Economics Analysis of Sansotta v. Town of Nags Head
Stephen Dwyer
Law and Economics
April 14, 2014
Westerfield
On my honor, I have neither given nor received any unauthorized assistance on my assignment.
X____________________________
Sansotta v. Town of Nags Head is an extremely interesting and complex case to analyze,
dealing with issues of procedural due process, equal protection, environmentally created
nuisance problems, and takings of private property. In order to analyze the economics of this
case, I will focus mostly on the nuisance and takings issues which have arrived. Due to the
circumstances of the case, I will also analyze these questions before and after a major restoration
process which took place during litigation. For both situations, I present the Kaldor-Hicks
efficient solution.
Roc Sansotta, Ralph and Gloria Tomita, Carole Shackelford, James Bergman, Linda
Atsus, George Rusin, and the estate of Joseph Klaus all own cottages (total of six) on Seagull
Drive in the town of Nags Head, North Carolina, all of which are managed and upkept by
Sansotta. The town of Nags Head sits next to a beautiful beach, often frequented by tourists.
Over the past few decades, the beaches of the Outer Banks have eroded an average of around two
feet per year1. Unfortunately, beaches in front of the six cottages in question have eroded a
stifling average of eight feet per year. In the recent decade, the erosion has moved the vegetation
line farther up the beach, causing Sansotta’s six cottages, as well as around twenty others, to lay
seaward of the vegetation line. In response, Sansotta hired contractors to help him reinforce the
properties and protect them against storms, such as the one on November 12, 2009, which ended
up causing septic tank damage and pollution to nearby areas. According to the town’s nuisance
ordinance,
The existence of any of the following conditions associated with storm-damaged or
erosion-damaged structures or their resultant debris shall constitute a public nuisance.
(a) Damaged structure in danger of collapsing;
1
Sansotta v. Town of Nags Head. United States Court of Appeals for the Fourth Circuit. 1 Aug. 2013. pg.4
d<http://www.ca4.uscourts.gov/opinions/Published/121538.p.pdf>
(b) Damaged structure or debris from damaged structures where it can reasonably be
determined that there is a likelihood of personal or property injury;
(c) Any structure, regardless of condition, or any debris from damaged structure which is
located in whole or in part in a public trust area or public land 2.
Therefore, on November 30, 2009, Town Manager Cliff Ogburn, under parts (b) and (c)
of above ordinance, ordered that the owners remove the nuisances by late January, or otherwise
receive civil fines of $100 per cottage per day until the nuisances were removed. Ogburn
reasoned that the septic tank damage and the probability of future septic tank damage constituted
a nuisance under part (b) and that the existence of the cottages on public property constituted a
nuisance under part (c) of the ordinance. Months later, in May of 2010, the owners of the six
cottages filed a law suit against the Town of Nags Head on claims of violation of procedural due
process, equal protection, and takings, aiming to not only keep their property but also receive
compensation for the “unjust” fees placed upon them.
Interestingly, in 2011, during the litigation process, the Outer Banks underwent a huge
beach restoration project, extending the beach front along most of the coast almost two-hundred
yards out. Following this restoration, the town withdrew its nuisance allegations based on part
(c) of the nuisance ordinance, yet it still held its allegations for part (b) and subsequently invited
the owners of the cottages to apply for permits to repair and reinforce the cottages (as opposed to
removing the cottages altogether). Considering this interestingly changing situation, I will
discuss the first two violations briefly and then discuss the third not only in terms of the postrestoration situation, but also contemplate how the court would decide differently without the
restoration.
2
Ibid pg.5
In regards to the question of procedural due process, which holds that the government
must give sufficient notice in advance for takings of property, the judge ruled in favor of the
town of Nags Head, claiming that its mayor’s notice to the property owners was sufficient
enough, and that the period before the fee began was enough time for the owners to respond. I
agree with the judges’ verdict, with or without the restoration, and believe that the citizens were
given fair due process.
In regards to the question of equal protection, which states that parties of similar
situations must be treated in similar fashion by the government, the court again sided with the
Town of Nags Head, stating that the six cottages were different from the others. This difference
leads to the important economic analysis of the case and into the takings and nuisance questions.
While many properties were partially located on public land, these six cottages in particular lay
so far into the beach that they prevented emergency vehicles from driving onto the beach in those
locations. Therefore, the cottages were not simply just nuisances, but also huge safety hazards3,
and for this reason I agree with the court’s decision.
