PROPERTY LAW
Trees and Neighbors
(Question by Alex Tabarrok, found at www.marginalrevolution.com)
In Virginia, the common law has long held that if a neighbor's tree encroaches on your yard you may cut the branches as they cross the property line, but any damage the tree does to your property is your problem. Your neighbor can even sue if your pruning kills the tree. In 2007, the Virginia Supreme Court overruled this 70 year-old precedent, making it your neighbor's duty to prune or cut down the tree if it is a "nuisance."
Which rule is better: the new rule or the old? What would the Coase Theorem say about the two rules?
My Favorite Bar
My favorite bar during graduate school (Antonio's Nut House, for those who know Palo Alto) was occasionally under threat of closing down - every once in a while, a lawyer would move into one of the apartments next door, and threaten to sue for a nuisance injunction due to noise.
The social value of the bar consists of the profits it earns, plus its value to its patrons, minus the inconvenience to the neighbors (and the opportunity cost of the space it takes up). Suppose this social value is negative when the neighbors happen to be people who are unusually sensitive to noise, but positive otherwise.
(a) Explain the difference between temporary and permanent damages.
(b) Explain how permanent damages, paid as "a servitude to the land," would solve the problem.
(c) Who would receive these damage payments if the neighboring homes were owner-occupied? If they were rented? What would the impact be on the value of the homes, or the rent charged to tenants?
Fugitive Property
Pick any example of fugitive property, and explain the tradeoff between assigning ownership via first possession versus tied ownership. (Examples of fugitive property from class include foxes, whales, natural gas, land, and baseballs; you can use any of these, or your own example.)
Eminent Domain and Efficiency
The government is interested in acquiring land to build a school. The school will be a public good, creating $5,000,000 in total value. The land the government wants to build on is currently privately owned.
(a) First, suppose the land is made up of 30 small plots, each one owned by a different owner. Each owner values his own land at $100,000.
i. Would transaction costs be high or low if the government tried to acquire the needed land through voluntary negotiations?
ii. Would the government's use of eminent domain to acquire the land be efficient or inefficient?
(b) Now instead, suppose the land is in one piece, and is currently owned by a wealthy retiree. The "fair market value" of the land is $2,000,000, but the retiree has lived on the land his whole life and values it at $10,000,000.
i. Would transaction costs be high or low if the government tried to acquire the needed land through voluntary negotiations?
ii. Would the government's use of eminent domain to acquire the land be efficient or inefficient?
Conceptually, eminent domain is similar to using a liability rule (damages), rather than a property rule (injunctions), to protect ownership rights - the government is allowed to take your land and pay you for it, rather than negotiating to buy it from you.
(c) Which type of rule, property or liability, is generally more efficient when transaction costs are high, and which is generally more efficient when transaction costs are low? Given this, is the use of eminent domain more likely to be efficient in the presence of high or low transaction costs? Does this agree with your answers to parts (a) and (b) above?
Nuisance Remedies
Al owns a shoe factory with noisy machines which disturb his neighbor Bob.
The value of the factory (the present discounted value of its future profits) is $1,000,000. Producing shoes without making noise would be much more costly - if Al were forced to run his factory silently, the value of the factory would fall to $400,000.
It is estimated that the harm done to Bob (having to endure the noise), now and in the future, is worth $100,000.
(a) What is the efficient outcome - for the factory to shut down, to run silently, or to run noisily?
(b) Suppose Bob was granted an injunction to stop the factory from making noise.
i. If Bob enforced the injunction, Al would have to run the factory silently. What would be Al's, and Bob's, payoffs?
ii. If Al and Bob tried to negotiate to deal under which Bob would not enforce the injunction, what would be each side's threat point during negotiations?
iii. If Bob agreed not to enforce the injunction, what would be the gains from cooperation?
iv. If the gains from cooperation were split evenly between the two sides, what would each side's payoff be? How much would Al be paying Bob not to enforce the injunction?
(c) Suppose instead that Al were required to pay Bob permanent damages if he wanted to continue making noise. What would Al's, and Bob's, payoffs be?
(d) What does the Coase Theorem say about the two remedies when there are no transaction costs?
(e) Which remedy is more efficient when transaction costs are high and bargaining is unlikely to succeed? Why?
(f) Suppose transaction costs between Al and Bob are high. Explain why temporary damages make it more likely that Al will buy quieter machines in the future, while permanent damages make it more likely Bob will soundproof his house.