1. Econ 522 Economics of Law
Dan Quint
Spring 2017
Lecture 9

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

3. Back to Remedies

4. 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
We already saw the principle of maximum liberty:
I can do whatever I want with my property as long as that doesn’t interfere with anyone else’s property
When the use of my property does interfere with someone else’s use of theirs, we have an externality
In property law, harmful externalities are called nuisances.
When an externality is imposed on a small number of others, we say it’s a private externality, or in the language of public and private goods, a private bad
In these cases, TC should generally be low, and the problem can be solved through negotiation.
(This might be the case with neighbors fighting over a tree that crosses the property line.)
In these cases, relief by injunction is generally attractive
the court does not need to go through the exercise of calculating damages
and the clear enumeration of property rights will hopefully encourage the neighbors to reach an efficient outcome by bargaining.
On the other hand, when an externality is imposed on a large number of people – as with a factory polluting air in an area of dense population – the TC of private negotiation are often prohibitively high
This is a public externality, or public bad
In these cases, from an economic point of view, damages are ideal
Damages cause the factory to internalize the externality – that is, the cost to the neighbors becomes a private cost to the factory
But the factory can still choose to accept this cost and continue polluting when this is efficient
(With high transaction costs, an injunction would likely force the factory to stop polluting, which may not be efficient.)

5. Types of damages Compensatory Damages Can be…
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
Compensatory damages is the term for damages intended to “make the victim whole,” that is, to return the victim to being as well off as he or she was before the harm occurred
(We’ll come back to other types of damages later on, in contract and tort law)
Compensatory damages can be either temporary or permanent
Temporary damages compensate for harms that have already occurred.
Permanent damages compensate in addition for the present discounted value of harm that is expected to be done in the future
By paying temporary damages, a factory compensates the neighbors for whatever pollution has already occurred
By paying permanent damages, the factory is effectively pre-paying the neighbors for the right to pollute in the future

6. 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
There are pros and cons to both types of damages
Temporary damages require the victim to keep returning to court if the harm continues, and require the court to keep calculating the amount of damages each time, so they impose a high transaction cost
However, under temporary damages, reductions in the harm itself lead to reductions in the damages owed, so the factory has an incentive to take steps to reduce pollution, or to pay the neighbors to take steps that reduce the harm on their end if this is more efficient.
On the other hand, permanent damages are a one-time, permanent fix, and therefore less costly to implement
But once permanent damages have been paid, the factory is not penalized for any additional harm they do (they’ve already paid for it); so there is no incentive to reduce the harm as technology makes this easier
In addition, since permanent damages are based on the expected discounted value of future harm, it depends both on future technology and future prices, which cannot be predicted with accuracy
So permanent damages suffer from higher error costs, that is, inefficiencies that are introduced when the amount of the compensation is incorrect.

7. Efficient nuisance remedies
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…
So Cooter and Ulen offer the following proscription for appropriate nuisance remedies:
if a nuisance affects a small number of people (private nuisance), award an injunction, and count on the parties involved to negotiate an efficient solution
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 (or costly) to measure and innovation occurs slowly, permanent damages are more efficient
However, this is not what is typically done in practice
With public nuisances, the remedy tends to be temporary damages (for harm already incurred) and an injunction against future harm
However, there’s an interesting case that shows the court becoming more receptive to damage remedies for public nuisances, in spite of all the precedent in favor on injunctions.

8. 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”
However, there’s an interesting case that shows the court becoming more receptive to damage remedies for public nuisances, in spite of all the precedent in favor on injunctions.
The case is Boomer v Atlantic Cement Co, decided in 1970 by the NY Court of Appeals
Defendant owns large cement plant near Albany; along with cement, produces dirt, smoke and vibration
The neighbors sued, the plant was found to be a nuisance
They were awarded temporary damages, but denied an injunction against future harms
Plaintiffs appealed, requesting an injunction; appeals court ruling was very interesting
They agreed that yes, this was a valid nuisance
And yes, nuisances are generally remedied with injunctions
But in this case, the harm of forcing the plant to close so greatly outweighed the level of the damage being done that they refused to issue an injunction, and instead ordered permanent damages to be paid