While at first, this seems to be a public goods problem (the good being the beach), this
problem can more accurately be measured as a negative externality problem. The negative
externality is danger, causing stress for the townspeople, and also imposing a cost of danger.
This negative externality is depicted in Graph 1 in the appendix.
The graph emphasizes an extremely important question, which is how the societal costs
and benefits can all be measured. There are four economic calculations which must be taken in
order to truly analyze the economic implications of this case. The cost of removing the cottages,
3
See Image 1 in appendix for actual view of cottages
the benefits of not having the cottages, the cost of removing the septic tank nuisance, and the
benefits of not having the septic tank nuisance.
The first calculation is the cost of removing the cottages. Two important values must be
summed to accurately assess the values of the cottages. First, by finding the price of a real,
small, oceanfront home on Seagull drive currently on sale4, the market value of each individual
cottage can be estimated, and in this case at around $300,000 per cottage. Second, the cottages,
like many of those in the outer banks, support the extremely important tourism industry when
rented out. The revenue of renting each of these cottages to tourists can also be calculated. In
2010, 1233 households resided in Nags Head5, while in 2012, the tourism industry brought in
$1,852,9176. Therefore, to calculate the cost of destroying the cottages as well as the loss of
tourism revenue:
Total Cost of Removing Cottages =
Cost of Cottage + Average Tourism Revenue of Cottages
TC = 6($300,000) + 6($1,852,917/1233) = $1,809,016.63
4
Shore Realty. "10211 E Sea Gull Drive, Nags Head NC 27959." 10211 E Sea Gull Drive, Nags Head NC 27959.
Shore Realty, 2012. Web. 14 Apr. 2015.
<http://www.outerbanksoceanfronthomesales.com/goose_wing/nags+head/oceanfront/10211-e-sea+gull+drivenags+head-83955-mls.html>.
5
United States of America. Department of Commerce. Census Bureau. N.p.: n.p., n.d. Web.
6
Matarrita-Cascante, David. "Tourism Dollars Add to Quality of Life For Dare Residents." Social Indicators Research
98.1 (2010): 105-27. Outerbanks.org. The Outer Banks, Fall 2012. Web. 13 Apr. 2015.
<https://www.outerbanks.org/media/902629/obvb_tourism_mailer.pdf>.
While it would be difficult to obtain a perfectly accurate number of the true market prices
of all six properties, as well as even the average revenue of each cottage, the above number gives
a relatively accurate estimate of the cost of removing the six cottages.
The second calculation addresses the benefit to society of not having the cottages, or
conversely, the cost of the cottages remaining in their current state. Factors which would make
up this value include the value of using that taken beach land for public recreational purposes,
the view of the ocean which is blocked by the cottages, the option and existence values of the
beach, the safety of its residents, and even the safety of its tourists who contribute such a large
part to the coastal economy.
Unlike the previous evaluation, it is almost impossible to
accurately use numbers to measure how much the town values the lack of these six cottages. For
example, to measure the value of safety, one should take the value of a life and multiply that by
the change in probability of fatal injury on the beach with and without emergency crew access to
the beach, as displayed in the equation below:
Value of Public Safety = (Value of a Life)*(Probability of Fatal Accident
With Cottages – Probability of Fatal Accident Without Cottages)
Safety = Life*(Pafter – Pbefore)
Because these probabilities are extremely difficult to calculate, and because there are
huge moral questions with valuing a life, the general full equation for this calculation rests
below:
Benefit of Open Public Beach =
Value of Public Usage + Value of Clear Beach View + Option Value +
Existence Value + Value of Resident Safety + Value of Tourist Safety
Benefit = Usage + View + Option + Existence + Safety(r) + Safety(t)
While measuring this value is difficult, there are some deductive ways to try and estimate
certain values above. For example, analyzing how much people pay for health insurance in the
area can give a relative idea of how much people value their safety and health. Calculating the
difference in oceanfront property and property directly behind it gives an estimate for how much
people value the view of the ocean. Because of the difficulty in calculating most of the values
above, and considering that many of the values, such as the value of safety, are extremely high,
for the purposes of this paper, we will assume that the public benefit of not having the cottages
on public property in Nags Head outweighs the cost of removing the properties.
