1. Agenda for 7th Class Admin stuff Handouts Negotiation Exercise Slides
Nuisance
Coase Theorem

2. Assignment for Next Class I
Review any questions we did not discuss in class today
Read pp. 13-end of the Nuisance Handout
Questions to think about / Writing Assignments
Questions 1-5 on p. 7 of the Nuisance Handout
Q1 (WG1), Q2 (WG2), Q3 (WG3), Q4 (WG4), Q5 (WG5), Q6 (WG6)
Also, consider the following variation on Q5. Suppose Atlantic’s factory does not cast shade on the solar panels, but rather Atlantic planted trees that shade the solar panels. If Boomer sues Atlantic for nuisance, who do you think will win? If you think Boomer would win, what do you think the remedy would or should be – an injunction or damages? Suppose the court issued an injunction ordering Atlantic to move its factory, and the injunction was affirmed on appeal, what do you think would happen next? (WG7)
Remember disclaimer

3. Assignment for Next Class II
Prepare for Negotiation Exercise
Read materials
Meet with your team to prepare strategy
Let me and your team mates know if you won’t be able to come to class on Friday
Settlement might involve one or more of the following:
Agreement by Holly not to build house or to relocate house
Agreement by Sally to relocate pool and/or solar panels
Monetary payments from Sally to Holly or vice versa
Other creative terms
Agreement by Sally not to sue Holly
Note that it is fine not to settle
Negotiation exercise will take place Friday
2nd half of class (starting roughly at 3PM)
You can negotiate in Rm. 101 or wherever you think best
You do not need to come back to the classroom when you are done
results to me when done
One per group of 5 or 6
Instructions on last page

4. Review of Last Class Right to exclude But exceptions
Necessity, anti-discrimination statutes, free speech
Other rights similarly have exceptions
Right to destroy, right to sell
Property rights are not absolute
Property rights are established by state to further particular policies
Sometimes other policies mean property rights need to be weakened
Common law or statutes
Sometimes exceptions are created by judges (common law) -- Necessity
Sometime exceptions are created by statute – anti-discrimination
Sometimes exceptions are compelled or influenced by US or state Constitutions – free speech
Exceptions are generally categorical (rules, not standard)
Unlike nuisance, which often involves case-by-case balancing
Exceptions can be challenged as “Takings,” but usually constitutional

5. Sans v. Ramsey Golf 1948. Ramsey built women’s tee built
1949. Ramsey built men’s tee built
1949. Sans purchased lot adjacent to golf course
1950. Sans built home
Sans annoyed by golfers
Conversations early in morning
Balls landed in their yard
Golfers asked kids and dog to be quiet or not to play in yard
Sans sued Ramsey for nuisance
Court found nuisance and ordered relocation of men’s and women’s tees
Even though makes the course less attractive, because too many “ordinary par 3” holes.

6. Questions on Sans v. Ramsey Golf
1. Do you think the court reached the right decision as a matter of law and/or policy? Can you think of a solution that would be more fair and just?
2. Suppose you were the developer of a golf course community. That is, you were developing a large tract of land to include both a golf course and houses along the course. Such developments are very popular, especially among the wealthy, who enjoy looking out their window onto beautifully groomed fairways and greens. It is inevitable in such developments that someone’s house will be near the tee-off areas (tees). How could you plan your golf course to avoid litigation such as that in Sans?
3. Why does the opinion mention the incident in which a golfer clubbed the Sans’s dog unconscious? Is clubbing a dog a nuisance or some other tort?
4. Could the Ramsey Golf & Country Club have sued the Sans family for nuisance? Do you think they would have won?
5. Suppose the Ramsey and Sans families owned the neighboring houses. The Ramseys did not keep up their house. Weeds grew in the yard. The paint was peeling. A shed in the back was occasionally used by neighborhood drunks and homeless as a place to congregate and sleep. Bats took up residence in the attic and screeched at night. If the Sans sued the Ramseys for nuisance, would they prevail? What would be the just and fair resolution of this conflict?

7. Coase Theorem
Weak version: If there are no transactions costs, resources will be allocated efficiently regardless of the legal rule.
Strong version. If there are no transactions costs, resources will be allocated efficiently and the same, regardless of the legal rule
Different from weak version, because there may be several ways to allocate resources efficiently. The strong version asserts that the same efficient allocation will be reached, regardless of initial assignment of rights
The strong version is correct only if there are no “wealth effects” (see below)

8. Transactions Costs Costs of negotiating agreements
Time of parties, cost of lawyers, cost of paper, etc.
Cost of enforcing agreements
Informational problems
Cost of acquiring necessary information
Adverse selection (which is a result of the costly nature of acquiring information about insureds)
Moral hazard (will discuss in future class)
Principal-agent problem (will discuss in future class)
Legal prohibitions
Law forbidding contracting about rights
e.g. selling kidneys, contracting out of product liability
In general, transactions costs are high when
When large numbers of people are involved
When communication is difficult

