Econ 522Economics of Law

Dan Quint

Fall 2009

Lecture 8

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This week: No office hours No lecture Thursday

Next week: Office hours Monday 1:30-3:30, and usual ones on Wednesday HW #1 due Tuesday at 11 a.m. SHARP

Week after next: Office hours Monday 1:30-3:30 (instead of Wednesday) Midterm #1 Tuesday, in class

Logistics

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Intellectual property What it is, what problem it solves, what other problems it creates

Types of public ownership, when to privatize a resource Boundary maintenance costs vs cost of congestion/overuse

Fugitive property First possession versus tied ownership rules

Proving property rights, and ways to lose them Restraints on alienation

How much owners can restrict their heirs

Private necessity Inalienability

Last week…

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More ways in which property rights are limited Unbundling Eminent domain/takings Regulation

More on remedies when rights are violated

Today, we wrap up property law…

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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…

Unbundling

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Land ownership consisted of three separable pieces (“estates”)

Surface estate

Support estate

Mineral estate

Pennsylvania and coal

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Free unbundling of property rights generally not allowed under common or civil law

Unbundling

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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

Unbundling

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More on remedies

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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

Remedies (review)

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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

Types of damages

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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

Temporary versus permanent damages

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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…

Efficient nuisance remedies

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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”

Boomer v Atlantic Cement Co(NY Ct of Appeals, 1970)

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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”

Boomer v Atlantic Cement Co(NY Ct of Appeals, 1970)

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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

Takings

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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

Takings

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Why allow takings?

Takings

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Why allow takings?

Why these limitations? why require compensation?

Takings

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Why allow takings?

Why these limitations? why require compensation?

Takings

$3 MM $1 MM$9 MM

$10 MM

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Why allow takings?

Why these limitations? why require compensation? why only for public use?

Takings

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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

Takings

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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)

Poletown Neighborhood Council v Detroit

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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)

Poletown Neighborhood Council v Detroit

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Regulation

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1800s: PA Coal purchased mineral and support estates, Mahon owned surface

1921: Kohler Act prohibited “mining of anthracite coal in such a way as to cause the subsidence of, among other things, any structure used as a human habitation.”

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.”

Regulation: Pennsylvania Coal v. Mahon

surface estate

support estate

mineral estate

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1800s: PA Coal purchased mineral and support estates, Mahon owned surface

1921: Kohler Act prohibited “mining of anthracite coal in such a way as to cause the subsidence of, among other things, any structure used as a human habitation.”

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.”

Regulation: Pennsylvania Coal v. Mahon

surface estate

support estate

mineral estate

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1800s: PA Coal purchased mineral and support estates, Mahon owned surface

1921: Kohler Act prohibited “mining of anthracite coal in such a way as to cause the subsidence of, among other things, any structure used as a human habitation.”

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.”

Regulation: Pennsylvania Coal v. Mahon

surface estate

support estate

mineral estate

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1800s: PA Coal purchased mineral and support estates, Mahon owned surface

1921: Kohler Act prohibited “mining of anthracite coal in such a way as to cause the subsidence of, among other things, any structure used as a human habitation.”

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.”

Regulation: Pennsylvania Coal v. Mahon

surface estate

support estate

mineral estate

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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

Blume and Rubinfeld, “Compensation for Takings: An Economic Analysis”

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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

Blume and Rubinfeld, “Compensation for Takings: An Economic Analysis”

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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

Blume and Rubinfeld, “Compensation for Takings: An Economic Analysis”

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Zoning laws Distinguish industrial areas from residential areas

More on regulation

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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

More on regulation

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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

More on regulation

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Recapping property law

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Why do we need property rights?

Coase: without transaction costs, initial allocation of rights doesn’t matter for efficiency – just need rights to be well-defined and tradable

Transaction costs

Normative Coase, Normative Hobbes

Recapping property law

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What things can be privately owned? Public vs Private Goods; efficiency: private goods should be

privately owned, public goods publicly provided/regulated Private ownership should begin when boundary maintenance costs

are less than losses due to overuse Property rights over information – patents, copyrights Different types of public ownership – common access, regulation,

unanimous consent

Recapping property law

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What can (can’t) owners do with their property? Maximum liberty Nuisances – public and private nuisances Rules against perpetuities Emergency exception (private necessity) Inalienability Unbundling

Recapping property law

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How are property rights established? Fugitive property, first possession vs tied ownership Verifying legal ownership (deeds and car titles), acquiring title Adverse possession, estray Eminent domain/takings

What remedy is provided when property rights violated? Injunctive relief vs damages Temporary vs permanent damages

Recapping property law

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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?

Property law: the big-picture question

End of material on first midterm

Next week: contract law HW1 due next Tues, 11 a.m. sharp Enjoy the day off Thursday, have a good weekend