Econ 522 Economics of Law Dan Quint Fall 2009 Lecture 8

1  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

2  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…

3  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…

4  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

5  Land ownership consisted of three separable pieces (“estates”)  Surface estate  Support estate  Mineral estate Pennsylvania and coal

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

7  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

8 More on remedies

9  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)

10  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

11  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

12  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

13  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)

14  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)

15  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

16  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

17  Why allow takings? Takings

18  Why allow takings?  Why these limitations?  why require compensation? Takings

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

20  Why allow takings?  Why these limitations?  why require compensation?  why only for public use? Takings

21  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

22  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

23  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

24 Regulation

25  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

26  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

27  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

28  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

29  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”

30  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”

31  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”

32  Zoning laws  Distinguish industrial areas from residential areas More on regulation

33  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

34  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

35 Recapping property law

36  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

37  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

38  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

39  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

40  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