Question

Using (explicitly) the Calabresi-Melamed theory of transaction costs, justify the following rights by a property rule or a liability rule: (12 pts)

a) land owner's right to exclude a neighbor's gas line from his property.

b) new car owner's rights to have his car's defective engine replaced by the seller

c) homeowner's right to be free from air pollution by a nearby factory

d) spouse's right to half the house upon divorce

Answer 1

Judicial process are always better than causing harm for someone or damaging something, when there is a bargaining between the people and assuming that these neighbors are capable to bargain. When the two people are not able to bargain , for example in case of divorce , such cases court will order the compensatory damage.When there is low transaction cost, the more efficient method is to adopt defendant's interference with the one who initiated the lawsuit. When there is a more transaction cost then more efficient way is to provide compensatory money for damage, the transaction costs may be bargaining cost , search cost, enforcement cost etc.

a) land owner's right to exclude a neighbor's gas line from his property.

If the gas line is already built in the property, then the enforcement cost is too high, the better option is to award the compensatory money for damage.

b) new car owner's rights to have his car's defective engine replaced by the seller.

since the cars engine is defective now car is not usable. For the seller it is very cheap to replace the engine transmission, The transaction cost is less so the effective method will be injunction.

c) homeowner's right to be free from air pollution by a nearby factory

In this case enforcement cost is too high for a company to continue functioning and at the same time transaction cost will be more so the compensatory damage will be more benefit for the house owner.

d) spouse's right to half the house upon divorce

It depends on the behavior and relationship between the divorced couple, If bargaining is more cost then compensatory damage will be best option