Property Law Remedies: Injunctions, Damages, and Inalienability, Study notes of Economics and Law

Download Property Law Remedies: Injunctions, Damages, and Inalienability and more Study notes Economics and Law in PDF only on Docsity! ECON 522 - SECTION 3 - PROPERTY LAW REMEDIES I. Property Law Remedies In lecture we’ve looked at three types of remedies for property disputes: in- junctions, damages, and inalienability. • Injunctions: Complete and tradable property rights. – If someone is granted an injunction then they are assigned the property right and can trade it if they wish. For example, if a homeowner is given an injunctive right to stop a neighbor from breeding noisy roosters, then the homeowner can either exercise this right, or sell it to the neighbor who wants to raise roosters. • Damages: The right to buy a property right at a set price. – Think of damages as setting a price for a property right and then allowing someone to purchase that right if they wish. For example, suppose the neighbor in the previous example (the one raising roosters) is forced to pay damages in the amount of $500 if he chooses to keep the birds on his property. Then the option for the neighbor is either (i) don’t raise roosters but don’t pay $500, or (ii) buy the right to raise roosters for $500.1 • Inalienability: Non-tradable property right. – An inalienable property right cannot be traded legally in the market. The existence of such property violates the conditions necessary for the Coase Theorem to work, but there may be reasons society would want to bar certain trades. I.1 Example: Raising Roosters. In Madison it is legal to own hens in residential neighborhoods, but it is not legal to own roosters. The reason that roosters are not allowed is that they create much more of a negative externality than hens do: Hens are relatively quiet and can provide families with eggs and meat, while roosters tend to be extremely loud, even at night, while they do not provide as much benefit for families (no eggs).2 Suppose there are two neighbors, Roger and Joe. Roger wants to raise roosters instead of hens, and this right is worth $700 to him. Joe is the only neighbor who would be affected by Roger’s roosters, and he values a rooster free neighborhood at $300. However, if Roger builds a sturdy coop to keep the roosters in then Joe’s payoff is only $100 less than if there were no roosters at all. Let the initial allocation be that there are no roosters and no coop. 1. Suppose a coop costs Roger $50 to build. What is the efficient allocation of rights? 2. Suppose the law is such that Joe has an injunctive right over Roger’s ability to own roosters. What are the neighbors’ respective threat points? If the two neighbors negotiate and decide to split any potential gains evenly, what would the final allocation and payoffs be? 3. Suppose Roger can raise roosters if he pays Joe one time damages of $300 if he does not have a coop, and $100 if he does have a coop. What would the neighbors choose to do and what would the final allocation and payoffs be? 1This is assuming the damages are permanent damages, which means the neighbor would not have to pay further fees in the future. 2Also, roosters are used in cockfighting, which is not legal. Allowing roosters to be bred openly would lower the cost of cockfighting, and thus increase its prevalence. 1 Docsity.com 4. Suppose Roger has to pay Joe $100 in damages regardless of whether or not he builds a coop. If transaction costs are low, what will the final allocation and payoffs be? What if transaction costs are high? 5. Suppose Joe has an inalienable right to a roosterless neighborhood. What would the neighbors choose to do and what would the final allocation and payoffs be? Answers: 1. Since Roger’s value for owning roosters is greater than Joe’s value for there being no roosters, Roger should have roosters. Also, since building a coop costs society $50 but is worth $100 to Joe, there should be a coop. Thus the efficient allocation is for Roger to raise roosters and keep them in a sturdy coop. 2. I’m going to say that Joe’s threat point is $300 and Roger’s is $0 (recall that I’m free to stipulate threat points however I wish, as long as I compare other allocations to these initial payoffs). Therefore, currently in the economy there is $300 in total wealth: Joe’s payoff + Roger’s payoff = $300 + $0 = $300 If Roger has the right to raise roosters and builds a coop, then the total social wealth would be $850: Joe’s payoff + Roger’s payoff = $200 + $700 − $50 = $850 Thus the gains from trade are $550, and if they split the gains then they should each get 12 (550) = $275 more than their initial payoffs (i.e. their threat points). Thus Joe gets $300 + $275 = $575, and Roger gets $0 + $275 = $275. This can be achieved by Roger buying the right to raise roosters in a coop for a price p = $375. The sale would be conditional on Roger building a coop. Here’s how to see this all works out: Joe’s payoff = $575 = (value when roosters are present in a coop) + p = $200 + $375 = $575 Roger’s payoff = $275 = (value for raising roosters) − (cost of coop) − p = $700 − $50 − $375 = $275 3. Roger will choose to build a coop and pay damages of $100. To see this, note that Roger has three options: (a) Do not get any roosters: Payoff=$0 (b) Get roosters but do not build a coop: Payoff=$700-$300=$400 (c) Get roosters and build a coop: Payoff=$700-$100-$50=$550 Thus Roger will pay damages of $100 to Joe. Thus Joe’s payoff is $300: Joe’s payoff = (value when roosters are present in a coop) + D = $200 + $100 = $300 Therefore we reach the efficient allocation, with total social wealth $300+$550=$850 4. We know that Roger will definitely raise roosters in this scenario, since it’s worth more than $100 to him to do so. Roger could get the roosters and not build a coop (since he doesn’t have to and he receives no benefit from it), giving him a payoff of: Value of roosters − Damages = $700 − $100 = $600 2 Docsity.com