allege that the values of their homes have been diminished
as a result of noise and other nuisance caused by use of the road. They wish
to claim compensation from the council under the Land Compensation Act
1973 (the Act) but section 19(3) bars such a claim where, the road is not
adopted within 3 years of first being open to public traffic. The claimants
argue that the subsection amounts to a statutory bar on their right according
to Human Rights.
The judge decided that section 19(3) of the Act
is not incompatible with the rights under article
6 of the claimants in this case and the claims
were failed.
Noise
[2001] 1 AC 1
Baxter
Camden
v
The tenant complaint that she suffered from noise generated by her
neighbor because of poor insulation.
It was dismissed because it was the state when
the residential unit was let to the tenant.
Noise
[1999] 4 All ER 449;
[1999] 3 WLR 939
21-Oct
London
Borough
of
Southwark
and Another
v. Mills and
Others Baxter
v. Mayor etc
of the London
Borough
of
Camden
The plaintiff sued the landlord because noise comitted by the others leading
to the breach of covenant by the landlord in providing tenants with a quite
enviroment
The case was dismiised because it is
“…impossible to hold that the landlord can be
liable in nuisance for conduct which is not a
nuisance on the part of the tenant… It is too
costly for every landlords of old buildings to
upgrade their properties. "These cases raise
issues of priority in the allocation of resources.
Such issues must be resolved by the democratic
process, national and local. The judges are not
equipped to resolve them."
12
Type of nuisance, case
number and date
Plaintiff and
defendants
Water
[2008] UKPC 45
Water
[2003] UKHL 66
4 Dec
Water
[2003] UKHL 61
19 Nov
Water
[1985] UKHL 9
24 Jan
Others
[1981] AC 1001
29 Jan
Court case detail background
Results
Ritoodoise
Daby
Appellant
v.
The State of
Mauritius
Respondent
Marcic
(Respondent)
v.
Thames
Water Utilities
Limited
(Appellants)
Transco plc
(formerly BG
plc and BG
Transco plc)
(Appellants) v
Stockport
Metropolitan
Borough
Council
(Respondents)
RHM
Bakeries
(Scotland) Ltd
v Strathclude
Regional
Council
The appellant's (original defendant) construction leading to the outflow of
water to claimant's ground.
Defendants had already paid compensation to
achieve the compulsory acquistion of plaintiff's
land and no more compensation for the problem
concerned would be grounded.
Serious and repeated external sewer flooding arising from overloaded
sewers occur. They are part of the public sewerage system laid probably in
the 1930s. The surface water sewer was constructed up to the standard
then. Because of subsequent construction, however, water sewer becomes
overloaded.
Thames Water agreed that it would carry out
remedy works began in April 2003 and
completed in late June 2003 at a cost of
£731,000.
The leak was first discovered when the well of the lift shaft at Hollow End
Towers was found to be flooded. The fracture was found and repaired
quickly. The cost of the works required to restore support and cover the
pipe was £93,681. Transco sued the council to recover the cost of repair.
The appeal was dismissed. One of the learned
judge held that Property insurance is relatively
cheap and accessible; in his opinion people
should be encouraged to insure their own
property instead finding opportunity to transfer
the risk to others via litigation, where heavy
transactional costs involve.
A sewer in the occupation and control of the defender had collapsed,
The judge agrees that with the pursuers’ claim of
flooding of their premises occurred. The pursuers claim reparation from the
£10,250.
Allen v Gulf
Oil Refining
Ltd
Gulf Oil Refining Ltd have installed refinery on land but the operation of
Since it could not be prevented by the use of due
the refinery causes a nuisance of bad smell, noise and vibration. The
diligence, it was held that the polluter were not
plaintiff sued for the compensation based on this.
liable for the said nuisance.
defenders for the sustained damage of £10,250 as the defenders' failure in
duties to them based on the three aspects:
13
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