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attempts to police exclusionary zoning,33 but most have ignored the issue.
One solution to the problem of exclusionary zoning would be to relocate land use planning functions from local governments to regional or state governments. This would allow a wider range of interests to be represented in the planning process. Such a shift in the level of regulation, however, would come with a sacrifice in detailed knowledge about local conditions and preferences. Moreover, there is little prospect that local communities will voluntarily relinquish their “right to exclude” any time soon, any more than individual property owners willingly give up their right to exclude, which is why the problem of externalities is so intractable.
• Further Reading
R.H. Coase, The Problem of Social Cost, 3 J.L. & Econ. 1 (1960) (pioneering study of the role of transaction costs in situations with externalities and propounding what later came to be known as the Coase theorem).
Guido Calabresi & A. Douglas Melamed, Property Rules, Liability Rules, and Inalienability: One View of the Cathedral, 85 Harv. L. Rev. 1089 (1972) (seminal article introducing the distinction between property rules and liability rules).
Robert C. Ellickson, Alternatives to Zoning: Covenants, Nuisance Rules, and Fines as Land Use Controls, 40 U. Chi. L. Rev. 681 (1973) (offering a comparative analysis of different legal mechanisms for regulating neighborhood effects).
William A. Fischel, The Homevoter Hypothesis (2001) (arguing that the political power of local landowners is the key to understanding land use regulation).
33. See, e.g., BAC, Inc. v. Bd. of Supervisors, 633 A.2d 144 (Pa. 1993).
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James E. Krier & Stewart J. Schwab, Property Rules and Liability Rules: The Cathedral in Another Light, 70 N.Y.U. L. Rev. 440 (1995) (emphasizing the importance of the ex ante versus ex post perspectives in considering the choice between property rules and liability rules).
A. Mitchell Polinsky, An Introduction to Law and Economics ch. 1 (3d ed. 2003) (offering a clear introduction to the Coase theorem and the choice between property rules and liability rules).
• nine
Government Forbearance
the government has made an appearance at various points in this book, as an enforcer of property rights, a creator of different property forms, a recorder of property rights, and an arbiter of disputes between neighbors, among other functions. But the government can also pose a threat to property rights, either by seizing property or by changing the rules of the game in ways that are destabilizing to owners. The most general question here is how far the government should forbear from undermining the expectations of owners about what they can and cannot do with their property. Complete vindication of expectations is impossible. Change is inevitable, and as new problems emerge, adjustments in property rights are often the response. Consider, for example, how changing attitudes about racial discrimination resulted in laws that limit the right of owners to refuse to rent or sell their property to persons based on their race (see Chapter 4). But too much change in government policy toward property, including in the extreme case outright expropriation, can undermine the ability of owners to plan for the future and may discourage them from undertaking needed investments. Striking the right balance between accommodating change and forbearing from frustrating expectations has always been, and will continue to be, difficult.
In this chapter, we consider some of the important ways in which governments are constrained to forbear from upsetting the
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expectations of property owners, thereby enhancing the security of ownership and the value of the institution of property.1
• The General Form of the Problem
The difficulty in striking a balance between demands for change and protecting reliance interests is nicely illustrated by a famous Supreme Court case, Charles River Bridge v. Warren Bridge.2 In 1785, Massachusetts granted a charter to the Proprietors of the Charles River Bridge to build a private toll bridge across the Charles River between Boston and Charlestown. The charter, after one extension, was to last 70 years, or until 1855. As population and economic activity in the Boston area grew, the bridge became highly profitable. In 1828, the legislature was persuaded to charter a second bridge, the Warren Bridge, which would roughly parallel the Charles River Bridge. The new bridge was to collect tolls for a short time and then become a free bridge. Not surprisingly, once the Warren Bridge stopped collecting tolls, the value of the Charles River Bridge franchise was destroyed. The proprietors of the Charles River Bridge sued, claiming that their charter was impliedly exclusive, and that by chartering the second bridge to compete against the first, the legislature had impaired the obligation of contract, in violation of Article I, section 10 of the Constitution.3
1.For econometric studies suggesting the importance of secure property rights and government forbearance to economic performance, see, e.g., Daron Acemoglu et al., The Colonial Origins of Comparative Development: An Empirical Investigation, 91 Am. Econ. Rev. 1369 (2001); Simon Johnson et al., Property Rights and Finance, 92 Am. Econ. Rev. 1335 (2002); Paul G. Mahoney, The Common Law and Economic Growth: Hayek Might Be Right, 30 J. Legal Stud. 503 (2001).
2.36 U.S. (11 Pet.) 420 (1837).
3.Stating that no state shall pass any law “impairing the obligation of Contracts.” U.S. Const. art. I, § 10, cl. 1.
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In the Supreme Court, all the justices agreed that the original charter was a contract between the Commonwealth of Massachusetts and the proprietors of the Charles River Bridge, and hence was protected by the Constitution. But they disagreed sharply about whether the original charter should be interpreted as including an implied promise of exclusivity.
Chief Justice Taney, writing for the majority, adopted the rule that corporate charters should be strictly construed in favor of the government. Because the charter was silent on whether it precluded a competing bridge, the proprietors’ claim failed. Taney noted the great difficulty that courts would have in determining the scope of exclusive rights if such a provision were implied. How far up and down the river would the original bridge have the right to operate as a monopoly? He also stressed how an implied term of exclusivity could interfere with economic growth and technological change. Many ferry charters had been replaced by bridge charters, and many charters for turnpike roads had been superseded by charters for railroads. If charters for bridges and roads always include an implied term of exclusivity, then innumerable old charters would awake “from their sleep,” and their promoters could call upon the courts “to put down the improvements which have taken their place.”4 In other words, affording too much protection for the reliance interests of the original charter holders would stifle progress.