As described in section (b), the nuisance that does not involve any takings is “damaged
structure or debris from damaged structures where it can reasonably be determined that there is a
likelihood of personal or property injury.7” As mentioned in the case, because of the cottages’
close proximity to the ocean, harsh storms often cause damage to the properties, even after
reinforcements. While normally these damages are simply internalized, causing no shift in the
7
Sansotta v. Town of Nags Head. United States Court of Appeals for the Fourth Circuit. 1 Aug. 2013. pg.5
<http://www.ca4.uscourts.gov/opinions/Published/121538.p.pdf>
social cost, because of the movement of water during these storms, septic tank damage often
causes negative externalities in the town, as depicted in Graph 2 of the Appendix.
The third calculation involves measuring the public benefit of not having the public
nuisance, or conversely, the cost of allowing the nuisance to continue. This cost first includes
the damage from the septic tank leaks. Septic tank failure clean-up costs often range anywhere
from $2000 to $10000 per tank failure. Because the septic tank failures take place in a beach
location, which is harder to access considering its distance from larger towns and cities, and
because the septic tank damage in Nags Head is spread over a larger distance due to the storm’s
onslaught and spread, it is probably more accurate to estimate the costs a little on the higher side,
probably around $7000 per septic tank8 9. This number, however, does not account for the
societal cost of an unaesthetic environment and the economic cost to the tourism industry.
In
addition, the damaged septic tanks must be repaired, which on average costs around $100010.
Therefore, the equation for the total benefit of not having the nuisance is:
Total Benefit of No Nuisance =
Septic Tank Clean-up Costs + Unaesthetic Environment + Harm to
Tourism Industry + Repair Costs for Tanks
TC = 6($7000) + Unaesthetic + Tourism + 6($1000)
8
Guillot, Craig. "Sewage Cleanup: Waste No Time Waiting for Help." Houselogic. NATIONAL ASSOCIATION OF
REALTORS, 28 Apr. 2011. Web. 14 Apr. 2015. <http://www.houselogic.com/home-advice/plumbing/home-sewagecleanup/>.
9
National Environmental Services Center. "Maintaining Your Septic System - A Guide for Homeowners."
Maintaining Your Septic System—A Guide For Homeowners 15.4 (2004): 1-8. National Environmental Services
Center. WVU Research Corporation. Web. 14 Apr. 2015. <http://www.nesc.wvu.edu/pdf/ww/septic/pl_fall04.pdf>.
10
HomeAdvisor. "Septic Tank Repair Costs | Average Price to Repair a Septic Tank." HomeAdvisor. HomeAdvisor
International, 2015. Web. 14 Apr. 2015. <http://www.homeadvisor.com/cost/plumbing/repair-a-septic-tank/>.
Therefore, from the equation above, the transactions benefits can be estimated
somewhere above $48,000. Not only does this number seem large on most scales, but is
especially large considering that Nags Heads average beach cleanup costs are probably around
$3528.96 (see appendix, equation 1 for calculations).
The fourth and final calculation, and probably the most simple, involves the cost of
removing the septic tank nuisance. Simply, this is the number of septic tanks which must be
replaced with newer and more improved septic tanks multiplied by the price of each tank:
Total Cost of Depleting Nuisance = 6($6748) = $40488
From all the above calculations, the four values are presented below:
Cost of Removing Cottages = $1,809,016.63
Benefit of Removing Cottages = Some immeasurable value assumingly
higher than Cost of Removing Cottage, measured by
Usage + View + Option + Existence + Safety(r) + Safety (t)
Cost of Removing Nuisance = $40,488
Benefit of No Nuisance = $48,000
For the two situations, before the restoration and after the restoration, which legal actions
are most efficient? First, I will look at the situation after the restoration, and then I will look at
the situation before the restoration.
To recap, after the restoration was completed, subsection (c) of the ordinance became
null, and the town only asked that the six cottages provide damage protection against the
nuisances caused by the breaking septic tanks. In this current situation, the questions of whether
or not to remove the cottages as a whole become null, and the only relevant costs and benefits
deal with the direct septic tank nuisance. Therefore, the first step in the legal analysis concerns
whether the nuisance should be nullified or not. Because the cost of the removing the nuisance
($40,488) is less than the benefit of the nuisance being removed ($48,000)
Benefit ($48,000) > Cost ($40,488)
it is economically efficient (Using Kaldor-Hicks, not Pareto) for someone to internalize
the costs of the nuisance. The next question is what options do the courts have and who exactly
should internalize the cost.
