Property Law What may owners do with their property? Restraints on property rights

1. Property LawWhat may owners do with their property?Restraints on property rights Prop_F

2. What may owners do with their property? General common law principle: An individual can use private property in any manner that does not interfere with some other person’s use of their private property or with some other right of another person This restriction is very closely related to the economic notion of external costs - a market failure External costs are costs imposed on a third party as the result of a private market transaction between a buyer and seller More generally, an involuntary cost suffered by someone as the result of my use of my private property Prop_F

3. Conflicting property rights and the problem of separability: If the exercise of every property right by each individual was completely independent of the exercise of all property rights by all other individuals, then the application of the basic common law principle of property rights would be simple – with respect property rights, everyone could do whatever they wanted to do Unfortunately my exercise of my property rights might interfere with your ability to exercise your property rights - termed ‘entangled uses’ Prop_F

4. In economic terminology - interdependent utility and/or production functions (smoking/clean air) Gives rise to ‘externalities’ – positive or negative Casino draws gamblers – business increases for local restaurants Casino draws gamblers – more traffic congestion at tunnel Two classes of externalities Private externalities and Public externalities - analogous to the concepts of private and public goods – (rivalry and excludability) Prop_F

5. Private negative externalities: - can be corrected through private bargaining - there is both rivalry and exclusion (right to night time darkness and bright security light) In legal terminology a ‘nuisance’ - if a legal remedy is required it should generally be an injunction – parties can bargain (your neighbour’s crab grass) We would want the law to set out individual property rights as clearly as is possible and leave it to the private parties to negotiate any disputes (Normative Coase Theorem) Prop_F

6. Public negative externalities: - cannot be corrected through private bargaining - rivalry and/or exclusion do not apply (acid rain problem, many forms of pollution) In legal terminology a ‘public nuisance’ - damages represent the efficient remedy, since the cost of private bargaining following an injunction, would be prohibitive – Zalev/Inco Private bargaining will most likely fail so that legal intervention is necessary – damages, regulation, etc. Prop_F

7. EXAMPLE ONE (B and H): Acid rain is a pollution problem that violates many (all?) of the Coasian conditions - pollution originates with sulphur emissions from numerous coal fired power plants in the Midwestern United States (and Ontario) - pollution effects occur far from the power plants, as acid rainfall in the Northeastern United States and Canada - This pollution falls indiscriminately over wide areas, affecting millions of individuals in the Northeastern United States and Canada Prop_F

8. - which power plant(s) are causing the death of which lake? - which jurisdiction's law applies? - the state or province in which the polluters reside, - the state or province in which the bad effects of the pollution occur - it is difficult to imagine how private bargaining between polluters and pollutees would even began Who has the property right to clean air? - this question is overshadowed by the problems which would arise if any individual who had a right to clean air ever attempted to enforce it. Prop_F

9. For example, all the fish are dying in my lake in Muskoka due to acid rain. - whom do I approach to start the bargaining? - how do I get my neighbours (including everyone in Northeastern United States and Canada who are affected by the same polluters) to share the cost of bargaining? The acid rain problem is a particularly difficult one - one which almost all would agree requires the intervention of the law Actually international law - an agreement between Canada and the United States - this has proven very difficult (two countries, many states and provinces, different property right systems, etc.) The Coasian conditions do not hold even for the bargaining among the governments involved Prop_F

10. Temporary versus Permanent Damages Temporary damages: compensate the plaintiff for past harm - restore the plaintiff to the utility level they enjoyed prior to suffering the external cost - if the harm continues, then the plaintiff returns to court to seek further remedy (more damages) - but this provides the defendant with the incentive to stop imposing future external costs (a polluter would have the incentive to limit future pollution in whatever way possible - as long as it is less costly than the damages it expects to pay) Prop_F

11. Permanent damages: compensate the plaintiff for the past and the present value of all anticipated future harm - intended to return the plaintiff to the utility level enjoyed prior to past losses and acknowledging that harm will continue into the future - permanent damages imply that the defendant has paid up-front for all future harm and has no incentive to limit future external costs (the defendant has no incentive to adopt or develop improved technology, or in some way internalize the external costs) Prop_F

12. If - damages are relatively easy to assess - the possibility of limiting future damages exists then temporary damages are preferred (pollution) If - damages are relatively difficult to assess - there is little possibility of limiting future damages then permanent damages are preferred (scenic view) Prop_F

13. Other general legal restraints on property rights Bequests and inheritances Traditionally heirs to property were stipulated by law - based on some notion of social well-being or principle of economic efficiency Principle of ‘primogeniture’ - eldest son inherits all the father’s property (England from 1066 to 1925) - encourage large (more efficient?) estates Under civil code land is divided equally among all children (male?) - encourage small (inefficient?) land holdings In more modern societies fewer restrictions are placed on the ability of an owner to bequeath property as desired Prop_F

14. What are the costs of interfering with an owners’ ability to bequeath (more generally dispose of) property as they wish? if the legal restriction conflicts with the owner’s desired transfer it will lead to wasteful (inefficient) attempts at circumventing the legal restrictions if laws cannot be circumvented the owner will have an incentive to deplete her wealth (inefficiently) prior to death Conclusion: we would want to place as few restrictions as necessary on how the owner can dispose of property at death … BUT Prop_F