Justice Story wrote a long and impassioned dissent. He said the rule of strict construction applied only to government charters given by donation, not to charters supported by consideration. Charters given for a promise of some return benefit, such as the one for the Charles River Bridge, should be liberally construed in favor of the grant recipients to ensure that the charters achieve their intended purpose. He rhetorically asked whether the original proprietors would have built the bridge, at considerable expense and
4. 36 U.S. at 477.
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risk, if they had been told that the state reserved the right to build a free bridge immediately next door. The rule adopted by the majority would discourage investment in enterprises designed to promote the public interest. Such a rule, he said, did not preclude modification of charters if technological or social change rendered the original promise obsolete. But the proper way to repeal or modify a charter was by using the power of eminent domain and paying just compensation for the value of the rights taken.
Charles River Bridge raises enduring questions about how far the government should forbear from interfering with expectations of property owners. The general question here is how much risk property owners should be expected to assume based on changes in government policy. Chief Justice Taney did not believe that property owners assume all risks of change in public policy. He acknowledged that explicit takings are prohibited without compensation, and that government must keep its express promises. But all other risks from government action he would treat as no different from the risks associated with natural disasters or changes in consumer preferences. Implicit in this view is the assumption that the government can generally be trusted to do the right thing.5
Justice Story believed that the government should provide a more robust form of insurance against risks associated with the government’s own actions. At the very least, when the government has taken action specifically designed to induce parties to invest in some enterprise, the government has an obligation to forbear from undermining reasonable expectations associated with that investment. In effect, Justice Story would impose a duty of good faith on the government in dealing with persons who have acted in reliance on its promises. His view implied a more skeptical attitude about whether government can be trusted without court supervision.
5. See also Louis Kaplow, An Economic Analysis of Legal Transitions, 99 Harv. L. Rev. 511 (1986).
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What is at stake here? Justice Story is probably correct that requiring the government to forbear from frustrating reasonable expectations would induce higher levels of investment in new enterprises. The risk of making such investments would be reduced, and hence the expected return would be higher. Justice Taney may be correct that a general policy of forbearing from interfering with reasonable expectations would significantly tie the hands of the government. If the government always had to pay just compensation to those whose reasonable expectations were frustrated, politicians might hesitate before adopting otherwise desirable changes in policy, because of the additional cost of compensation.
The matter is complex, however, because it is not clear how government actors respond to forbearance requirements.6 With private actors, the requirement to forbear or pay internalizes the cost of interfering with others’ rights to the private actor, who can then weigh it against the benefit from the action in question. With governments, things are less clear. If governments must forbear or pay, the cost of compensation ultimately comes out of taxpayers’ pockets. Politicians seek to maximize their political support and, in particular, their chance of reelection, which may or may not correlate closely with taxpayer welfare. The incentives of government officials are especially likely to be skewed if the linkage between government action and the need for higher taxes is not very transparent.
Another way to view the problem is to ask whether or how far one generation should be allowed to tie the hands of the next. Government forbearance presents a more specific application of the problem of “dead hand control” that raises its head in many areas of the law of property. Just as we ask whether an owner should be allowed to dictate who should get the owner’s property
6.See, e.g., Daniel A. Farber, Public Choice and Just Compensation, 9 Const. Comment. 279 (1992); Daryl J. Levinson, Making Governments Pay: Markets, Politics, and the Allocation of Constitutional Costs, 67 U. Chi. L. Rev. 345 (2000).
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after the owner’s death, or whether an owner should be allowed to enter into a servitude that limits the use of the property after it has been sold to someone else, we also must ask whether one generation of lawmakers should be allowed to make promises to forbear from interfering with property that are binding on succeeding generations of lawmakers. One perspective is that it is inherent in the concept of democratic government that each generation should be able to decide what laws it will be governed by.7 Values and social problems change, and it makes no sense that people living today should remain slaves to the vision of those long dead. A rival perspective is that the ability to entrench certain expectations is vital to achieving the goals of democratic government; to deny this tool to lawmakers would impair their ability to govern.8 Certainly, we hold governments to their contracts, and one way of viewing the problem of government forbearance is to ask whether an additional precommitment device analogous to a government contract is useful or possible.9
In practice, neither of the extreme positions—never permit entrenchment or always permit entrenchment—prevails. Our legal system has gradually become more committed to the principle of majority rule, for example, by expanding the franchise to include previously excluded groups such as racial minorities and women, providing for direct election of the Senate, and choosing Presidential electors by statewide elections. Yet many features of entrenchment remain, such as requiring the approval of both houses and the President before a law is passed—which is in practical effect a supermajority requirement—and subjecting legislation to review by life-tenured judges to assure compliance with the Constitution.
7.See, e.g., David Dana & Susan P. Koniak, Bargaining in the Shadow of Democracy, 148 U. Pa. L. Rev. 473 (1999).
8. See, e.g., Eric A. Posner & Adrian Vermeule, Legislative Entrenchment: A Reappraisal, 111 Yale L.J. 1665 (2002).
9.Kyle D. Logue, Tax Transitions, Opportunistic Retroactivity, and the Benefits of Government Precommitment, 94 Mich. L. Rev. 1129 (1996).