Law and economic case study

Background story:
The Fontainebleau, a luxury hotel in Miami Beach, was built in 1954. Its neighbor to the north, the Eden Roc, also a luxury hotel, was built in 1955. Both face the Atlantic Ocean. In 1958, the owner of the Fontainebleau began construction of a 14-story addition to his hotel, twenty feet from its north property line, 130 feet from the mean high water mark of the Atlantic Ocean, and 76 feet from the ocean bulkhead line. The 14-story tower would extend 160 feet above grade in height and is 416 feet long from east to west. During the winter months, from around two o’clock in the afternoon for the remainder of the day, the shadow of the addition would extend over the cabana, swimming pool, and sunbathing areas of the Eden Roc, which are located in the southern portion of its property.
The Eden Roc sued, seeking to enjoin the Fontainebleau from proceeding with the construction of the addition to the Fontainebleau (it appears to have been roughly eight stories high at the time suit was filed), alleging that the construction would interfere with the light and air on the beach in front of the Eden Roc and cast a shadow of such size as to render the beach wholly unfitted for the use and enjoyment of its guests, to the irreparable injury of the plaintiff; further, that the construction of such addition on the north side of defendants’ property, rather than the south side, was actuated by malice and ill will on the part of the defendants’ president toward the plaintiff’s president;
The Fontainebleau’s construction has been approved by the local Miami Beach authorities as to building permits, zoning, height restrictions, set-back from the ocean, etc. Also assume that there are no Florida statutes or judicial decisions on point. The question at hand is whether Eden Roc has a right to the unencumbered light.
Question 1:
Let’s put some numbers to the various costs and benefits of the different actions of the Fontainebleau and Eden Roc Hotels.
Prior to the expansion, the Fountainbleau profits were $60m and the Eden were $25m.
If the Fontainebleau completes the highrise expansion, their profits will increase by A.
If the expansion is built and Eden makes no changes, Eden’s profit will fall by B from the shadow cast on its pool area.
Eden can convert the shaded region of their property to a nightclub (which is unaffected by any shadow). In that case, Eden will earn a total profit of C.
Alternatively, the Fountainblue can demolish the expansion, and instead put in two story condominiums which will not interfere with Eden sunlight, but then will only increase profits by D.
What would the efficient outcome? Specifically, determine whether it is efficient for the Fontainebleau to complete the expansion or convert to low-rise condos, and whether Eden should keep the pool area or convert it to a nightclub.
NOTE: A,B,C, and D are in millions.
Question 2: Continue
Suppose that Eden lose the lawsuit, and Fountainbleau is permitted to complete construction as is choose.
A) What will each party choose to do in the absence of bargaining?
B) What will be the threat value?
C) What is the cooperative surplus from bargaining? Enter zero if there is no gain
D) With equal bargaining power what price will they agree on? Specifically, which party will pay the other and what will they agree to each do? If there is no bargain possible, simply state that.
E) What will be the final payoffs after bargaining is complete?
Question 3:
Suppose that Eden is granted the injunction, halting the construction of the high rise expansion.
A) What will each party choose to do in the absence of bargaining?
B) What will be the threat value?
C) What is the cooperative surplus from bargaining? Enter zero if there is no gain
D) With equal bargaining power what price will they agree on? Specifically, which party will pay the other and what will they agree to each do? If there is no bargain possible, simply state that.
E) What will be the final payoffs after bargaining is complete?
Question 4:
Suppose that Eden loses the lawsuit, and Fountainebleau is permitted to complete construction as it choose.
A) What will each party choose to do in the absence of bargaining?
B) What will be the threat value?
C) What is the cooperative surplus from bargaining? Enter zero if there is no gain
D) With equal bargaining power what price will they agree on? Specifically, which party will pay the other and what will they agree to each do? If there is no bargain possible, simply state that.
E) What will be the final payoffs after bargaining is complete?
Question 5:
Suppose that the court decides not to issue an injunction, but instead has Fontainebleau pay damages to Eden for any damages resulting from lack of sunlight to their swinmming area, Note that if Eden converts to a nightclub, there will no damage to pay for because the nightclub is not affected.
A) What will each party choose to do in the absence of bargaining?
B) What will be the threat value?
C) What is the cooperative surplus from bargaining? Enter zero if there is no gain
D) With equal bargaining power what price will they agree on? Specifically, which party will pay the other and what will they agree to each do? If there is no bargain possible, simply state that.
E) What will be the final payoffs after bargaining is complete?
Question 6:
If the court were to award damages, would you recommend they award permanent damages or temporary damages? Explain
Question 7
In the bargaining process between the two hotels, which of the following transaction costs is most likely be present? Search costs, hold out problem, Free rider problem, or Asymmetric Information problem.
Explain? In light of that potentially high transaction costs what remedy would be suggested by the Normative Hobbes Theorem?
Question 8
How is the externality created between the Eden and Fontainebleau “reciprocal” as Coase would explain the term?