Can't See the Tacking for the Trees? Try a Coasian Solution

This note provides a modern story for principles instructors to use as a supplement to textbook accounts of problems associated with externalities and the applicability of the Coase theorem. Our story begins in July of 1988, when Larry Ellison paid $3.9 million for a home in the Pacific Heights neighborhood of San Francisco – a property that provided Ellison with a prized view of San Francisco Bay below. However, later, in 2004, a $6.9 million home below Ellison’s was purchased by Bernard and Jane von Bothmer. After taking ownership of the property below Ellison, the von Bothmers allowed three redwood trees and an acacia to grow by several feet. The redwood and acacia growth came at the expense of Ellison’s view: due to the taller trees, Ellison could no longer see San Francisco Bay from the third-story living room of his four-story home on the Bay. The story of Larry Ellison’s battle for a clear view of San Francisco Bay is a classic example of a property dispute that has the potential for settlement so long as rights are established. All of the key features for a Coasian bargain to work itself out are present: the ownership rights are clearly defined, transaction costs and communication costs are fairly low, and there are well established markets in tree services and land. The final outcome involved where resources—particularly Ellison’s uninhibited view of San Francisco Bay—flowed to the one valuing it most. This story gives scholars an opportunity to talk about the “Invariance Hypothesis” and the role that endowments and wealth play when Coasian bargains are made.