Econ 522 Economics of Law

Econ 522Economics of Law Dan Quint Spring 2017 Lecture 9

Logistics • Second homework due next Thursday (Feb 23) • First midterm Wednesday March 1 • practice problems on website, along with answers to some

Back toRemedies

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

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

Temporary versus permanent damages • Temporary damages • 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 • Include value of anticipated future harm • One-time, permanent fix • No incentive to reduce harm as technology makes it easier

Efficient nuisance remedies • If a nuisance affects a small number of people (private nuisance), an injunctionis 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…

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”

Limitations and Exceptions toProperty Rights

Lots of ways in which property rights are not absolute • Limitations we’ll see: • How you can lose ownership of your property by neglecting it – adverse possession • When someone can violate your property rights without being punished – private necessity • Limitations on how you can use/sell your property – unbundling, prohibition on perpetuities • How the government can force you to sell your property even if you don’t want to – eminent domain • Restrictions the government can place on how you use your property – regulation – but we’ll also see limits on regulation

One way to lose (or acquire) ownership: 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

One way to lose (or acquire) ownership: 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 • Advantages • clears up uncertainty over time • allows land to be put to use • Disadvantages • owners must incur monitoring costs to protect property

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

Private Necessity • Makes perfect sense as an exception when you think about transaction costs • With private goods like land… • “Normal times”: TC are low, so property rule typically efficient • “Emergency” is a time when TC are high, so damages rule efficient • (“When TC are high, structure the law to minimize harm due to failures of private bargaining”)

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…

Example of unbundling: Pennsylvania and coal • Land ownership consisted of three separable pieces (“estates”) • Surface estate • Support estate • Mineral estate

Unbundling • Free unbundling of property rights generally not allowed • Civil law more restrictive than common law • For efficiency… • 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?

Unbundling • Free unbundling of property rights generally not allowed • Civil law more restrictive than common law • For efficiency… • 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

Unbundling? source: http://articles.nydailynews.com/2009-08-24/news/17934480_1_ebay-auction-crypt-marilyn-monroe

Next: 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” 21

Eminent Domain 22

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 23

An example from Madison, fall 2015

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 25

Takings • Why allow takings? 26

Takings • Why allow takings? • Why these limitations? • why require compensation? 27

Takings • Why allow takings? • Why these limitations? • why require compensation? $10 MM $9 MM $3 MM $1 MM 28

Takings • Why allow takings? • Why these limitations? • why require compensation? • why only for public use? 29

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 30

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) 31

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 90-acre 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’shome or business, then no property in America is safe.” 32

Recent exampleof eminent domain • Bruce Ratner owned the Nets from 2004-2011 • 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 • 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 33

Econ 522 Economics of Law