Coase Theorem II: The nperson case

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Coase Theorem II The n-person case

• F.H. Buckley
• Sciences Po
• fbuckley_at_gmu.edu
• Goetz 35-47
• Goetz 49-75 to follow

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Coase Theorem II The n-person case

• Recall that next Thursday
• is our double day
• Goetz 75-95, 99-102
• Goetz 149-53,
• Buckley 38-50, 136-40
• Goetz 159-74
• Delete paragraph beginning As Exhibit 4.5 in
  Goetz p. 162

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The Coase Theorem
The Problem of Social Cost, 3 J. Law Econ. 1
(1960)
Legal rules do not affect the allocation of
resources where transaction costs are zero but
the interesting case is where transaction costs
are high
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The Corollary to Coase

• Legal rules are not irrelevant, but may affect
  the allocation of resources where there are
  barriers to bargaining
• Barriers to bargaining as transaction costs.

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The Corollary to Coase

• Legal rules are not irrelevant, but may dictate
  results, where there are barriers to bargaing
• Barriers to bargaining as transaction costs.
• So what are examples of transaction costs?

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Transaction CostsN-person bargains and hold
outs
Recall the holdout problem in the land assembly
case
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Boomer v. Atlantic CementGoetz p. 35

• An example of high transaction costs
• What is the difference between an injunction and
  damages?

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Boomer v. Atlantic CementHigh Transaction Costs

• What possible outcomes are canvassed in this
  case?

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Boomer v. Atlantic CementHigh Transaction Costs

• What possible outcomes are canvassed in this
  case?
• No remedy no injunction, no damages
• Injunction
• No injunction but damages
• Injunction and locus poenitentiae (dissent)
• Injunction unless damages paid (majority)

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Does the legal rule change the result in Boomer?

• Suppose the value of the factory to Atlantic
  Cement is 20M. Plaintiff Smith suffers 100
  damages and obtains an injunction. Describe the
  bargaining.

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Calabresi and Melmed85 Harv.L.Rev. 1089 (1972)

• Property rules protect rights through
  injunctive relief or specific performance
• Liability rules (damages) dont offer property
  protection

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Is Coasian bargaining feasible here?

• How many plaintiffs are there?
• Does the difference between damages and
  injunctive relief matter? Is a balancing test
  which mimics the market more efficient than
  injunctive relief?

13
Bomber v. Particular GypsumGoetz p. 37
Lot 38 Particular Gypsum
Lot 39
Bomber Property
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Damages

• Damages to homeowners 1,000 each (100,000 if
  a class action).
• Cost to Particular of moving 12,437,000
• What result under Boomer?

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Damages

• Damages to homeowners 1,000 each (100,000 if
  a class action).
• Cost to Particular of moving 12,437,000
• What result under Boomer?
• Just when does one have a large disparity in
  economic consequences?

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Damages

• Damages to homeowners 1,000 each (100,000).
• Cost to Particular of moving 12,437,000
• What result under Boomer?
• What result if Bomber could get an injunction? Is
  there a hold out problem?

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Damages

• What result if Particular owned all of Lot 39?
• Does this provide a way to determine whether an
  injunction should lie?

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Damages

• What result if Particular owned all of Lot 39?
• Does this provide a way to determine whether an
  injunction should lie?
• Internalizing the externality

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Weingarten v. Northgate

• What was the basis for Weingartens claim?

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Weingarten v. Northgate

• What was the basis for Weingartens claim?
• Weingarten shall have the right to obtain an
  injunction specifically enforcing such rights and
  interests without the necessity of proving
  inadequacy of legal remedies or irreparable
  harm.
• Could the parties stipulate to invoke C.C. art.
  1927? Why limit freedom of contract?

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Weingarten v. Northgate

• Why was Weingarten suing?
• It is dubious that devastation of the building
  is in Weingartens real interest.

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Coming to the Nuisance

• What if the polluter gets there first and the
  housing development is created afterwards?
• When the homeowners bought their houses, was the
  pollution already reflected in the purchase
  prices?

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Coming to the Nuisance

• What if Particular had gotten there first and the
  housing development was created afterwards?
• When the homeowners bought their houses, was the
  pollution already reflected in the purchase
  prices?
• Would this amount to a windfall for the
  homeowners? Or would the remedy be capitalized in
  the price of the house?

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Should we therefore ignore distributional issues?

• But then how would we decide these cases from an
  efficiency perspective?

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What do these rules do to the incentives of the
parties to move to undeveloped land?

• Suppose there is a come to the nuisance
  defense. Would this result in a race between
  developers and factory owners to get there first?

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What do these rules do to the incentives of the
parties to move to undeveloped land?

• Suppose there is a come to the nuisance
  defense. Would this result in a race between
  developers and factory owners to get there first?
• Suppose there isnt such a defense the case of
  the pollution arbitrageur

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Spur v. Del WebbGoetz p. 41
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Spur v. Del Webb
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Can you state the rule in the case?

• Del Webb came to the nuisancebut got an
  injunction. Why?

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Can you state the rule in the case?

• Del Webb came to the nuisancebut got an
  injunction. Why?
• A novel twist The victim has to compensate the
  polluter

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Can you state the rule in the case?

• Del Webb came to the nuisancebut got an
  injunction. Why?
• A novel twist The victim has to compensate the
  polluter
• Suppose that Del Webb sued before it had begun
  development?

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Coming to the nuisanceWhat happens when polluter
gets there first

• Possibility 1 Doesnt affect victims
  remediescan still get injunction or damages
• Possibility 2 No remedy for victim (result in
  Spur had lots not been sold to homeowners)
• Spur Injunction coupled with compensation for
  polluters moving expenses.

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From a Coasian perspective

• Does it matter?
• If Del Webb had not sold lots, it could have
  bought the ranch
• But it could have done this even after selling
  the lots.

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Does the difficulty in measuring pollution costs
argue for a regulatory solution?

• The rise of environmental regulatory agencies
• Should one distinguish between kinds of
  pollution?

35
Sprecher v. Adamson

• How does this case differ from the cases we saw
  involving pollution?

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Sprecher v. Adamson

• How does this case differ from the cases we saw
  involving pollution?
• Suppose the problem could have been avoided had
  Adamson spent 10,000, and that this would have
  avoided a cost of 100,000.

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Sprecher v. Adamson

• How does this case differ from the cases we saw
  involving pollution?
• Suppose the problem could have been avoided had
  Adamson spent 10,000, and that this would have
  avoided a cost of 100,000.
• Suppose that either Sprecher or Adamson could
  have cured the problem with the same expense.

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The misfeasance-nonfeasance distinction

• Does it does on any economic logic?

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The misfeasance-nonfeasance distinction

• Does it does on any economic logic?
• Suppose the land had been unoccupied. What might
  this do to incentives to buy it?

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The misfeasance-nonfeasance distinction

• Does it does on any economic logic?
• Suppose the land had been unoccupied. What might
  this do to incentives to buy it?
• What about a duty to rescue?