Agenda for 7 th Class

1. Agenda for 7th Class • Admin stuff • Handouts • Negotiation Exercise • Slides • Nuisance • Coase Theorem

2. Assignment for Next Class I • Review any questions we did not discuss in class today • Read pp. 13-end of the Nuisance Handout • Questions to think about / Writing Assignments • Questions 1-5 on p. 7 of the Nuisance Handout • Q1 (WG1), Q2 (WG2), Q3 (WG3), Q4 (WG4), Q5 (WG5), Q6 (WG6) • Also, consider the following variation on Q5. Suppose Atlantic’s factory does not cast shade on the solar panels, but rather Atlantic planted trees that shade the solar panels. If Boomer sues Atlantic for nuisance, who do you think will win? If you think Boomer would win, what do you think the remedy would or should be – an injunction or damages? Suppose the court issued an injunction ordering Atlantic to move its factory, and the injunction was affirmed on appeal, what do you think would happen next? (WG7) • Remember disclaimer

3. Assignment for Next Class II • Prepare for Negotiation Exercise • Read materials • Meet with your team to prepare strategy • Let me and your team mates know if you won’t be able to come to class on Friday • Settlement might involve one or more of the following: • Agreement by Holly not to build house or to relocate house • Agreement by Sally to relocate pool and/or solar panels • Monetary payments from Sally to Holly or vice versa • Other creative terms • Agreement by Sally not to sue Holly • Note that it is fine not to settle • Negotiation exercise will take place Friday • 2nd half of class (starting roughly at 3PM) • You can negotiate in Rm. 101 or wherever you think best • You do not need to come back to the classroom when you are done • Email results to me when done • One email per group of 5 or 6 • Instructions on last page

4. Review of Last Class • Right to exclude • But exceptions • Necessity, anti-discrimination statutes, free speech • Other rights similarly have exceptions • Right to destroy, right to sell • Property rights are not absolute • Property rights are established by state to further particular policies • Sometimes other policies mean property rights need to be weakened • Common law or statutes • Sometimes exceptions are created by judges (common law) -- Necessity • Sometime exceptions are created by statute – anti-discrimination • Sometimes exceptions are compelled or influenced by US or state Constitutions – free speech • Exceptions are generally categorical (rules, not standard) • Unlike nuisance, which often involves case-by-case balancing • Exceptions can be challenged as “Takings,” but usually constitutional

5. Sans v. Ramsey Golf • 1948. Ramsey built women’s tee built • 1949. Ramsey built men’s tee built • 1949. Sans purchased lot adjacent to golf course • 1950. Sans built home • Sans annoyed by golfers • Conversations early in morning • Balls landed in their yard • Golfers asked kids and dog to be quiet or not to play in yard • Sans sued Ramsey for nuisance • Court found nuisance and ordered relocation of men’s and women’s tees • Even though makes the course less attractive, because too many “ordinary par 3” holes.

6. Questions on Sans v. Ramsey Golf • 1. Do you think the court reached the right decision as a matter of law and/or policy? Can you think of a solution that would be more fair and just? • 2. Suppose you were the developer of a golf course community. That is, you were developing a large tract of land to include both a golf course and houses along the course. Such developments are very popular, especially among the wealthy, who enjoy looking out their window onto beautifully groomed fairways and greens. It is inevitable in such developments that someone’s house will be near the tee-off areas (tees). How could you plan your golf course to avoid litigation such as that in Sans? • 3. Why does the opinion mention the incident in which a golfer clubbed the Sans’s dog unconscious? Is clubbing a dog a nuisance or some other tort? • 4. Could the Ramsey Golf & Country Club have sued the Sans family for nuisance? Do you think they would have won? • 5. Suppose the Ramsey and Sans families owned the neighboring houses. The Ramseys did not keep up their house. Weeds grew in the yard. The paint was peeling. A shed in the back was occasionally used by neighborhood drunks and homeless as a place to congregate and sleep. Bats took up residence in the attic and screeched at night. If the Sans sued the Ramseys for nuisance, would they prevail? What would be the just and fair resolution of this conflict?

7. Coase Theorem • Weak version: If there are no transactions costs, resources will be allocated efficiently regardless of the legal rule. • Strong version. If there are no transactions costs, resources will be allocated efficiently and the same, regardless of the legal rule • Different from weak version, because there may be several ways to allocate resources efficiently. The strong version asserts that the same efficient allocation will be reached, regardless of initial assignment of rights • The strong version is correct only if there are no “wealth effects” (see below)

8. Transactions Costs • Costs of negotiating agreements • Time of parties, cost of lawyers, cost of paper, etc. • Cost of enforcing agreements • Time of parties, cost of lawyers, cost of paper, etc. • Informational problems • Cost of acquiring necessary information • Adverse selection (which is a result of the costly nature of acquiring information about insureds) • Moral hazard (will discuss in future class) • Principal-agent problem (will discuss in future class) • Legal prohibitions • Law forbidding contracting about rights • e.g. selling kidneys, contracting out of product liability • In general, transactions costs are high when • When large numbers of people are involved • When communication is difficult

