Dirty Laundry and Property Rights

U.S. Residents Fight for the Right to Hang Laundry

This seemingly silly article has very important implications. Those of us who are subject to Home Owners Association (HOA) rules are often frustrated by the silly tenets stating what we can and cannot do. For instance, some of the tenets I have to follow are that the side of the drapes that one sees from outside must be white. This forces me to buy two sets of drapes, a white one for against the window, and then one of my choice covering it that those of us inside the house can enjoy. Another silly tenet is that I have to get permission and submit a request – with drawings (I am not kidding) – for installation of a satellite dish.

These tenets, while frustrating, are the part of the rules I agreed to by purchasing the house – that is, I had a choice on whether or not I wanted to abide by them. These tenets are agreements within the community in which I choose to live. So what happens when someone outside the community tries to tell me what I can or cannot do with my property?

This is where it gets interesting, but thankfully, it doesn’t have to be complicated. The article mentioned and cited above raises the issue of who has what right. Does the property owner have the right to hang her laundry outside? Does the neighbor across the street have the right to a laundry-free view? The answer might seem obvious, but in today’s world where property rights are eroding right and left, the answer is not always so clear.

Because of disastrous Supreme Court rulings like Hawaii-Housing v. Midkiff and Kelo v. New London, what once was a fundamental property right can now be called into question. Where before the neighbor would be laughed at and ridiculed for complaining about someone hanging laundry on their own property, now, articles like this one must be written to clarify and stress the importance of property rights.

Because nobody seems to have the answer (due in large part to the rules always changing, ala the cases mentioned above), we turn to lawyers and legislators to come up with laws about what we can and cannot do, about how we can and cannot use our own property. This is the wrong tactic, and luckily (as always) economics gives us clear direction.

Ronald Coase articulated the brilliantly simple idea of what is now known as the Coase Theorem. What it basically says is that we don’t need legions of lawyers, legislators and judges to decide who can do what with their property. All we need to do is decide which person has the property right.

Does the property owner have the right to hang her laundry or does the neighbor have the right to an unobstructed view? This is significant for an important reason: it doesn’t matter who is assigned the property right. As long as property rights in general are enforced, an efficient allocation will result regardless who is actually assigned the property right.

For example, let’s assume that a court rules that the neighbor has the right to an unobstructed view. This doesn’t mean that the property owner can no longer hang her laundry; it simply means that the table is now set to negotiate. Whoever values their behavior more will be allowed to continue with that behavior.

Let’s put this idea in context first and then we’ll illustrate with an example. As the situation is now, if a court decided that the neighbor had a right to an unobstructed view, it would be illegal for the property owner to hang her laundry. A law would have to be written specifically banning laundry hanging. If she continued to hang her laundry anyway, the police would have to come, issue her a ticket and a court date (or a fine). If she did go to court, the judge would have to decide if she really did or did not violate the law and if so, to find an appropriate punishment. In any case, whatever happens, even if she’s found innocent, there is clearly a waste of resources. Everybody’s time could be much better served if they didn’t have to deal with such a trivial issue. That is how the situation is handled as things currently stand.

Now, if we apply the Coase Theorem, things instantly become much simpler. Let’s continue with the assumption that it’s the neighbor who was assigned the right to an unobstructed view. The property owner that wants to hang her laundry, if she truly values that activity, can negotiate with her neighbor. She could, for instance, offer to pay her neighbor $20 to help offset the inconvenience of the compromised view.

If the neighbor agrees to that, then obviously the view was worth less than $20 to her, while the ability to hang laundry was worth more than $20 to the property owner. Everybody wins and all at lowest cost. If the neighbor does not agree and instead asks for $50, the property owner can decide if hanging her laundry outside is worth $50. If it’s not, then the neighbor valued her right to a view more than the property owner valued her right to hang clothes, so again everybody wins at lowest cost.

As the situation stands now, if the court said it was illegal to hang your clothes outside, then regardless of how much one did or did not value an activity, the situation would never change. For example, let’s say the neighbor valued her view at $10. That is, if the property owner would offer her $10, the neighbor would say it’s okay to hang the laundry. But now, even if the property owner valued hanging laundry at $1000, it’s still illegal. No matter how much one might value an action, and no matter that both neighbors might agree, it’s still illegal.

This is not a lowest cost solution because not only do you have the explicit costs that are required to enforce such a law, you have the implicit costs of value. There is an activity that has potentially $1000 of value that is not allowed to continue. If the neighbors were allowed to negotiate, the property owner could pay the neighbor $10 for something she values at $1000, thus giving society a savings of $990. In other words, there is now $990 worth of social welfare that we otherwise wouldn’t have had, all at a cost of $10.

With the law approach, the social benefit is only $10 (that of the neighbor), while the cost is at least $1000 plus the extra cost of administering and enforcing the law.

The beauty of the Coase Theorem is that we will get the same result even if the right is assigned to the other party, the property owner. Let’s say that the property owner has the right to hang her laundry. Her neighbor can either offer her money to not hang her laundry, or she can live the obstructed view. Whichever costs her the least, in her mind, is the action she will choose.

If she values her view at only $10, she might offer that $10 to the property owner. If the owner says no, the neighbor is okay with that because she doesn’t value her view that much. If however, the neighbor REALLY values the view, say at $1000, that might be enough to convince the property owner to not hang her laundry.

In the article, the property owner hangs her laundry outside because it saves her $80 a month in energy bills. So long as she gets more than $80 to not hang her laundry, she will be happy to use the dryer. Either way, whoever values their action the most is the one that will be able to continue.

Since this will all come about as an agreement between the parties (a contract), by default both of the will be better off. A contract would never be entered into if both parties weren’t better off. Thus, by simply assigning property rights, we can save everybody time and resources, can achieve our goals at lowest cost, and can ensure that everybody is better off. With the law approach, it’s a lose-lose situation. While it may arguably achieve its goal, it is not lowest cost and at least one person is definitely worse off.

In economics, we call the Coase Theorem a “Pareto Improvement”. That is, it is possible to allocate resources in such a way that people are made better off and nobody is made worse off. We have achieved “Pareto Optimality” when it’s impossible to change the allocation of resources in such a way that we make one person better off without at the same time making one person worse off.

The Coase Theorem, assuming transactions costs are low, can be applied to many areas of our lives, and can be critical for helping us evaluate public policy like cap-and-trade.

For many many many many reasons, property rights are critical to liberty, economics and just about everything that’s important in our lives. Property rights must be vigorously defended and held in a sacred regard. Property rights provide the underpinning of our entire society, affecting everything – even our dirty laundry.