COMING TO THE NUISANCE
The New Palgrave Dictionary of Economics and the Law, Macmillan, 1998
If my neighbour makes a tan-yard, so as to annoy
and render less salubrious the air of my house or gardens, the law will
furnish me with a remedy; but if he is first in possession of the air,
and I fix my habitation near him, the nuisance is of my own seeking, and
must continue. (Blackstone 1766: 402-403)
On the other hand, intuition suggests that "being first is nothing" is not a satisfactory rule, either. The truth lies somewhere in between and, as will be shown below, it is economic logic that clarifies the contingencies when being first counts and the doctrine of coming to the nuisance should be invoked.
The analysis is in two separate steps. The first step is to determine the optimal outcome and the second step is to design rules that lead to that outcome.
We start with the first step. For convenience we will characterize the problem as a conflict between a nuisance (say a cattle feedlot or smoking factory) and homeowners. The basic insight is to view the problem as an issue of resource allocation over time and to ask which sequence is optimal. That is, the determination of who should have the right depends on the costs and benefits of the entire income stream, not just on those costs and benefits after the second party came.
We consider the following six scenarios as candidates for efficient allocation over time. (1) The nuisance comes first, the residences come second, and the nuisance leaves; (2) the nuisance comes first, the residences come second, and both remain with each mitigating the damage optimally given that the other is there; (3) the nuisance comes first and the residences never come to the area; (4) the residences come first and the nuisance never comes; (5) the residences come first, the nuisance comes second with each mitigating the damage optimally given that the other is there; and (6) the residences come first, the nuisance comes second, and the residences leave.
Note that we do not consider all possible scenarios. For example, we do not consider the following sequence, the nuisance comes second and then immediately leaves, since this is clearly inefficient.
Having determined the optimal sequence for a particular set of circumstances, the next step is to determine the liability rule or property right that promotes the efficient sequence. Strategic behavior by the participants trying to be first and thereby gaining extra consideration is avoided by granting extra consideration to the side which should have been first instead of to the side who was actually first. The extra consideration is the inclusion of moving costs by the side who should have been first into the cost-benefit calculations. As can be seen from the six possible efficient scenarios, moving costs of the other party are not part of the cost-benefit calculations, because no efficient sequence would have the second party move in and then move out again.
But how do we determine who should have been first?
Some areas, even before either the nuisance or the houses are present,
are clearly inappropriate for one or the other use; in such cases, the
right goes to the appropriate use regardless of who was there first. Other
areas have no distinguishing characteristics and it is the first use that
creates the character of the area. In such cases, it is the first that
gains the right. Finally, the optimal character of a place may change over
time. In such cases, the moving costs of the party which was there first
and should have been there first are considered in the calculations. The
details will become clearer as we consider these possibilities in turn.
1. Character of the area predetermined
Parties should anticipate the future, especially when the future is easy to see. In Gau v. Ley (1916: 239) the nuisance came to the residents. The court held that the plaintiff was not entitled to relief from the noise arising from the operation of the defendant's plant, which was built after the plaintiff constructed his home. Two railroads were operating on tracks nearby long before the plaintiff and others located their homes in the vicinity. "[I]t was not reasonable to presume that plaintiff in the presence of all these facts, could not have foreseen that in the large and growing city of Cincinnati, the march of business would sooner or later follow the line of these railroads and convert the adjacent strip of land into business uses.'' Even though the residential area was there first, the residents should have foreseen that the location was ideally suited for the nuisance." Consequently, the residents should not have been there first and their moving costs should not be included in weighing the costs and benefits of alternative land use (while it is appropriate to include the costs of moving the businesses in the cost-benefit analysis). Of course, even if the cost of moving the homes were included, the balance would have been against the homeowners. In this case, it is more efficient that the homes were built elsewhere in the first place than having the appropriately located business mitigate the damage to the inappropriately located houses. Therefore the burden of mitigation was left entirely to the homeowners.
The court's judgment in Gau v. Ley is neither unusual nor controversial. The logic is mirrored in Bove v. Donner-Hanna (1932: 233) where the court stated: "It is true that the appellant was a resident of this locality for several years before defendant came on the scene ... and that when the plaintiff built her house, the land on which these coke ovens now stand was a hickory grove. This region was never fitted for a residential district (low land, river, seven railroads)."