The four options for the court are:
1. Court in Law, in favor of town, requires cottage owners to pay for nuisance.
2. Court in Law, in favor of owners, requires town to pay for nuisance.
3. Court in Equity, in favor of town, gives nuisance right to town.
4. Court in Equity, in favor of owners, gives nuisance right to owners.
To start, because there are six cottage owners, in addition to whoever represents the town
in negotiations, the high number of people would raise transactions costs substantially, thereby
nullifying Coase Theorem. Options 3 and 4 would therefore be inefficient, leaving only options
1 and 2. Options 1 and 2, which involve government intervention, improve overall efficiency by
lowering transactions costs. To clarify before moving forward, the efficiency in question in
Kaldor-Hicks efficiency, and not Pareto efficiency. This is because regardless of the option
chosen, some party will be hurt, yet society as a whole will improve. Because the costs and
benefits of options 1 and 2 are the same, the precedent that each option sets determines the
overall efficiency. If the court rules in favor of option 2, this precedent would take away
owner’s incentives to care for their own septic tanks because the government would simply cover
the damages. However, if the court rules in favor of option 1, the precedent set would give
owners the incentive to care for their septic tanks and other property because they would have to
later internalize the costs. While repair for septic tanks on average costs $1000, annual check-up
only costs $150 to $300. Therefore, because of the precedent set and the greater future
efficiency of that precedent, the court’s most efficient solution is option 1.
Now, I will analyze the hypothetical situation regarding if the restoration had not be
completed. To recap, both subsection (b) and (c) of this ordinance stay in affect during this
situation, meaning that the town suffers from both the septic tank pollution nuisance as well as
all those associated with the cottages laying on public property. The first step in this legal
analysis concerns whether the cottages should be removed or not. It is extremely important to
note that while the cost of removing the cottages only includes that set cost, the benefit of
removing the cottage not only includes the pre-calculated benefit of such, but it also includes the
benefit of not having the septic tank nuisance. Therefore, because the cost of the removing the
nuisance ($1,809,016) is less than the benefit of the nuisance being removed (Assumed value
greater than $1,809,016 + $48,000)
Benefit (Value>$1,809,016 + $48,000) > Cost ($1,809,016))
it is economically efficient (Using Kaldor-Hicks, not Pareto) for someone to internalize
the costs of removing the cottages, as opposed to simply leaving them there. The next question
is what options do the courts have and who exactly should internalize the cost.
The four options for the court are:
1. Court in Law, in favor of town, requires cottage owners pay for removal.
2. Court in Law, in favor of owners, requires town to pay for removal.
3. Court in Equity, in favor of town, gives cottage property rights to town.
4. Court in Equity, in favor of owners, gives cottage property rights to owners.
As with the first scenario, the high number of parties raises the transactions cost to an
inefficient level, nullifying options 3 and 4. Options 1 and 2, which involve government
intervention, also improve overall Kaldor-Hicks efficiency by lowering transactions costs.
Again, the precedent that each option sets determines the overall efficiency. If the court rules in
favor of option 1, this precedent would take away owners’ incentives to own property at all
because there would be too much risk from the government’s overly abused eminent domain
power. People would fear that the wealth they put into their property could simply be taken
away, and therefore either not buy property at all, or not add much wealth to it, leaving it at its
bought, or even eventually lower value. This would not only hurt the real estate market in Nags
Head, but it would also harm the tourism industry because the rental properties would degrade in
quality and therefore be forced to charge less. However, if the court rules in favor of option 2,
the precedent set would keep the owners’ incentives to buy property and continue to improve on
that property, because the owners could be sure that no matter what happens, if their property
gets taken away, they will be compensated for the value which they bought it for and for the
value which they invested into it. Therefore, because of the precedent set and the greater future
efficiency of that precedent, the court’s most efficient solution is option 2. It’s extremely
interesting to reflect that the state’s actions during this litigation changed the efficient solution.
Appendix
Image 1 – Seagull Drive
Google. "E Seagull Dr, Nags Head, NC 27959 - Google Maps." E Seagull Dr, Nags Head, NC 27959 - Google
Maps. Google, 2015. Web. 14 Apr. 2015.
