1. Property Law How are property rights protected?
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2. How are property rights protected? Damages and Injunctions
How should the courts respond when one individual interferes with the property rights of another individual?
Two basic types of ‘relief’ or ‘remedy’:
1. Legal remedy - ‘compensatory damages’ – damages
An amount of money, that will ‘make the plaintiff whole’ - return them to the state they were in prior to the violation of their property rights
backward-looking relief - compensates for harm done
(A farmer spays a powerful weed killer on his fields. This weed killer destroys his neighbour’s apple crop - the court might decide that the farmer should pay the orchard owner for her loss of profits)
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3. 2. Equitable relief – injunction
A court order instructing the defendant to do something, or to not do something, so as to avoid interfering with the plaintiff’s property rights – the defendant is ‘enjoined’ to do something, or to refrain from doing something
forward-looking relief - an attempt to avert the harm
(If the orchard owner foresees the harm that the farmer is about to cause, then she might seek an injunction from the court preventing him from applying the weed killer)
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4. At times both types of relief are sought (‘damages’ for past harm and an ‘injunction’ preventing future harm - Napster)
NOTE: An injunction does not necessarily ban the defendant from ‘ever’ doing what the injunction says he cannot do - it does not make the act itself illegal
The injunction is ‘granted to the plaintiff’ and this gives the plaintiff the right to enforce the injunction
If the plaintiff decides that she does not want to enforce the injunction then the defendant can go ahead and do whatever it was that they wanted to do
The injunction is a clear assignment of property rights to the plaintiff - the plaintiff is free to exercise these property rights or not exercise them, to sell them, to give them away, whatever.
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5. EXAMPLE: At times employers seek and are granted injunctions against a union, preventing its members from picketing
However, after being granted the injunction the employer will agree to allow the union to picket
In this situation the court has granted the firm a property right (the right to be free of picketing) which the firm is then free to bargain away in the labour negotiations
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6. Bargaining in the Shadow of the Law the bargaining outcome and the available remedy
Only a small fraction of property conflicts ever reach court - most disputes are settled through private bargaining
Does this mean that the existing law has no effect on the outcomes of private bargaining? NO
In the Local Cable Inc/Com Inc example which party had property rights affected how the social surplus was shared even though private bargaining always resulted in Local Cable controlling the property rights
The nature of the available remedy (whether it is damages or an injunction) will also affect the distribution of the social surplus that results from successful private bargaining
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7. EXAMPLE: The farmer and orchard owner
Farmer can spray herbicide or harrow his fields to control weeds - it is cheaper to spray herbicides
The harvest of the adjacent orchard will be adversely affected by the herbicide but unaffected by harrowing
The orchard owner could erect a barrier between the farm and the orchard which would prevent the harm from the herbicide
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8. - uses herbicide he earns profits of $500 from his harvest
If the farmer:
- uses herbicide he earns profits of $500 from his harvest
- harrows his fields he earns profits of only $280
- uses herbicide the orchard owner’s profits will be $100
- harrows the orchard owner’s profits will be $300
BUT
If the orchard owner builds the barrier, her profit will be $200, whether or not the farmer sprays (it costs $100 to erect the barrier)
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9. Consider the following profit table (with the farmer’s profits shown as the first entry in each set)
ORCHARD
No barrier Erect a barrier
FARMER
Spray herbicide ($500, $100) ($500, $200)
Harrow field ($280, $300) ($280, $200)
The most ‘efficient’ outcome is that outcome which maximizes the joint profits of the farmer and orchard owner. This occurs when the farmer sprays and the orchard owner erects a barrier ($500, $200) or $700 in joint profits.
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10. Farmer spray’s and orchard owner sues - three possible judgements by the court:
1. SPRAYER’S RIGHTS - the farmer has the right to spray his
own crop without regard to the impact on the orchard
2. ORCHARD’S RIGHTS / DAMAGES REMEDY - the orchard owner has the right to be free of the effects of the farmer’s spaying and if she suffers damage she is entitled to compensatory damages for lost profits
3. ORCHARD’S RIGHTS / INJUNCTION REMEDY - the orchard owner has the right to be free of the effects of the farmer’s spaying and if she suffers damage she is entitled to be granted an injunction preventing the farmer from spraying
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11. Suppose the court decides the outcome - what is the value of the non-cooperative outcome (court decision) under each of the three possible rulings?
