Consider Peevyhouse v Garland Coal & Mining [382 P. 2d 109 (1962)]. In 1954 Willie and Lucille Peevyhouse leased land to Garland Coal Co. for a five year strip mining operation. The contract stated that Garland would restore the land to its original character after five years. When the time came Garland refused, saying the the value of the restoration was only $300 while the cost was $25,000. Willie and Lucille sued.

Lets consider marginal improvements to the strip mined land and some illustrative numbers. The table below shows the costs of benefits of restoration, where a unit of restoration is given in the left column. Suppose that the contract specified an improvement to level 7

Restoration Costs Benefits

0 0 0

1 $10,000 $100,000

2 $25,000 $150,000

3 $45,000 $190,000

4 $75,000 $220,000

5 $100,000 $240,000

6 $140,000 $250,000

7 $190,000 $255,000

a. Suppose that the court finds for Peevyhouse and upholds the contract with a judgement of specific performance. (That is, the judgement gives Peevyhouse the right to insist on level 7 restoration.) In a world of zero transactions costs, what would be the level of restoration? Explain.

b. Suppose that the benefits of improvement were known to the court and that the court awarded damages to Peevyhouse. Then Garland could choose how much restoration to do. Presumably it would balance the costs of restoration against the lower damages. How much would it choose? Explain.

c. The benefits measure the value of the improvement as far as the Peevyhouses are concerned. In economics this is called the use value. Use value may be significantly more that market value, and it is generally thought to be private information; in this case it is not observed by Garland. How does this asymmetric information stand in the way of the parties reaching an agreement? (hint: make a Coase theorem argument here)

d. Now suppose the court just awarded $255,000 to Peevyhouse. How much restoration would it buy?