9. 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”
They pointed out that the two sides could settle the issue instead through voluntary negotiations, but that “the imminent threat of closing the plant would build up the pressure on defendant…”
They also pointed out that techniques to reduce dirt and vibration from the cement production process would be developed by the industry as a whole, not just by this one plant, and that these were therefore outside the defendant’s control and unlikely to occur within a short time
The court had estimated the total of permanent damages to all plaintiffs to be $185,000
And the company had invested $45,000,000 in the plant and it employed 300 people
So the court refused to issue the injunction.
(Technically, they issued an injunction that would automatically be vacated once permanent damages to the plaintiffs were paid.)
They also noted that the damages were paid as “a servitude to the land,” that is, the fact that damages had been paid attached itself to the land, not the individual plaintiffs
So if these plaintiffs, having already received permanent damages, sold their property, the new owners could not sue for damages
Instead, the ongoing nuisance caused by the cement company would simply be a feature of the land, and would presumably be figured into the price that they could sell it for.
Permanent damages typically compensate for “all reasonably anticipated future harms.”
Presumably, if Atlantic Cement in the future were to expand greatly, or adopt a much noisier or dustier process of production, these new harms would still be liable for damages; but the established level of harm had already been compensated.

10. Limitations and Exceptions to Property Rights

11. 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

12. 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
We already asked the question, how do you establish property rights over something?
Also worth asking is, how do you give up (or lose) property rights over something?
One way that this can occur is Adverse Possession
Suppose that you own a vacant plot of land next to my house, and decide to build yourself a house there
By mistake, you build it so that it intrudes into my land by a couple of feet
Now suppose that I don’t notice for a long time
15 years later, I decide to replant my garden, examine the property line, and realize you have trespassed on my property
Do I still have the right to force you off my property?
Or by being there for long enough, have you established a legal right to that bit of my land?
Adverse possession is so named because the trespasser’s possession of the land is adverse to the owner’s own interests
In such a case, if you occupy the property for a long enough time (specified by law), you gain legal rights to it; provided
the occupation is adverse to the owner’s interests
and the owner did not object or take legal action
That is, if an owner “sleeps on his rights” and allows you to trespass, he eventually gives up his ownership.

13. 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
Why does such a law make sense?
One benefit is that, over time, it clears up any uncertainty about ownership
For example, suppose you want to buy a house that was built in 1910 and sold in 1925, again in 1937, and again in 1963
When you research the title, there seems to be some confusion about whether the 1937 sale was legal
However, if the current tenant has lived there since 1963 without legal challenge, he has gained legal right to the land; and so you can buy it from him without worry
So by making rights unambiguous over time, these laws facilitate trade, making it easier for the property to be sold to whoever values it the most
So one defense of adverse possession is that it resolves uncertainty
Another defense is that it prevents valuable resources from being left idle for too long, by specifying a way for a more productive user to gain title to the resource.
Of course, adverse possession also has a cost – property owners must actively monitor their land against possible trespass
Now if you’re renovating your garden close to the property line, I have to keep an eye on you, to make sure you stay on your side of the boundary
If you cut into my land a little, I can’t say to myself, “I’m not using that bit of land now, so I’ll let it go, and complain later if I decide I want to use it.”
Thus, I incur monitoring costs, which are inefficient
So whether adverse possession laws are efficient depends on whether the costs – basically, these monitoring costs – are outweighed by the benefits

14. 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
We said before that property rights are typically protected by injunctive relief
Using another owner’s property without permission is typically considered criminal trespass
When TC are low, this leads to bargaining and through bargaining to efficient use of the property.
However, these restrictions are not absolute
We already noted there are “fair use” exceptions to copyright protection
even though a copyright is a form of ownership, there are ways in which I can use others’ property legally, such as for educational purposes or in satire
There are also exceptions in general property law
The Supreme Court of Vermont decision established one such exception, in the case of Ploof v Putnam, decided in 1908.
Ploof was sailing on Lake Champlain with his wife and two children when a storm came up very suddenly and they needed a safe harbor quickly
The nearest one was on an island owned by Putnam
Ploof tied his boat to a pier on the island to wait out the storm
But an employee of Putnam’s worried that the boat would bang against the pier and cause damage, so he untied the boat (with Ploof and his family still aboard) and pushed it away
Ploof sued, claiming that the eventual wreckage of his boat and injuries to his family were the fault of Putnam (through his employee)
Ploof claimed that the emergency justified his trespassing on the defendant’s property without permission; he asked for damages
Putnam answered that property owners have the right to exclude trespassers, and claimed that it was so obvious the case should not even go to trial
The Vermont Supreme Court agreed with Ploof, saying that private necessity was an exception to the general rule of trespass.

