учебный год 2023 / (Encyclopedia of Law and Economics 5) Boudewijn Bouckaert-Property Law and Economics -Edward Elgar Publishing (2010)

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involved the introduction of the concept of ‘reasonableness’ that resulted in the abolition of the absolute rights enjoyed by property owners and the adoption of the ‘reasonable use’ criterion. The ‘reasonableness test’ was employed to determine whether a specific use of land constituted a nuisance in the particular context (Lewin, 1986, p. 780). It considered the nature of the activity that brought about the nuisance suit, the character of the neighbourhood, the frequency of the activity, the ‘hypersensitivity’ of the plaintiff, and the defendant’s motive (Buckley, 1996). Thus the ‘reasonableness test’ limited the scope of the pre-existing nuisance doctrine since courts could now find that certain interferences with the use and enjoyment of land were not actionable. Yet, courts still retained an absolutist attitude in their decisions regarding remedies. If a nuisance was proven, an injunction was granted routinely.

Subsequently, however, this imbalance was gradually redressed by American courts, by incorporating the ‘utility’ of the defendant and society within the reasonableness test. In the first Restatement of Torts (1939) the American Law Institute (ALI) adopted the ‘balancing of the equities or utilities’ test.

Under the ‘balancing of the equities’ test a nuisance would be established ‘only if its harmful consequences outweighed its benefits to society’ (Lewin, 1986, p. 780). However, the test was soon found to be defective in that it rendered any activity with sufficient social value absolutely immune from liability for interference with the use and enjoyment of nearby land (Lewin, 1986, p. 781).

A less drastic judicial solution to the problem of the disproportionate impact of injunctive relief was to ignore the utility of the activity in determining liability and consider it only in determining the appropriate remedy after liability was established (Lewin, 1986, p. 781; Ellickson, 1973). Hence, the courts would first apply the reasonableness test to establish the nuisance and then apply the ‘comparative hardship’ or ‘balancing of the conveniences test’ to determine the nature of the relief. The court would then grant an injunction to the plaintiff only if the harm she experienced from the nuisance outweighed the social cost of abatement. This less drastic solution was also introduced in the first Restatement of Torts (1939). However, the co-existence of both the balancing of the equities test and the balancing of the conveniences test was found to be contradictory and confusing, and consequently judicial practice has been confined primarily to the use of injunctive relief (Lewin, 1986, p. 782).

Nevertheless, the ALI’s approach to the law of nuisance as expressed in the Restatement (Second) of Torts (1969) was not radically different than that in the first Restatement (Ellickson, 1973; Lewin, 1986; Polinsky, 1980).

Nuisance 163

3.The law and economics approach to nuisance law

The new ‘law and economics’ paradigm as emerged in the 1960s recognised that traditional nuisance law faced several doctrinal and practical shortcomings. It had been characterised as ‘unsystematic’, ‘neglected’ and in a state of dismay and confusion (Coase, 1960; Ellickson, 1973; Newark, 1949; Epstein, 1979; Brenner, 1974). Prosser (1971) comments that ‘[t]here is perhaps no more impenetrable jungle in the entire law than that which surrounds the word “nuisance”’ (p. 516). This new approach to nuisance law can be viewed as an attempt to reformulate and systematise the traditional approach to nuisance. It is also the field in which many of the first attempts to marry law with economics occurred.

A.General

The ‘law and economics’ paradigm analyses the nuisance dispute as a case of informal joint activity arising out of conflicting land uses (Coase, 1960; Posner, 1972; Calabresi and Melamed, 1972; Michelman, 1971; Polinsky, 1980; Kaplow and Shavell, 1996). Nuisance may also be viewed as a form of externality that interferes with the enjoyment or use of another’s property. These externalities are a form of inefficiency which in turn can be corrected through the internalisation of these external effects. Hence, nuisance laws are the framework within which this cost internalisation occurs (Cooter and Ulen, 1988, p. 170). Equivalently, nuisance laws may be seen as the framework within which joint activities by independent agents are co-ordinated.

B.Coase (1960)

The literature acknowledges the beginning of the modern approach to nuisance law as being Ronald Coase’s celebrated article ‘The Problem of Social Cost.’ The fundamental question raised by Coase was whether allocative efficiency was invariant to the initial assignment of property rights. The answer Coase gave to this problem has been referred to as the (simple) Coase Theorem (Polinsky, 1983, p. 12): In the absence of transaction costs, the efficient outcome will inhere irrespective of the assignment of rights.

Coase’s article has been viewed as a reaction to the Pigouvean approach. This approach involved the identification of the agents imposing costs on others and then requiring these agents to compensate the injured parties in the amount of the full cost of their actions (i.e. to internalise the external costs). Coase emphasised the reciprocal nature of this problem – in that both of the parties to a nuisance cause the nuisance. In Coase’s framework a nuisance dispute arises as the result of the interaction of two or more conflicting property uses, not as a cost inflicted by one onto another.

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Coase’s pioneering article dealt with a more general or fundamental issue in economics – the effect of the property right distribution on allocative efficiency. It was pure happenstance that many of the examples used to illustrate his innovative ideas involved nuisance and trespass disputes. In analysing these disputes under the assumption of zero transaction costs, Coase showed that the assignment of entitlements was irrelevant to the attainment of allocative efficiency. Under the zero transaction costs assumption, the party that incurs the costs from conflicting uses may acquire the entitlement to these uses from the other party at a price that is less than the costs she would suffer, if those uses of the resources are inefficient. Hence, where co-operation is not costly, the efficient allocation of resources will be achieved through private co-operation between the parties acting to maximise the value of their joint activities.

Obviously, much of the impact of this framework depends upon the usefulness of the assumption of zero transaction costs. The term ‘transaction costs’ includes the costs of identifying and assembling the parties involved in the negotiations, the costs of the actual negotiations and the costs of enforcing the outcome of the negotiations. Coase acknowledged that transaction costs are in reality positive. He used the examples involving nuisance disputes not to describe actual behaviour but to illustrate a point. Coase noted that in the presence of positive transaction costs the initial distribution of property rights does affect allocative efficiency, and that the courts may be in a position to assign property rights in such a way as to promote efficient outcomes. ‘In a world in which there are costs of rearranging the rights established by the legal system, the courts, in cases relating to nuisance, are in effect, making a decision on the economic problem and determining how resources are to be employed’. And the ‘economic problem’ in cases of nuisances ‘is how to maximise the value of production’ (Coase, 1960, p. 15).

C.Calabresi and Melamed’s Framework

Following Coase’s pioneering work, Calabresi and Melamed (1972) offered the next notable contribution in the evolution of the modern approach to nuisance law. They furthered the Coasean ideas to construct a unified framework for the analysis of entitlements in property and torts. Their breakthrough was that they stressed that property and tort laws have a common objective: the protection of entitlements. However, the two systems differ in the rules used to enforce the entitlements: property rules for property entitlements and liability rules (negligence or strict liability) for torts. The novelty of their approach lies in that they recognised that these rules can be applied even in the cases where the entitlement is given to the defendant.