15. An owner might want to restrict the future property rights of her heirs –”Some property rights live forever, all owners die” Motivation of owner for restrictions on future generations: - extension of owner’s personal preferences beyond death (spite, aesthetics, religious or moral considerations) - to protect heirs from their own bad judgement - maintain ownership of the property within the family - disallow sale to certain classes of buyers - etc. Prop_F

16. Should an owner be allowed to place restrictions on the use of the property which she bequeaths? - does an individual have the right to enforce property rights from beyond the grave, perhaps in perpetuity? Example: - a Toronto dry goods merchant who owned a store on Young Street died during the late 1800’s - T. Eaton was his arch competitor during his lifetime - he bequeathed his property to the University of Toronto with the stipulation that it never be transferred to the ownership of any member of the Eaton family - very valuable property and a part of the Eaton Centre at Young and Queen now sits atop this property! - how and why did this happen? Prop_F

17. Conclusion: for the same reasons that we would want to give an owner the maximum freedom in disposing of her property at death, we would not want to allow her to place undue restrictions on subsequent owners If the current owner is allowed to restrict the freedom of future owners, then this has the potential to result in - wasteful use of resources in circumventing the restrictions - wasteful post-death misallocation by the heirs - you cannot participate in voluntary exchange from the grave General principle: any restriction on the freedom of any owner of a property right in the sequence of owners of that right will reduce economic efficiency. THE TRANSACTION COSTS ASSOCIATED WITH BARGAINING WITH THE DEAD ARE VERY HIGH! There is an inter-generational trade-off between the preferences of the current owner and the future owner – (are we only interested in currently living owners?) Prop_F

18. A practical solution: ‘the rule against perpetuities’ Consider the following: - a ‘prudent’ owner will not restrict a ‘prudent’ heir but a ‘prudent’ owner will restrict a ‘foolish’ heir (‘prudent’ and ‘foolish’ beings matters of personal taste of the owner) - most owners are both ‘prudent’ and ‘benevolent’ towards their heirs (want their heirs to be as happy as is possible) - at times we might find an owner who is ‘foolish’ and/or an owner who is malevolent towards her heirs - the world is dynamic and unpredictable (the world evolves in ways that make it impossible to create restrictions that would be consistent with the desires of a prudent and benevolent owner and all subsequent prudent and benevolent heirs, but at the same time would restrict the behaviour of foolish and/or malevolent heirs) Prop_F

19. We want a rule which will allow for the fewest possible restrictions on most heirs but provide for the ability to restrict the behaviour of the occasional foolish heir in a possibly very long line of heirs Rule against perpetuities: any restriction placed on a gift, sale, bequest or other transaction, if still in force, automatically lapses after the legal time limit defined as ‘lives-in-being plus 21 years’ An owner can place a restriction on the use of her property which holds for the duration of the life of a currently living heir (or other recipient, buyer, etc.) plus an additional 21 years Allows for ‘generation skipping’ - freedom to restrict the living generations but not unborn future generations A reasonable attempt to maximize the efficient allocation of property across generations, while allowing for the restriction of the occasional ‘fool’ Prop_F

20. Rights to use someone else’s property Private Necessity - the right to use another’s property in an emergency ‘an individual can use the property of another without permission but must compensate the owner for the cost of its use’ Economic logic - transaction costs might preclude bargaining simply because it is an emergency, voluntary exchange will not transfer the property to the user who values it most The need for the emergency trespasser to compensate the owner ensures that the trespass will occur only if the property is more valuable to the emergency user than to the owner ‘Private necessity’ also avoids any attempt to extort monopoly profits from individuals in temporary dire need Prop_F

21. Inalienability Inalienability is the notion that you cannot sell, give or have taken away (in general part with) something by any legal means Body organs, blood, sex are all inalienable by sale Voting rights are inalienable by sale or gift Human rights are inalienable by any means Prop_F

22. Motivation for laws of inalienability: - morality - paternalistic/idealistic political theory Morality and political idealism evolve so these laws can change - it is now legal, in some jurisdictions, to ‘buy’ sperm or eggs or to ‘rent’ wombs Is there an economic rationale for laws of inalienability? No, it is difficult for economics to explain how banning any voluntary exchange could make individuals better off What about inalienable duties (bads): jury duty, jail sentence, conscription - should these duties be transferable? Prop_F

23. The public use of private property: takings (expropriations) and regulation The state has considerable authority to: - take ownership of private property, with compensation (say to build a road – or a casino?) - to regulate the use of private property generally without compensation (say zoning or re-zoning of land use) Takings (expropriation) Compensation: the state is generally required to pay compensation, at market rates, for any private property that it takes – this should remove the incentive for the state to use expropriations as a tax Prop_F