15. 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
Thus, in an emergency, one person can use another’s property without permission, and must only compensate the owner for the cost of use
So if Ploof’s boat had indeed damaged Putnam’s dock, Ploof would have had to pay to repair the dock, but would not be punished for trespassing.
Similarly, a lost hiker is allowed to break into a remote cabin for food and shelter, but must pay for the damage to the cabin and whatever food he took.
Other examples where private necessity justifies unauthorized use of another owner’s property
breaking into a pharmacy when someone is deathly ill and the owner cannot be found
using someone’s valuable vase as a weapon against a murderer.
This is also similar to the rule we saw in Demsetz as property rights over land were being established among Native Americans - you could kill an animal for food on someone else’s land if you were starving, but you could not keep its valuable fur.

16. 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”)
This type of exception to the general rule of property law makes perfect sense, if we see property law as an attempt to encourage individuals to bargain over the most efficient use of property
Clearly, in an emergency, there is no time for bargaining
Or, transaction costs can be thought of as being prohibitively high
So a damages rule is more efficient than a property rule, since it ensures that the property will be put to its most efficient use.
(If Ploof had been able to find Putnam and had tried to bargain with him, Putnam would have found himself in a very strong bargaining position, and might have demanded an unreasonable amount of money
Ploof might have agreed to pay it, and then tried to get out of it after the fact
Once we get to contract law, we’ll discuss, among other things, the legality of contracts signed under situations like this.)

17. 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…
Earlier in the course, we defined property as “a bundle of rights,” that is, a collection of rights that you have over the use of your property
In some instances, an owner may want to unbundle these rights
that is, separate them, so that he could sell some of them and hold onto others
In most instances, this is not allowed – an owner may be permitted to sell the bundle as a whole, but not in pieces.
One situation where it isn’t permitted: I can’t place permanent restrictions on how my heirs will use my property
so I can’t separate the right to live on my property from the right to turn it into a golf course
that is, I can’t pass on to future generations the right to own and live on the property, but keep for myself the right to determine how it’s used
Similarly, the owner of a vacant lot might be able to sell it whole, but zoning restrictions may prevent him from dividing it up into smaller pieces and selling them separately
However, in some instances, unbundling is permitted

18. Example of unbundling: Pennsylvania and coal
Land ownership consisted of three separable pieces (“estates”)
Surface estate
Support estate
Mineral estate
A great example of unbundling comes from Pennsylvania
Pennsylvania was largely built on coal
lots of land has coal under it
lots of money was made by mining this coal
In Pennsylvania, as of the late 1800s and early 1900s, land ownership consisted of three separable pieces, referred to as “estates”
the surface estate – the rights to use the surface of the land (build a house on it, grow corn on it, whatever)
the mineral estate – the rights to whatever coal lay underneath the surface
and most interestingly, the support estate – the rights to whichever parts of the underground structure are holding up the surface.
If I owned the surface and support estates, I could build a house on the land and live there
If you owned the mineral estate, you could mine coal from my land
So now suppose I build my house, you mine for coal, but the mine weakens the rock under my house and my hosue begins to sink
If I own both the surface and support estates, then you owe me damages
That is, by owning the support estate, I own the right to my house not falling in
On the other hand, if you owned both the mineral and support rights, you could mine the coal however you wanted
Since I own the surface, I can still build a house
But if the surface fell in as a result of your mining operation, I had no recourse, since I owned the surface but not the right to have it held up
In this case, the “support estate” wasn’t tangible property, and had no value on its own
But it made it completely clear who had the rights to do what with the property, and the three property estates could be bought and sold separately.
There’s an interesting case from the 1920s, Pennsylvania Coal vs Mahon, which is discussed on the textbook website – we’ll come back to that case later today, because it’s interesting for other reasons.