9. Legal Rule • Sometimes phrased as “regardless of assignment of rights” • Same idea • Legal rules assign rights • Product liability law assigns right to damages to consumer • Privity of contract doctrine denied such a right • Duty to rescue assigns right to damages to persons who could have been saved by passerby • Common law granted no such right • Contract law generally assigns right to collect damages (but not injunctions) • Common law generally gave polluters the right to pollute • Environmental regulations take away that right, but don’t allow polluters and others to negotiate

10. Efficiency • 2 concepts of efficiency • Pareto efficiency • Situation is Pareto efficient if no one can be made better off without making someone else worse off • Kaldor-Hicks efficiency • Situation is Kaldor-Hicks efficient if total value is maximized • Value • Willingness to pay for things person does not have • Willingness to accept for thinks person has • In considering efficiency, remember to take into account the possibility that parties might pay or compensate each other • If transactions costs are zero, Pareto efficiency and Kaldor-Hicks efficiency are the same.

11. Same Allocation (strong version) • Behavior is same • But parties may be better or worse off • Pollution example • Same level of pollution will be emitted, whether laws exist to regulate pollution or now • But polluters better off if no regulation; others better off if pollution regulated • Injunction versus damages • Breach will occur just as often, whether legal remedy is damages or injunction • But non-breaching party better off with right to injunction

12. Ancient Lights • Consider two possible legal rules • Owner of building has right to enjoin construction which would block light (“ancient lights”) • Owner of building has no such right (American rule) • Suppose legal rule is “ancient lights” • Owner’s valuation of light: $10,000 • Suppose builder gets $20,000 profit from constructing new building which would block light to owner • What will happen? • Suppose legal rule is American rule • What will happen? • Suppose Owner valuation of light is $40,000 • What will happen under the two legal rules?

13. Wealth Effects • Example assumed owner’s valuation of light=$10,000 or $40,000 • What mean? • How much willing to pay (WTP) to purchase right (if initially allocated to builder, e.g. American rule) • How much willing to accept (WTA) to waive right (if initially allocated to owner, e.g. Ancient Lights) • Example assumes that WTP and WTA are the same • Not always true • Poor owner might not be willing to pay a lot to protect light, but might be willing to accept only a much larger sum to waive right • In general, the more valuable the right in relation to party’s wealth, the greater the divergence between WTP and WTA • Large divergence – right to medicine, right to bodily integrity, right to food if starving, etc • Duty to rescue. Poor parent might be willing to pay relatively little to rescue child, but might still demand very high amount to allow child to drown. (See next slide)

14. Ancient Lights with Wealth Effects • Builder makes $20,000 profit from new building • Owner WTP = $15,000 • Owner WTA = $25,000 • Ancient lights -- Building not built • Most builder will offer for permission to build is $20,000, but owner will not accept anything less than $25,000 (her WTA) • Not building is efficient • Building makes Owner worse off • Builder would need to pay $25,000 in compensation (WTA) • American rule -- Building will be built • Most owner would offer to stop building is $15,000 (WTP), but builder will not accept anything less than $20,000 • Building is efficient • Not building would harm builder • Owner would need to pay $20,000 to stop builder • Illustrates weak version of Coase Theorem • Allocation always efficient, but depends on legal rules (initial assignment of rights) • Hard to know what is normatively correct when WTP < WTA by big margin

15. Point of Coase Theorem • Simplistic interpretation • Law doesn’t matter • Sophisticated interpretation • Need to focus on and understand transactions costs • In general, good to lower transactions costs • Improve communication • Remove legal barriers to negotiation • Solve information problems • If transactions costs are (or can be made) low, then best to let market take course • Legal allocation not that important • If transactions costs are (by necessity) high, then law is necessary • Initial allocation of rights makes a big difference • Law can make world much better place • In real world, there are always transactions costs • If transactions costs are low, assumption of zero transactions costs can be helpful

16. Coase Theorem and Legal Rules • Coase Theorem helps figure out what legal rule should be • How depends on context • Ancient Lights • If profit to new building usually higher than prior owner’s valuation of light • Then, if transactions costs are zero new building will be built, regardless of legal rule • BUT if transactions costs are positive and moderate, ancient lights rule will require costly negotiation • If transactions costs are very high, then ancient lights rule will block efficient allocation • So American rule more efficient • Converse if prior owner’s valuation of light is higher than profit to new building

17. Coase Theorem and Legal Rules II • Pollution • If transactions costs are zero, pollution controlled optimally, no matter the legal rule • Transactions costs are, in fact, very high, b/c too many people affected • So rule which allocated right to pollute to potential polluters would result in an efficiently high amount of pollution • Some form of pollution regulation is probably efficient • Of course, most efficient form of pollution control subject to debate

18. Externalities & Coase Theorem • When externalities affect small number of people who can negotiate ex ante or who deal with each other repeatedly, probably don’t need law to correct or encourage • Nice or mean things done to family or friends • Contracts usually deal explicitly with externalities • E.g. promisee pays for positive externality granted by promisor • Parties indemnify each other for harm • But law sometimes imposes mandatory terms • E.g. Product liability, medical malpractice liability • Covenants running with land, homeowners associations • Deal with externalities among neighbors • But when externalities affect large numbers of people, need law • Pollution, congestion, torts among strangers, etc.