View
217
Download
5
Embed Size (px)
Citation preview
Property Law
Introduction to Law and Economics
Boston College Law School
September 22, 2006
Fontainebleau v. Eden Roc
Fontainebleau
Eden Roc
Pool
Fontainebleau
Fontainebleau v. Eden Roc
Fontainebleau
Fontainebleau Addition
Eden Roc
Fontainebleau v. Eden Roc
Eden Roc
Fontainebleau Addition
Fontainebleau v. Eden Roc
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
Fountainebleau
Administrative Details
• Next Assignment– Finish III.C – Nuisance– Skim 309-16
• Class Cancellation– No Class Monday (will reschedule)