19. 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?
In general, neither the common law nor the civil law allow free unbundling and repackaging of property rights
The civil law tradition is the more restrictive of the two
In the civil law, the rights which come with property ownership are attached to the property itself, not to the owner
so they typically cannot be separated at all.
To illustrate unbundling, the book gives an example of two brothers, one of whom inherits a watch that’s a family heirloom
The other brother wants to be able to wear the watch at a family Christmas party every year
If unbundling of property rights were allowed, the brother could buy the “Christmas rights” to the watch, with the heir retaining all the other rights
Then if the heir sold the watch, he could only sell the non-Christmas rights to it, since he did not possess the Christmas rights, and the brother would have a legitimate claim against the new owner to wear the watch on Christmas.
If we were trying to design an efficient legal system, what would we say about unbundling?
Well, we generally want property rights to be as complete as possible, to eliminate “missing markets” and get to efficiency through Coase
(If the second brother values the “Christmas rights” more than the first brother, why shouldn’t he be allowed to buy them?)
If we allow unbundling, people will only choose to separate out individual property rights when that increases the total value of the property, which seems to suggest we should allow unbundling

20. 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
The counterargument, though, is that allowing unbundling may increase transaction costs
More complete, complex property rights are always more expensive to administer
In addition, unbundling creates greater uncertainty
In a world with unbundled rights, any time I want to buy a watch, I need to make sure the guy selling it to me owns all the related rights – that he hasn’t sold off the Christmas rights to someone else and therefore can’t sell them to me
When you buy a house, you hire someone to do a title search – to make sure you know about all the rights associated with the property. (Does the current owner actually own it? Did he negotiate an agreement with the next-door neighbors that they could cut through his yard when they roll their garbage cans to the curb? Is there a bank lien against it? And so on)
That’s fine when you buy a house – that’s a large, rare transaction that justifies some investment of time and effort
But if you had to do that type of research any time you wanted to buy a watch, or a piece of clothing, or an apple – transaction costs would be enormous
Thus, for efficiency, it may make more sense to keep property rights “simple”, by not allowing unbundling

21. Unbundling?
Saw discussion of this on a Canadian law blog:
In Ontario, the Cemeteries Act prohibits the private resale of burial plots or crypts. When someone purchases a burial plot, they receive interment rights in perpetuity, not property rights. The property rights belong to the cemetery and if required, transfer to a third party requires the consent of the cemetery and the cemetery maintains the right to buy back the interment rights.   However,  in the United States many states do not have similar legislation and some suggest that the reselling of burial plots have increased in recent economic times
(source: )
source:

22. 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 21

23. Eminent Domain 22 22

24. 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
Earlier, we discussed the fact that when public goods are privately provided, they tend to be undersupplied
It follows, then, that one important role of government is to provide public goods
Defense; roads and other infrastructure; parks; to a certain degree, art and science; lots of public goods are, and should be, provided by the government.
In order to provide these things, the government sometimes has to use land which would otherwise be private property
In some cases, the government can simply negotiate with the owner to buy this land
But as we’ve discussed, it’s very hard to negotiate with a large number of people at once
if the government needs to buy a large area of adjoining land, which is currently owned by many different people, it may be impossible to negotiate the sale voluntarily.
(As we’ve discussed, individual landowners may hold out, hoping to get inflated prices once most of the other land has already been bought up.)
In most countries, the government has some right to seize private property even when the owner doesn’t wish to sell
This is referred to as the right of eminent domain
Not too surprisingly, this type of seizure is also called a taking 23 23

25. An example from Madison, fall 2015
The proposal calls for condemning five houses and an apartment building at West Mifflin and North Bassett streets to create a public park about one acre in size.
“The reality is: This area is the most park-deficient part of our community, bar none,” Downtown Ald. Mike Verveer said. Upscale apartment buildings are rapidly being built in the central city, some with fancy amenities, Verveer said, but “rooftop swimming pools on a couple of these properties and balconies just don’t cut it.”
The city would make the rare use of its condemnation rights because city employees’ inquiries to property owners were “either ignored, rejected, or responded to with excessive demands,” a city staff report said.
(The city ended up focusing on a different site.)