24. Public use: traditionally the state has been limited to the expropriation of private property for ‘public’ use. This restriction imposes an important limitation on the ability of the state to interfere with private valuations Note that expropriation represents an involuntary transfer at ‘fair market prices’ But presumably the owners did not want to sell at ‘fair market prices’ otherwise they would have sold without expropriation (Note that most of us do not put our homes up for sale for exactly this reason) Justification for the state taking private property, even with market valued compensation, must go beyond ‘fair’ market compensation and public use Prop_F

25. Holdouts: Public sector projects such as road building or public housing projects often require large tracts of adjacent land (contiguity) Cases in which developers must assemble large tracts of land from two or more smaller contiguous parcels gives rise to the possibility of ‘holdouts’ - whether or not the development is private or public This is a form of transaction costs which limits the possibility of successful bargaining - ‘over-reaching’ CONCLUSION: The state should expropriate property only in those cases in which compensation is paid, the resource is for public use and bargaining costs preclude a private transaction (Casino Windsor, DaimlerChrysler building, etc. – currently a big issue in the U.S.) Prop_F

26. Regulations - little difference between placing restrictions (regulating) the use of private property and taking (expropriation) - regulation implies ‘expropriation’ of some property rights without assuming ownership - any restriction would cause a fall in the value of the property Regulation is often used to address the problem of externalities Courts must sometimes decide whether or not a given government action is a taking or a regulation of use – why? Lack of compensation for regulations implies that governments will tend to over-regulate Compensated regulation would result in property owners being indifferent to future regulation of their property Prop_F

27. On distribution Our discussions of the economics of property law have focussed almost entirely on the goal of efficiency – distribution effects were noted as an aside The re-distribution of wellbeing is also a legitimate social objective and property law is one possible policy tool for re-distribution To what extent should the law be used to influence the distribution of wellbeing? Prop_F

28. Many in society believe that the current allocation of wellbeing is not perfect - wellbeing should be transferred from the rich to the poor, from large corporations to small enterprises, from city dwellers to farmers, from males to females. If as a society we agree that one or more of these transfers should take place, should they be carried out by reassigning property rights? - providing child care, employment equity – hiring quotas, admission quotas, marketing boards, aboriginal banks, exemptions from health and safety regulations, labour regulations or pollution laws for certain firms, farmers or organizations, etc. Prop_F

29. We must distinguish carefully between the ‘ends’ or social goals of re-distributing wellbeing (income) and the ‘means’ of affecting these transfers Many, if not most, economists would agree: - property rights should be assigned according to efficiency criteria (ensuring the maximum production - as big an economic pie as is possible) - redistribution (the allocation of that pie for consumption purposes) should be carried out through taxes and transfers Prop_F

30. Why? 1. Re-assigning property rights is often a crude tool of re-distribution policy. Property rights are assigned to classes of individuals (home owners, parents, women, university students, farmers, residents of Eastern Canada …) But many relatively well-off individuals are members of these ‘property classes’ - some high paid residents of Eastern Canada benefit from special EI provisions not available to low paid workers in the rest of Canada - some wealthy farmers and corporations benefit from the system of production quotas which increase the cost of food to the urban poor - some wealthy renters of expensive apartments benefit from rent controls - some wealthy students benefit from tuition freezes while professors live in poverty Prop_F

31. 2. The benefits from re-distribution of property rights might not remain with the targeted group - if the users of a given property do not own it (if the farmer benefitsfrom agricultural quotas but rents his farm from an absentee owner, then the owner can simply raise the rent to scoop the benefits of the quota. The re-assignment of property rights will get ‘capitalized’ in the value of the land (the rental price) - employers can pay lower hourly rates because their seasonal employees qualify for more generous EI benefits - universities can over-charge for textbooks, cafeteria food, residence fees, etc. because the government subsidizes tuition (and even if tuition is frozen) - generally any benefit will be shared (elasticities of demand or supply) 3. The relative efficiency of the taxation system in affecting re-distribution of wellbeing (less distorting – bigger pie) Prop_F

32. If transaction costs are zero property rights can be re-distributed and private bargaining will re-allocate the rights to the benefit of the new recipient, with no efficiency loss Example: - re-distribute all land so that each individual owns an equal amount of land - if the resulting plots of land are inefficiently small, then the land will be bought and sold until plots of an efficient size are created - the recipients of the land will be better off, having sold their land for money and there will be no efficiency loss - but transaction costs are not zero, so that the post-re-distribution trading will not be complete and some plots will remain inefficiently small Why not simply tax large landowners and transfer the tax revenue to the poor - this is a fairly general result - the resource cost of collecting and distributing taxes is generally much lower than the resource cost of re-distributing property rights Prop_F

33. Two caveats to the standard economic efficiency argument against redistribution through the transfer of legal rights: 1. What if consumption is not the only argument in the utility function? What if social status, personal dignity, etc. also enter the utility function directly? Income transfer might not be enough? Generally true (Mommy and Daddy have jobs!) 2. What about working on all margins in solving a problem? Can tax distortions get so great that it becomes more efficient to use some property rights transfers to address a given social issue? Prop_F

34. The philosophical concept of propertyoptional for midterm and final Utilitarianism Distributive justice Liberty and self-expression Conservatism and the origins of property (read relevant portion of text) Prop_F