9. Legal Rule Sometimes phrased as “regardless of assignment of rights”
Same idea
Legal rules assign rights
Product liability law assigns right to damages to consumer
Privity of contract doctrine denied such a right
Duty to rescue assigns right to damages to persons who could have been saved by passerby
Common law granted no such right
Contract law generally assigns right to collect damages (but not injunctions)
Common law generally gave polluters the right to pollute
Environmental regulations take away that right, but don’t allow polluters and others to negotiate

10. Efficiency 2 concepts of efficiency Pareto efficiency
Situation is Pareto efficient if no one can be made better off without making someone else worse off
Kaldor-Hicks efficiency
Situation is Kaldor-Hicks efficient if total value is maximized
Value
Willingness to pay for things person does not have
Willingness to accept for thinks person has
In considering efficiency, remember to take into account the possibility that parties might pay or compensate each other
If transactions costs are zero, Pareto efficiency and Kaldor-Hicks efficiency are the same.

11. Same Allocation (strong version)
Behavior is same
But parties may be better or worse off
Pollution example
Same level of pollution will be emitted, whether laws exist to regulate pollution or now
But polluters better off if no regulation; others better off if pollution regulated
Injunction versus damages
Breach will occur just as often, whether legal remedy is damages or injunction
But non-breaching party better off with right to injunction

12. Ancient Lights Suppose legal rule is American rule
Consider two possible legal rules
Owner of building has right to enjoin construction which would block light (“ancient lights”)
Owner of building has no such right (American rule)
Suppose legal rule is “ancient lights”
Owner’s valuation of light: $10,000
Suppose builder gets $20,000 profit from constructing new building which would block light to owner
What will happen?
Suppose legal rule is American rule
Suppose Owner valuation of light is $40,000
What will happen under the two legal rules?

13. Wealth Effects
Example assumed owner’s valuation of light=$10,000 or $40,000
What mean?
How much willing to pay (WTP) to purchase right (if initially allocated to builder, e.g. American rule)
How much willing to accept (WTA) to waive right (if initially allocated to owner, e.g. Ancient Lights)
Example assumes that WTP and WTA are the same
Not always true
Poor owner might not be willing to pay a lot to protect light, but might be willing to accept only a much larger sum to waive right
In general, the more valuable the right in relation to party’s wealth, the greater the divergence between WTP and WTA
Large divergence – right to medicine, right to bodily integrity, right to food if starving, etc
Duty to rescue. Poor parent might be willing to pay relatively little to rescue child, but might still demand very high amount to allow child to drown. (See next slide)

14. Ancient Lights with Wealth Effects
Builder makes $20,000 profit from new building
Owner WTP = $15,000
Owner WTA = $25,000
Ancient lights -- Building not built
Most builder will offer for permission to build is $20,000, but owner will not accept anything less than $25,000 (her WTA)
Not building is efficient
Building makes Owner worse off
Builder would need to pay $25,000 in compensation (WTA)
American rule -- Building will be built
Most owner would offer to stop building is $15,000 (WTP), but builder will not accept anything less than $20,000
Building is efficient
Not building would harm builder
Owner would need to pay $20,000 to stop builder
Illustrates weak version of Coase Theorem
Allocation always efficient, but depends on legal rules (initial assignment of rights)
Hard to know what is normatively correct when WTP < WTA by big margin

15. Point of Coase Theorem Simplistic interpretation Law doesn’t matter
Sophisticated interpretation
Need to focus on and understand transactions costs
In general, good to lower transactions costs
Improve communication
Remove legal barriers to negotiation
Solve information problems
If transactions costs are (or can be made) low, then best to let market take course
Legal allocation not that important
If transactions costs are (by necessity) high, then law is necessary
Initial allocation of rights makes a big difference
Law can make world much better place
In real world, there are always transactions costs
If transactions costs are low, assumption of zero transactions costs can be helpful

16. Coase Theorem and Legal Rules
Coase Theorem helps figure out what legal rule should be
How depends on context
Ancient Lights
If profit to new building usually higher than prior owner’s valuation of light
Then, if transactions costs are zero new building will be built, regardless of legal rule
BUT if transactions costs are positive and moderate, ancient lights rule will require costly negotiation
If transactions costs are very high, then ancient lights rule will block efficient allocation
So American rule more efficient
Converse if prior owner’s valuation of light is higher than profit to new building

17. Coase Theorem and Legal Rules II
Pollution
If transactions costs are zero, pollution controlled optimally, no matter the legal rule
Transactions costs are, in fact, very high, b/c too many people affected
So rule which allocated right to pollute to potential polluters would result in an efficiently high amount of pollution
Some form of pollution regulation is probably efficient
Of course, most efficient form of pollution control subject to debate

18. Externalities & Coase Theorem
When externalities affect small number of people who can negotiate ex ante or who deal with each other repeatedly, probably don’t need law to correct or encourage
Nice or mean things done to family or friends
Contracts usually deal explicitly with externalities
E.g. promisee pays for positive externality granted by promisor
Parties indemnify each other for harm
But law sometimes imposes mandatory terms
E.g. Product liability, medical malpractice liability
Covenants running with land, homeowners associations
Deal with externalities among neighbors
But when externalities affect large numbers of people, need law
Pollution, congestion, torts among strangers, etc.