26. 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
In the U.S., takings are limited by the Fifth Amendment to the Constitution, which attaches two conditions:
private property may only be taken for public use
and only be taken with just compensation
“Just compensation” has consistently been interpreted to mean fair market value
that is, what the owner would likely be able to sell the property for
(This may be less than his subjective value for it, or the price he would voluntarily accept – too bad!) 25 25

27. Takings Why allow takings? 26 26
The need for a right to government takings, and the limiting of compensation to fair market value, is fairly clear
Calculating someone’s subjective value directly would be impossible
Allowing the owner to name his price would be the same as removing the power of eminent domain and simply requiring the government to buy property openly.
In situations where many possible sites are available, this might be fine.
But in a situation with only a single possible location for a valuable public good, the owner of the property could demand an unreasonable price (not because he valued the property that highly, but because he thought the government would pay it).
Similarly, if lots of adjacent bits of land were required (say, to build an airport), some owners might hold out, hoping to get high prices once most of the property had been bought up.
The government would then have to either fund the purchase through higher taxes (basically, redistributing wealth from all of society to one person who is already probably relatively well off since he owns property), or fail to provide a valuable public good
So public goods would continue to be underprovided, which is the situation we were trying to avoid.
So the rationale for allowing takings, and limiting compensation to fair market value, is pretty clear 26 26

28. Takings Why allow takings? Why these limitations?
why require compensation?
The limitations on government takings – that the government can only seize private property for public use, and only with compensation – seem to agree with some notion of fairness.
But they also serve another purpose – to discourage the government from abusing this power
If the government could seize private property without compensation, this would give it a way (aside from taxes) to finance itself
Uncompensated takings would function like taxes targeted at specific individuals
But we come back to the general principle that the more narrow a tax is, the more distortion it causes, because people will go to greater lengths to avoid paying the tax, which makes it inefficient
The more broad a tax is, the less distortion it causes, and therefore the less inefficiency.
So the government should be discouraged from using takings as a source of financing, which is ruled out by requiring compensation.
(If compensation were not required, this would lead people to take costly actions to make their property less attractive to the government
That is, if the government were looking for a suitable place to build a park, people who lived in attractive locations might start cutting down their own trees, or spilling chemicals on their lawn, to make sure that the government didn’t go after their property.
Uncompensated takings would also encourage corruption, as owners would be willing to pay a lot to influence the government’s choice of which property to seize
If people value their own property more highly than “fair market value,” this type of corruption is still a risk with compensated takings, but on a much smaller scale.) 27 27

29. Takings Why allow takings? Why these limitations?
why require compensation?
$10 MM
Posner, in “Economic Analysis of Law,” makes the additional point that if compensation were not required, the government might substitute land, which it could get for free, for other inputs, which are cheaper than land in reality, but more expensive to the government
He gives an example
Suppose the government has two ways to provide the same public good:
It can buy a large plot of land, and build a short, wide building
Or it can buy a small plot of land, and build a narrow, tall building
Suppose The market value of the large lot is $3 million, and the small lot is $1 million
The short wide building costs $9 million to build, and the tall narrow building costs $10 million
In social costs, the short wide building costs $12 million and the tall narrow one $11 million, so society is better off with the tall narrow one
But if the government can seize private land without compensation, than land appears free to the government
And if land is free, then the government might choose to seize the larger lot and build the short, wide building.
$9 MM
$3 MM
$1 MM 28 28

30. Takings Why allow takings? Why these limitations?
why require compensation?
why only for public use?
The restriction of takings to be only for public use similarly discourages the government from abusing this power
Suppose I own a home, which has a fair market value of $100,000
But I’ve lived there a long time and grown accustomed to it and value it at twice that much.
Along comes a developer who wants to build something else on my land, and values the land at $150,000
Clearly, selling my land to the developer is not efficient, and would not occur on its own
But if the government could take private land for any purpose, it could force me to sell for $100,000, then turn around and sell the land to the developer for $150,000, keeping the difference
Or it could simply force me to sell to the developer for $100,000, in which case the developer would obviously be willing to go to great lengths (such as paying any sum up to $50,000) to make this happen.
The whole notion of Coase was that we should let people negotiate on their own to reach efficiency; by making transactions involuntary
Takings go outside this framework, and so should only be used as a solution to a clear problem, such as the provision of private goods. 29 29