Notice, that in comparing the costs and benefits of the polluter versus the pollutee it is inappropriate to consider the costs of the pollutee rebuilding since the pollutee should not have been there in the first place. A judicial outcome granting the property rights to the polluter serves as a precedent. Potential residents facing a similar set of costs and benefits in the future will choose to be in an appropriate location in the first place. We can also ask which party would end up with the right if transaction costs were zero. The trick here is to know when the question should be asked. It should be asked before the residents have built their homes (more generally, before either side has made an investment).
The logic can be applied equally well to a nuisance
that inappropriately builds in an area most suitable for residential housing.
2. Character of the place determined by its first use.
Swamps and railroad tracks are appropriate locations for heavy industry and inappropriate for housing; hill tops in urban areas are appropriate for housing and inappropriate for heavy industry. But sometimes large expanses of land are featureless, and the first use of the land establishes its character.
This was the case in Mahlstadt v. City of Indianola
(1959: 194). Mahlstadt, a housing developer, had enjoined the operation
of the city dump. The appellate court overruled the lower court and ruled
in favor of the defendant. There was nothing peculiar to the location making
it particularly appropriate or inappropriate for housing or for a dump.
Therefore the first activity determined the character of the location.
The court held that the dump's "prior operation at that place should be
given substantial weight in determining the character of the locality and
the reasonableness or unreasonableness of operating it there." City dumps
need to be located near cities -- the cost of transporting garbage is very
high. The long-run stream of costs and benefits made it appropriate for
the dump to be located there initially and to maintain operation as the
area became more residential. However, if the residents were there first,
it would have been inefficient to locate a dump next to them and the courts
would have ruled in favor of the plaintiffs. In a nutshell, when the character
of the place is determined by the first user, the doctrine of coming to
the nuisance and its converse are invoked.
Suppose that developers could collect damages or
force dumps to move. Would developers or homeowners be better off in the
long-run? Surprisingly, the answer is no. Consider the case where homeowners
receive $10,000 per house for being next to a pre-existing city dump. Then
they would be willing to pay $10,000 more for their homes; the same holds
for the developer. So in this situation, a system of compensation does
not make homeowners or developers better off. The only person that is affected
by the rule is the original owner of the undeveloped property.
3. Character of the place determined by the second use
There are many situations where the first party should have been there first, yet the second party creates the dominating character of the place. Cities often expand into rural areas. Rural areas are appropriate for animal husbandry, but cities and cattle feedlots do not mix very well. Of the three possibilities, cities leap frog around cattle feedlots, urban housing and businesses border cattle feedlots, and feedlots re-locate, the last is clearly the most efficient. And the law unambiguously reflects this economic logic.
In such situations, the law is unlikely to compensate for the costs of relocation even though the party was there first and should have been there first. There are several reasons for such a policy. First, alternative land uses are likely to be more profitable, so that the feedlot owner would benefit from relocating. Second, overtime, the owner of the property could have let the property depreciate rather than undertake repairs and upgrades. Third, a system of compensation would be costly since in the absence of compensation the outcome (shutting down the feedlot) is the same and a court case is rarely needed. And fourth, a system of compensating feedlots for moving would encourage owners to hold on to their businesses in order to collect damages (the problems that arise in the absence of compensation, too few feedlots in period one or too much expansion of the urban area in period two are less likely except at the very margin).
The taking away of a property right without compensation might appear to violate some basic notions of the inviolability of property. But this paradox is resolved if we realize that all property rights are contingent in space and time. For example, I have the right to dig holes on my land, but not to throw dirt at people passing by. Similarly, people have the right to have a cattle feedlots on their property but not if the area is urban. That is, when the city grows around the cattle feedlot, and the feedlot is forced to move without compensation, the owner of the feedlot is not losing his property rights since the owner never had the right to have a feedlot within an urban area.
Even though, the cost of relocation of feedlots is factored in, it is easy to see that the efficient outcome is for the feedlots to move as the city expands. For other kinds of activity, where there are more substantial moving costs and smaller negative externalities, the stream of benefits may make it economically efficient to give rights to an activity when it should have been first even if the activity would have been outlawed if it had not been first. Thus there is "nonconforming land use" for those activities that should have been there first and should remain while initiation of similar activities are prevented because the cost-benefit stream dictates that they should be undertaken elsewhere.