<https://www.google.com/maps/place/E+Seagull+Dr,+Nags+Head,+NC+27959/@35.8552045,75.5674203,257m/data=!3m1!1e3!4m2!3m1!1s0x89a4fa5178ef77eb:0x6200177aa7b86b9f>.
Equation 1 - Average Annual Clean up cost for Nags Head
(Average per capita clean-up cost)*(population)
($1.28)*(2757) = $3528.96
Stickel, B. H., A. Jahn and W. Kier 2012. The Cost to West Coast Communities of Dealing with
Trash, Reducing Marine Debris. Prepared by Kier Associates for U.S. Environmental
Protection Agency, Region 9, pursuant to Order for Services EPG12900098, 21 p. +
appendices.
United States of America. Department of Commerce. Census Bureau. N.p.: n.p., n.d. Web.
Graph 1 - Danger Negative Externality
Graph 2 - Pollution Negative Externality
Bibliography
Google. "E Seagull Dr, Nags Head, NC 27959 - Google Maps." E Seagull Dr, Nags Head, NC 27959 – Google
Maps. Google, 2015. Web. 14 Apr. 2015.
<https://www.google.com/maps/place/E+Seagull+Dr,+Nags+Head,+NC+27959/@35.8552045,75.5674203,257m/data=!3m1!1e3!4m2!3m1!1s0x89a4fa5178ef77eb:0x6200177aa7b86b9f>.
Guillot, Craig. "Sewage Cleanup: Waste No Time Waiting for Help." Houselogic. NATIONAL ASSOCIATION OF
REALTORS, 28 Apr. 2011. Web. 14 Apr. 2015. <http://www.houselogic.com/homeadvice/plumbing/home-sewage-cleanup/>.
HomeAdvisor. "Septic Tank Installation Costs | Average Price to Replace a Septic Tank." Septic Tank Installation
Costs | Average Price to Replace a Septic Tank. HomeAdvisor International, 2015. Web. 14 Apr. 2015.
<http://www.homeadvisor.com/cost/plumbing/install-a-septic-tank/>.
HomeAdvisor. "Septic Tank Repair Costs | Average Price to Repair a Septic Tank." HomeAdvisor. HomeAdvisor
International, 2015. Web. 14 Apr. 2015. <http://www.homeadvisor.com/cost/plumbing/repair-a-septictank/>.
Homewyse. "Homewyse Calculator: Cost to Remove Construction Debris." Homewyse. Homewyse, 2015. Web. 14
Apr. 2015. <http://www.homewyse.com/services/cost_to_remove_construction_debris.html>.
Matarrita-Cascante, David. "Tourism Dollars Add to Quality of Life For Dare Residents." Social Indicators
Research 98.1 (2010): 105-27. Outerbanks.org. The Outer Banks, Fall 2012. Web. 13 Apr. 2015.
<https://www.outerbanks.org/media/902629/obvb_tourism_mailer.pdf>.
National Environmental Services Center. "Maintaining Your Septic System - A Guide for Homeowners."
Maintaining Your Septic System—A Guide For Homeowners 15.4 (2004): 1-8. National Environmental
Services Center. WVU Research Corporation. Web. 14 Apr. 2015.
<http://www.nesc.wvu.edu/pdf/ww/septic/pl_fall04.pdf>.
Sansotta v Town of Nags Head. United States Court of Appeals for the Fourth Circuit. 1 Aug. 2013. Print.
Shore Realty. "10211 E Sea Gull Drive, Nags Head NC 27959." 10211 E Sea Gull Drive, Nags Head NC 27959.
Shore Realty, 2012. Web. 14 Apr. 2015.
<http://www.outerbanksoceanfronthomesales.com/goose_wing/nags+head/oceanfront/10211-esea+gull+drive-nags+head-83955-mls.html>.
Stickel, B. H., A. Jahn and W. Kier 2012. The Cost to West Coast Communities of Dealing with
Trash, Reducing Marine Debris. Prepared by Kier Associates for U.S. Environmental
Protection Agency, Region 9, pursuant to Order for Services EPG12900098, 21 p. +
appendices.
United States of America. Department of Commerce. Census Bureau. N.p.: n.p., n.d. Web.