Positive and Negative Externalities in Real Estate Development

Positive and Negative Externalities in Real Estate Development

By, Richard A. Epstein. Full text here.

In this Article, I offer a unified framework for dealing with positive and negative externalities in real estate transactions. The initial move starts in an imagined world in which a single person owns all real estate, which is then sold off to various buyers and sellers. That person internalizes through the price mechanism all of the gains and losses that are obtained from initial buyers and thus chooses that pattern of entitlements that yields the highest net advantage. Just this view is found on a limited basis when single owners of extended plots of land develop condominiums and gated communities. The rights so created are of two sorts: (1) those that are largely invariant across users—which tend to track the common law of nuisance; and (2) those which tend to be sensitive to differences in wealth and preferences—which tend to vary widely.

That difference between these two types of covenants provides the clue for understanding how the general law should deal with rights among neighbors who do not derive their title from a common owner. The rule is to keep as part of the positive law of tort those nuisance-like rules that are uniformly adopted consensually. Under this view, therefore, it is unwise to allow actions for restitution for the benefits that one landowner is said to provide neighbors. Instead, the preferred approach for these variable benefits is to rely on other methods, like covenants and limited zoning, to control those interactions that are context-specific. The advantage of private covenants is that they avoid the factional struggles that plague much of modern zoning and other land-use constraints, while internalizing a larger set of both positive and negative externalities. To prevent these abuses with state-imposed zoning laws or other land-use requirements, it is critical to incorporate a strong compensation requirement under takings law to provide all landowners similar kinds of protections offered by private associations.