Property Law Introduction to Law and Economics Boston College Law School October 5, 2004

Fountainebleau v. Eden Roc Fountainebleau Eden Roc Pool Fountainebleau

Law and Economics Basic claim: legal rules should be set so as to maximize social wealth – “efficiency” –“Wealth” = aggregate market value –“Maximization” = Pareto Superiority: one person better off, no one worse off Kaldor-Hicks: gains to those better off are greater than losses to those worse off

Case 1: Benefit Outweighs Harm Eden Roc Fountainebleau Pool Fountainebleau If Eden Roc gets entitlement –Fountainebleau willing to pay up to $10MM to build –Eden Roc willing to accept more than $6MM to suffer blocked light –Contract: Fountainebleau will pay Eden Roc between $6-10MM to build If Fountainebleau gets entitlement –Eden Rock willing to pay up to $6MM to stop building –Fountainebleau unwilling to stop for less than $10 MM –No contract: Fountainebleau will build $6 MM in Harm $10 MM Benefit

Case 2: Harm Outweighs Benefit Eden Roc Fountainebleau Pool Fountainebleau If Eden Roc gets entitlement –Fountainebleau willing to pay up to $6MM to build –Eden Roc unwilling to accept less than $10MM to suffer blocked light –No contract: Fountainebleau will not build If Fountainebleau gets entitlement –Eden Rock willing to pay up to $10MM to stop building –Fountainebleau unwilling to stop for less than $6MM –Contract: Eden Roc will pay Fountainebleau between $6-10MM not to build $10 MM in Harm $6 MM Benefit

Coase Theorem Coase Theorem: where transactions costs are zero, awarding entitlement to either party will be equally efficient –If entitlement given to party who values it more, then efficient result –If entitlement given to party who values it less, then parties will bargain to efficient result Implications for law –Where transactions costs are zero, legal rules do not matter for purposes of efficiency –Where transactions costs are not zero, legal rules may matter for efficiency

Transactions Costs Types of transactions costs –Bargaining, negotiation, contracting costs –Strategic behavior, hold-outs –Imperfect information –Inability to agree on splitting surplus

Case 3: Transactions Costs Eden Roc Fountainebleau Pool Fountainebleau Transactions costs = $5 MM If Fountainebleau gets entitlement –Eden Rock willing to pay up to $6MM to stop building –Fountainebleau unwilling to stop for less than $10 MM –No contract: Fountainebleau will build If Eden Roc gets entitlement –Fountainebleau willing to pay up to $10MM to build –Eden Roc willing to accept more than $6MM to suffer blocked light –Costs of negotiating contract, $5MM, exceed social surplus –No contract: Fountainebleau will not build – inefficient result $6 MM in Harm $10 MM Benefit

Implications for Law Implications for law –Courts should try to lower transactions costs –Where costs are too high, courts should award entitlement to party that values it more

Broader Critiques Ignores distributional implications Ignores non-economic values (e.g. fairness) Willingness to pay not a good measure of social utility Offer and asking prices may differ due to: –Wealth effects –Endowment effects Individuals may not act rationally

Fountainebleau v. Eden Roc Fountainebleau Eden Roc Pool Fountainebleau

Fountainebleau v. Home Owners Fountainebleau

Administrative Details Next Assignment –Finish III.C – Nuisance –Skim Classroom Change –Next class, Thursday, October 7 –Stuart 315