Friday, 25 July 2003

Stormy weather

It’s been three days now since “Summer Storm 2003”, as the local media have christened it, and like 175,000 other Memphians, I’m still without power. I’m guessing I’ll be among the last to get power back, since my power line is lying in the middle of my back yard, having been downed by a neighbor's falling tree.

I discovered an interesting fact about homeowner’s insurance: if your neighbor’s tree falls and does damage to your property, your neighbor (or his insurance company) is only liable if the tree was damaged or diseased. Falling tree damage is handled by a negligence rule, not a strict liability rule.

I’m wondering whether this is the correct rule, from the perspective of economic efficiency. Generally, a rule that places liability with the party most likely to prevent an economic harm is the more efficient one. The negligence rule for tree damage shifts some of the economic risk from the tree owner, who could easily trim his trees, to potential neighbor, who can at best choose not to buy property next to people with towering trees.

The negligence rule will be more efficicient, economically, only if there are sufficient positive externalities to having towering trees in residential neighborhoods. There are some externalities, of course. I like living in neighborhood with tall trees, and I get to enjoy this even though there aren’t any tall trees on my property. If enough other people enjoy this as well, this will be reflected in the market value of the property. But are these externalities sufficient to overcome the problem of property owners ignoring tree maintenance, and letting trees grow to the point where they could easily damage the property of others?