Under rule 1 (sprayer’s rights) farmer sprays and the orchard owner’s best response is to build the barrier - joint profits will be $700 ($500, $200) - efficient outcome.
Under rule 2 (orchard’s rights / damages remedy) the farmer must pay for orchard’s loss of $200 – farmer will spray and earn $300 ($500 - $200). This is better than his profits of $280 if he doesn’t spray. Orchard owner will earn $300 ($100 + $200) she has no incentive to build a barrier. Joint profits of $600 ($500, $100), or after the court ordered damages ($300, $300) will result.
Under rule 3 (orchard’s rights / injunction remedy) the orchard owner will be granted an injunction preventing the farmer from spraying. There is then no incentive for the orchard owner to build a barrier. She will earn $300. The farmer will harrow his fields and earn profits of $280. Joint profits will be $580 ($280, $300).
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12. Farmer will spray and earn $500
Only one of the three possible legal rules will result in an efficient outcome without the need to bargain.
Rule 1 which assigns spraying rights to the farmer will result in maximum joint profits of $700
Farmer will spray and earn $500
Orchard owner will build the barrier and earn $200
Does this imply that we should simply have a rule of Farmer’s Rights?
What if the law gets it wrong (with respect to efficiency) but private bargaining ensues?
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13. Coase at Work Again: the efficient outcome of private bargaining
Court applies the inefficient rule 2 (orchard’s rights / damages remedy). Joint profits are $600. But if the orchard owner agrees to build the barrier and the farmer sprays - $700 in joint profits results ($500, $200). A cooperative surplus of $100 is available - $50 each under the ‘reasonable solution’.
Potential outcome of private bargaining:
Farmer gets $350 = $500 - $100 (lost orchard profits) - $50
Orchard owner gets $350 = $200 + $100 (lost orchard profits) + $50
Court applies the inefficient rule 3 (orchard’s rights / injunction remedy). Joint profits are $580. But if the orchard owner agrees to build the barrier and the farmer sprays - $700 in joint profits ($500, $200). A cooperative surplus of $120 is available
Farmer gets $340 = $500 - $100 (lost orchard profits–cost of barrier) - $60
Orchard owner gets $360 = $200 + $100 (lost orchard profits) + $60
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14. Outcome of bargaining under alternative legal rules and remedies
Sprayer’s Orchard’s rights:
rights Damages Injunction
remedy remedy
Ruling Bargain Ruling Bargain
Farmer’s
profits $500 $300 $350 $280 $340
Orchard’s
Profits $200 $300 $350 $300 $360
Joint profits $700 $600 $700 $580 $700
Cooperative
surplus $ $100 $120
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15. Bargaining in the shadow of the law!
Some conclusions:
1. If agents are rational and courts make clear and consistent rulings then rational agents will generally not waste their time and money litigating these issues
- if orchard owner’s rights are known to hold with damages as the usual remedy, then the parties will bargain towards that cooperative solution ($350, $350)
- if orchard owner’s rights are known to hold with injunction as the usual remedy, then the parties will bargain towards that cooperative solution ($340, $360)
Bargaining in the shadow of the law!
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16. 2. If orchard’s rights prevail, then the farmer would prefer a damages remedy, while the orchard owner would prefer an injunction remedy
3. The cooperative surplus is larger, the lower are joint profits under the remedy ruling - the size of the social surplus resulting from private bargaining is a measure of how inefficient the law is (initial assignment of property rights/remedy combination)
4. Past harm will generally result in a damages remedy - it is really future harm that we are dealing with in this example.
