2.

Property
1. The Coase Theorem(s)
1. Consider the establishment of a general right to peace and quiet within the vicinity
of one's home. In principle this is enforceable insofar as it is possible to call the
authorities if a neighbour turns his radio up loud. The question addressed by
Ronald Coase in his seminal paper "The Problem of Social Cost" was: does it
matter to the public at large whether such a right is established, given that
individuals can bargain with each other?
2. Coase addresses this question by reference to Sturges v. Bridgman, a classic 19th
century case in which the courts were asked to settle a dispute over property
rights. The dispute arose over the noise from a confectioners workshop
(Bridgman), which was adjacent to a doctors premises (Sturges). The doctor
maintained that the noise of the machinery was sufficiently loud to deter some
patients from coming to his premises.
3. What Coase shows is that:
(a) providing there are no obstacles to bargaining, the outcome will always be
Pareto efficient, irrespective of whether or not a right to peace and quiet is
established (this is a version of the Positive Coase Theorem);
(b) however, there is no expectation that the level of noise will be independent
of the legal position: we would in general expect the outcome to be less noisy
if a right to peace and quiet is established in law, even if there are no obstacles
to bargaining. This is because the parties preferences will be affected by their
wealth, and
(c) there is a clear expectation that the party with the right to decide the
amount of noise will end up richer.
3. Obstacles to bargaining solutions
1. The efficient outcomes to the negotiations between neighbours outlined above
could fail to materialise for a number of reasons. It is possible that the neighbours
had long ago fallen out with each other and were not on speaking terms;
consequently they were not able to communicate in order to agree a mutually
acceptable level of noise. This problem would of course be far more serious if the
number of neighbours affected by the noise was multiplied: each would have to
identify the source of the noise and then discuss a solution with the person
responsible.
2. Even if the neighbours were on good terms, and there were only two of them,
there remain substantial obstacles to a bargained solution. Obviously, each party
wishes to negotiate the best possible deal for himself. Consequently, the person
who dislikes noise will attempt to exaggerate the harm that he suffers; similarly,
the neighbour who listens to the radio will emphasise the sacrifice from missing
his favourite programmes. Each party will attempt to hold out for the best
possible outcome. However, this strategic behaviour may result in a negotiated
solution breaking down, if one party believes that the other is not interested in

reaching agreement. This kind of breakdown is more likely to happen when the
parties are unfamiliar with each other and less likely when the parties are in a
long, continuing relationship.
3. If the parties communicate, and reach agreement in spite of strategic behaviour,
there remains the problem of monitoring and enforcing the agreement. In the case
of the noisy radio, a breach of the agreement is fairly easy to observe if there is
only one possible source of noise. If, on the other hand, there are several
neighbours who may be responsible, monitoring becomes more difficult.
4. In all of these cases, then, the efficient Coasean bargain may not materialise
because of transaction costs (including the effect of strategic behaviour). The
normative version of the Coase Theorem maintains that the role of the law should
be to minimise the effect of transaction costs on the achievement of private
bargains. This encompasses both the avoidance of costs which are being incurred
in the pursuit of efficient bargains, and the avoidance of inefficient bargains which
result from the existence of transaction costs.
5. How may the law fulfil this role? In another seminal paper in the development of
Law and Economics, Calabresi and Melamed (1972) argued that judicial decisions
over property rights can be separated into two stages: first, the courts must
allocate property rights to individuals; then they must decide how to protect those
rights.
6. According to Calabresi and Melamed, once allocated, property rights (or
"entitlements") may be protected in three different ways: by property rules, by
liability rules, or by inalienability rules. The difference between these takes us
beyond the simple assumption that the only means available to the courts for
protecting rights was through strict enforcement by injunction. In the above
example, we implicitly assumed that the neighbour who is given the right to peace
and quiet is able to enforce his right by means of an injunction, and that he may
decide not to enforce this right if he can come to an agreement with his noisy
neighbour.
4. Alternative means of protecting property rights
1. Calabresi and Melamed refer to a tradeable injunctive remedy as a property rule
for the protection of rights. An injunctive remedy is an example of equitable
relief, in which the court orders the defendant to perform an act or to refrain from
acting in a particular manner. Failure to comply may be considered to be in
contempt of court, and punishable by imprisonment. What we have referred to
above as the basic role of the law in defining and protecting property rights in
order to facilitate trade is another variant of this property rule approach:
individuals are able to trade rights over goods, the ownership of which is protected
by the full force of the criminal law.
2. By contrast, a liability rule is held by Calabresi and Melamed to be the protection
of a right by means of the payment of compensatory damages - i.e. legal relief.
In other words, the right can be appropriated by someone and retained in exchange
for the payment of court-determined compensation. This is the normal remedy