The role of sequence in allowing for nonconforming land use is very evident when there is severe damage to the nonconforming structure due to fire, earthquake, etc. Then the prior use is no longer prior, and cannot be reinstated. "With the improvement substantially destroyed, the land on which it is located will presumably have approximately as much value for use in conformity with the ordinance as otherwise and the public interest in conformity with the ordinance will be served if he is not permitted to continue the nonconforming land use." O'Mara v. Council of the City of Newark (1965: 838).
Sometimes the nonconforming land use is allowed a certain amortization period. Consistent with our economic analysis, such a scheme must be reasonable in character and commensurate with the investment involved. The relevant factors include remaining useful life, the harm to the public if the structure remains standing beyond the prescribed amortization period and cost of moving. See United Business Com. v. City of San Diego (1979: 189) and City of Los Angeles v. Gage (1954: 127).
Note that the analysis makes no difference whether
it is a government regulation or a private suit in a court of law.
4. The character of the place is determined by the second use, but the second use should not have been there
We now come to the most complicated situation, which is also the most enlightening. It is possible that the second use creates the character of the area, yet the second use should not have been there in the first place.
In Spur Industries v. Del E. Webb Development Co. (1972: 700) the defendant commenced cattle-feeding operations in an agricultural area well outside the boundaries of any city and subsequently a real estate developer purchased land nearby and began to develop an extensive retirement community. The court held that the developer was entitled to enjoin the cattle-feeding operation as a nuisance but was required to indemnify the cattle feeder for the reasonable cost of moving or shutting down. The novel solution in this case reflects the fact that the cattle-feeding operator could not have reasonably foreseen the development of a retirement community nearby and therefore should be compensated for all costs associated with moving his business.
If the court had not questioned whether the developer
should have been there in the first place, the court would have ruled for
the feedlot to move without compensation as it was cheaper to move the
feedlot than to move the residents. But without compensation an inefficient
precedent would have been established. Developers would choose areas inappropriate
from a social cost-benefit analysis because the developers would not incur
the costs to the adjacent nuisance of moving away. In future situations,
even if it were cheaper for the builder to develop elsewhere than to make
the feedlot move, the developer might move near the feedlot (if he did
not have to compensate the feedlot owner). Thus courts are encouraging
individuals to make efficient decisions by anticipating the future and
considering the whole stream of costs and benefits and not just
those costs and benefits which arise after both parties are located in
Sequence is important in other areas of law, as well.
For example, the doctrine of last clear chance in accident law puts extra
burden on the second party to mitigate damages even if the first party
acted inefficiently; the analysis is parallel to Spur Industries v. Del
Webb (see Wittman, 1981). In other areas, being first confers special advantages.
For example, at a four-way stop, the car that has come to the stop first
has the right of way; this is roughly parallel to Mahlstadt v. Indianola
(see Wittman, 1982).
Barth v. Christian Psychopathic Hospital Ass'n, 163 N.W. 62 (1917)
Bove v. Donner-Hanna Coke Corp., 258 N.Y.S. 229 (1932)
City of Los Angeles v. Gage, 127 Cal. App. 2d 442 (1954)
Gau v. Lee, 38 Ohio C.C. 235 (1916)
Mahlstadt v. City of Indianola, 100 N.W. 2d 189 (1959)
O'Mara v. Council of the City of Newark, 238 CA2d 836 (1965)
Spur Industries v. Del E. Webb Development Co., 494 P. 2d 700 (1972)
United Business Com. v. City of San Diego, 91 CA3d
Blackstone, William, 1766. Commentaries on the Laws of England vol. 2 (1st ed.) University of Chicago facsimile of Vol. 2 (1979, A. W. B. Simpson, ed.) Chicago.
Wittman, D. A. 1981. Optimal pricing of sequential inputs: last clear chance, mitigation of damages and related doctrines in the law, Journal of Legal Studies 10: 65-91.
Wittman, D. A. 1982. Efficient rules in highway safety
and sports activity, American Economic Review 72: 78-90.
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