5. AGAIN, COASIAN BARGAINING ENSURES THE EFFICIENT OUTCOME IRRESPECTIVE OF THE INITIAL ASSIGMENT OF PROPERTY RIGHTS OR THE TYPE OF REMEDY APPLIED BY THE COURTS
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17. Efficient remedies with and without significant transaction costs
From the above example it would appear that damages and injunctions are equally efficient remedies - whatever remedy is imposed successful bargaining will lead to the efficient outcome
But we have not considered transaction costs
If transaction costs are non-trivial then the efficiency of the alternative remedies will differ
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18. Two situations – two rules
Rule 1: In situations in which transaction costs are low (ie. bargaining is likely to succeed) injunction is the relatively efficient remedy for a defendant’s interference with the property rights of a plaintiff.
Rule 2: In situations in which transaction costs are high (ie. bargaining is likely to fail) damages are the relatively efficient remedy for a defendant’s interference with the property rights of a plaintiff.
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19. Logic of Rule 1.
If transaction costs are low, the parties should be able to arrive at a successful bargain and this is more likely if property rights are clear and simple
An injunction remedy is clearer and simpler than a damages remedy – (although it might still be difficult to determine threat values)
The private parties need only decide on the value of those rights between themselves ( or Narrow Passage)
There is more uncertainty if the court must assess damages – more variation from case to case
The private parties are more likely to be able to assess threat values in the face of an injunction remedy, than in the face of a damages remedy ( or Narrow Passage – what will compensation be if they go to court)
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20. Logic of Rule 2.
If transaction costs are high, then even though property rights are clearly assigned and straightforward, the parties will not pursue cooperation through bargaining.
This means that if the initial assignment of property rights (the law) is inefficient no reallocation is possible through bargaining and we cannot get to the efficient outcome
However, if the court awards damages then the party who values the property most (but does not own the property right) would have the option of doing whatever they want to do and then paying damages.
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21. Example: Zalev metal recycling
From time to time, the Zalev metal recycling yard, located on the edge of South Windsor, emits a ‘brown dust’ which covers parts of the surrounding neighbourhoods
Now the residents of South Windsor have the right to be free of this ‘brown dust’
So why hasn’t Zalev been closed down?
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22. Consider the alternative remedy of injunction in this situation
It happens that if you live in this area, and if your car gets covered with this dust, then Zalev will pay for the cleaning of your car
This either results from a previous court ruling which awarded damages to someone whose car was dirtied, or is a pre-emptive offer designed to avoid litigation (with the knowledge that the court would ultimately award damages) – the shadow of the law
Consider the alternative remedy of injunction in this situation
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23. Suppose the profits from operating the recycling business are far in excess of the cost to the residents of the ‘brown dust’ pollution – it is socially optimal to operate Zalev
What if a court granted the citizens of South Windsor an injunction forcing Zalev to stop emitting dust particles, and there existed no technical solution to this problem (Zalev was already using the cleanest technology possible)
The injunction would require Zalev to negotiate with all of the affected residents of South Windsor, possibly hundreds of households, to secure the right to operate (each resident owns a part of the injunction)
The likelihood of successful bargains being made with so many plaintiffs is remote – ‘overreaching’ alone – Zalev closes
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24. Example: Inco plant in Sudbury (former student)
The Inco plant emits sulpfur dioxide (?) which corrodes automobiles.
Residents of Sudbury who believe that their car has been damaged by Inco emissions can be compensated for up to 80% of the cost of repainting the car - damages
Why do they only pay 80%? (moral hazard problem)
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25. Now few people in Sudbury really want Inco to close, but this would likely be the outcome were the court to grant an injunction to the residents of Sudbury which forced Inco to stop emitting the pollutants
Under an injunction Inco would have to negotiate with each of the residents in order to buy the right to emit the sulphur dioxide – bargaining would fail and the plant would close
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26. Conclusion The ‘damages’ remedy says to the firm
- the residents have the right to a pollution free air
if you want to pollute, go ahead but you must pay ‘damages’ – return the residents to their pre-pollution level of wellbeing
Will the firm pollute?
Yes, if profits with pollution > damages
No, if profits with pollution < damages
We end up with an ‘efficient’ level of pollution
and David Suzuki goes absolutely raving mad
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