Property Law

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Property Law

• Introduction to Law and Economics
• Boston College Law School
• September 28, 2005

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Fontainebleau v. Eden Roc
Fontainebleau
Fontainebleau
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Fontainebleau v. Eden Roc
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Fontainebleau v. Eden Roc
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Fontainebleau v. Eden Roc
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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

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Case 1 Benefit Outweighs Harm
Eden Roc

• 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
Pool
Fountainebleau
Fountainebleau
10 MM Benefit
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Case 2 Harm Outweighs Benefit
Eden Roc

• 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
Pool
Fountainebleau
Fountainebleau
6 MM Benefit
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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

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Transactions Costs

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

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Case 3 Transactions Costs
Eden Roc

• 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
Pool
Fountainebleau
Fountainebleau
10 MM Benefit
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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

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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

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Fountainebleau v. Eden Roc
Fountainebleau
Fountainebleau
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Fountainebleau v. Home Owners
Fountainebleau
Fountainebleau
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Administrative Details

• Next Assignment
• Finish III.C Nuisance
• Skim 349-57
• Class Cancellation
• No Class Monday, Oct. 3