applied by the courts: injunctive remedies are reserved for those cases where it
can be shown that damages would undercompensate the plaintiff.
3. In addition to these two rules, Calabresi and Melamed also suggested a third rule,
which is where rights are established and assigned to individuals, protected by the
full force of the law, but where the owners are not permitted to trade these rights.
This they refer to as a rule of inalienability. It is, for example, not possible to sell
oneself into slavery.
4. When considering the property rule/ liability rule distinction in the context of
externalities from an economic perspective, can we say which is the most efficient
means of protecting property rights? Calabresi and Melamed suggest that the
courts should choose between compensatory damages and an injunction on the
basis of the parties ability to cooperate in resolving the dispute. If there are
severe obstacles to negotiation, the preferred remedy should be compensation,
because in those circumstances the Coasean bargaining outcome cannot be relied
upon to achieve efficiency. If there are few obstacles to bargaining, however, they
argue that the preferred remedy should be an injunction, because in principle this
allows the efficient exchange to occur in the way we have discussed above.
5. For example, in the case of the noisy neighbour, when there is only one other
party involved an injunction would result in the efficient outcome being
negotiated, providing that the parties behave non-strategically. If the noise
emanated from a nearby airfield, however, and many people were affected, the
payment of compensation might be more efficient in that it would save on the
bargaining costs that would be needed under an injunctive remedy awarded to all
individual householders. Of course, this does presume that the courts are capable
of making a reasonable estimate of the harm imposed by the externality.
1. Nuisance law
1. Consider again the case of Sturges vs Bridgman, as developed by Stephen:
2. Damage measures
1. If the courts decide to award the entitlement to the doctor, there remains the option of
protecting the right by means of a property rule (i.e. an injunction against the
confectioner), or by means of a liability rule (i.e. damages paid by the confectioner to
reflect the impact of the noise on the doctor's profits). In the previous diagram, we
assumed that a property rule was in place, and that the parties would bargain around the
injunction in order to agree the efficient, cost-minimising level of noise. The same effect
could be achieved if the courts were to award damages equal to the doctor's costs against
the confectioner. The confectioner's total costs would then be equal to the sum of both
parties' costs, and he would therefore choose to adopt the efficient level of
soundproofing.
2. What if the court were to award the entitlement to the confectioner? Again, if a
property rule is used to protect this, a bargain will be agreed (in the absence of obstacles
to bargaining) at which total costs were minimised. If a liability rule was used, this

should imply that the doctor would be asked to compensate the confectioner for the
amount spent on soundproofing. This is an unusual possibility - but not unknown (see
the US case Spur Industries vs Del Webb 108 Ariz 178 [1972]).
3. To what extent do English courts pay attention to the issues raised above in the
context of nuisance law? In fact, unlike other areas of the law, in nuisance cases the
courts consider injunctive relief to be the primary remedy (see Pride of Derby vs British
Celenese Ch 149,181 [1953]). Moreover, the decision as to whom to award the
entitlement only rarely takes into account the costs of complying with the injunction.
However, the case in which both these principles were questioned was that of Miller v
Jackson (3 All ER 338 [1977]). Lord Denning's judgement on this case began as follows:

It might be argued by an economist that Lord Denning came to the right decision for the
wrong reasons. Why? A similar point can be made with respect to the well known US
case of Boomer et al vs Atlantic Cement (26 NY 219 [1970]).