31. 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
Aside from the possibility of forcing a trade that isn’t efficient, there is another reason overuse of takings is undesirable: it creates uncertainty
We said before that when property rights are clearly enumerated and unambiguous, this effectively lowers transaction costs and helps people bargain to efficient outcomes
On the other hand, if government takings were very common, this would create a great deal of uncertainty
if you’re considering whether to buy new property, you don’t know whether you will get the full benefit of it, or whether it will instead get seized by the government
This may make it harder to transfer property to the owner who values it most
(We’ll come back to this point.)
Given the potential for abuse, and the negative effects caused by uncertainty when takings are overused, Cooter and Ulen suggest the principle that governments should only rely on takings when they cannot be avoided
That is, “the government should only take private property (with compensation) to provide a public good when transaction costs preclude purchasing the necessary property.” 30 30

32. 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)
The “just compensation” restriction on takings is fairly uncontroversial
Might be difficulty in calculating fair market value, but no conceptual doubt over what it means
However, the “public use” restriction has come under debate in recent years.
The last question on the homework is about one such case, Poletown Neighborhood Council versus City of Detroit
In short, in 1981, GM was threatening to close an auto plant in Detroit and move to another state unless it could relocate the plant to an improved site
The city of Detroit, which had already lost one auto plant recently, was worried about the loss of 6,000 jobs and millions of dollars in tax revenue
The city used eminent domain to condemn an entire neighborhood, Poletown, forcing over 1000 houses and 100 businesses to sell their land, which was used for an upgraded, modern plant for GM
The city defended the use of eminent domain, saying that employment for its residents, and tax revenues, were public goods which justified its use.
The Michigan Supreme Court ruled for Detroit, saying the taking was legal – that “alleviating unemployment and revitalizing the economic base of the community” were valid public purposes, and that “the benefit to a private interest is merely incidental.”
The decision was overturned much later in a 2004 ruling by the Michigan Supreme Court, County of Wayne v Hathcock
But a similar case in Connecticut, Kelo v City of New London, was decided by the US Supreme Court in 2005, also in favor of the use of eminent domain. 31 31

33. 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’s home or business, then no property in America is safe.”
The Kelo case is described in Posner’s book, Economic Analysis of Law
Posner describes the situation: “the pharmaceutical company 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 that the city’s redevelopment plan earmarked for office space and parking. It might have been impossible to develop those areas for these uses had the areas remained spotted with houses… The city… solved the problem by condemning the houses [seizing them]. It said, “the area [of the redevelopment project] was sufficiently distressed to justify a program of economic rejuvenation.”
(Posner criticizes the court’s own logic behind its ruling, but offers what he sees as a better argument: that the more limitations are placed on the private use of seized land, the more the government itself would become a developer, which would be inefficient.)
Since it’s a homework problem, I don’t want to say too much more about these cases
On the one hand, higher unemployment weakens the local economy, may lead to an increase in crime and other problems that affect everyone, and hence can be seen as public bads
On the other hand, as Dana Berliner, an attorney arguing the Kelo case, said, "If jobs and taxes can be a justification for taking someone's home or business, then no property in America is safe. Anyone's home can create more jobs, if it is replaced by a business and any small business can generate greater taxes if replaced by a bigger one."
The dissenting opinions in both Poletown and Kelo are similarly dire. 32 32

34. Recent example of eminent domain
Bruce Ratner owned the Nets from
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
For those who read the website Grantland, or like Malcolm Gladwell…
Recent article about Bruce Ratner, the former owner of the NJ Nets
He bought the team about ten years ago, and sold it last year to a Russian businessman, Mikhail Prokhorov, for less money than he had paid for it
This was held up by NBA Commissioner David Stern as evidence that NBA players needed to make financial concessions – owners were losing money!
Gladwell’s point is that Ratner didn’t actually lose money
According to Gladwell, Ratner never had any interest in owning an NBA team
What he had interest in was a 22-acre building site in Brooklyn, which he wanted to develop into a mix of residential and commercial
Buying it all up would have been difficult – lots of current owners, higher prices once they learned of the development plans
Trying to get it seized, a la Kelo, would be politically unpopular
But what if the development plans included a basketball stadium?
Then it’s a home run – the state seizes the land through eminent domain, sells it to him to build a stadium (along with all the other stuff – it was a big lot), everyone wins
So when he sold the team “at a loss”, he had already gotten what he wanted out of it – the deal had gone through
He’s now building the Barclays Center – he already got $400 million for the naming rights, and expects huge annual profits once the development project is complete 33 33