Econ 338 Exam 2 Study guide

How is it that common law is a legal system of maximum liberty?

-maximum liberty, which allows owners to do anything with their property, as long as it doesn't intervene with other people's property rights.

why limit takings?

-more distortion than taxes -taxes assessed on a more broad base are more efficient -takings very narrowly applied tax

What is a public good?

-non excludable -non rival

What is the tragedy of the anti-commons and how can patents lead to this problem?

tragedy of the anti-commons: -too much ownership ----tragic under use

what is takings?

-5th amendment: nor shall private property be taken for public use without JUST COMPENSATION -take to provide public use(public good) -just compensation ---markt value

Why do takings for public use make more economic sense than takings for private use?

-A public good will be more efficiently allocated with the government than with a private ownership. -Since the public will benefit from the taking, it makes more sense than if the government took land for private use, that they would run less efficiently than the private owner.

What are the tradeoffs associated with a broad copyright rule versus a narrow copyright rule?

-Broad Copyright: forbids any unauthorized use -Narrow Copyright: permits some unauthorized use (ex: books can be quoted in reviews, copied for educational use)

Contrast the incentives created from a narrow patent rule with the incentives from a broad patent rule.

-Broad Rulings lead to fast duplicative research. -Narrow Rulings lead to slow, complimentary research.

What is a copyright? How can copyright law improve the markets for information and creative work?

-Copyrights: grant writers, composers, and other artists(creators), property rights in their deomonstration that the work is an original expression

What are the two rules for establishing ownership?

-First possession -Tied ownership

Explain the tradeoff between innovation and dissemination with patents.

-Innovation-patent increase the incentive to innovate (by creating a monopoly profit) -Dissemination- Replacing secrecy with patent protection can increase dissemination, but increased monopoly protection decreases dissemination. Also a monopoly leads to dead weight loss.

How is it that takings cause uncertainty in the market?

-It can cause much uncertainty. -if the taking of the land is allocated efficiently while public, or if it was more efficient while private

Why is it that when property rights are not clearly delineated parties have an incentive to bargain to clarify them?

-Leverage changes depends on property rights ruling. Transaction costs are also effected. -Incentive to bargain, low TC

Define the marginal social cost of increased patent duration.

-Monopoly -higher price -inefficiently low output -DWL

What are patents?

-Patents allow the inventor to be the appropriator of the invention. -ownership rights to inventions and technical improvements

Why is it that in an efficient property right system private goods should be privately owned?

-Private ownership --Transactioncosts ---Private enforcement ---Private exchange

What are the tradeoffs associated with the rule of first possession?

-Pros: clear and easy to determine -Con: incentive to "wrestle" for the ball "wrestle"-possessory acts

What are the tradeoffs associated with the rule of tied ownership?

-Pros: no incentive to 'wrestle" -Con: harder to establish, not as clear, costly to administer

Why is it that in an efficient property right system public goods should be publicly owned?

-Public ownership(state ownership, state regulations, tax subsidies) --Transactioncosts ---Public administration ---collective decision making

What happens when private goods are publicly owned?

-it is inefficient due to TC -for a private good to be efficient they are used or owned by whom values them the most EX: CAB, a public agency heavily regulating a private good

In what ways other than intellectual property rights can policy be used to mitigate the undersupply of information problem?

-lowering barriers to entry

intellectual property:

-Solve the problem of non appropriability -Create an incentive to produce information

What is the tragedy of the commons?

-The tragedy of the commons is an economic problem in which every individual tries to reap the greatest benefit from a given resource. As the demand for the resource overwhelms the supply, every individual who consumes an additional unit directly harms others who can no longer enjoy the benefits. Generally, the resource of interest is easily available to all individuals; -the tragedy of the commons occurs when individuals neglect the well-being of society in the pursuit of personal gain. -to little ownership -tragic overuse

The 5th Amendment of the U.S. Constitution contains the following: "...nor shall private property be taken for public use, without just compensation." Does this clause make sense from an economic efficiency perspective? Explain.

-This clause is essentially the eminent domain clause. This means that the government can not just take your property. If the government was trying to build a highway where your house is they would have to pay the fair market price for it. -This makes sense because the incentive to develop property is killed without eminent domain.

What are tracing costs? How are tracing costs affected by copyright duration?

-Tracing Costs: must make sure the work is original. -High tracing cost=low duration

How is it that patents can be used to mitigate the undersupply of information problem?

-When there needs to be fast duplicative research a broad ruling is applied. When slow research is preferred a narrow ruling. -it will lead to innovation

Why is it that takings generally cause more distortion in the market than taxes?

-Without just compensation a government is able to to fund its operations through takings. -This leads to more distortion than through taxes. -The governemnet will only take properties that could be more efficiently ran by the government as a public good. -government can't generate revenue through takings

What is a trademark?

-a property protection for recognizable symbols of companies or products

What is the issue of nonappropriatbility and how does it apply to the economics of information?

-because information is so easy to transmit, once it has been produced producers have difficulty selling it for more than the cost of producing it.

Why is it that for goods that are not rivalrous and not excludable public ownership TC are lower than private ownership TC?

-because it is easy and clear for the government, and wouldn't make sense to have private ownership on something that everyone has access to

How do special interests (concentrated benefits vs. dispersed costs) relate to the TC of the public ownership of private goods?

-example we used in class is the legalization of marijuana. people reach out to the government to help growing industries. -costs to grow the industry can be dispersed through taxes and the industry in the end gets the higher benefit. -for the society as a whole the costs outweigh the benefits. (monopoly)

What is a private good?

-excludable(can exclude others from using) -rival(one person's use of the good precludes anothers use of the good.. consumption) --for a private good to be efficient they are used or owned by whom values them the most

How do trademarks help solve an information problem?

-generic products names cannot be trademarket ---would create monopoly ---bad information -Firm must protect TM by suing rivals. High TC

When should the patent be broad or narrow?

-if social value of investment in pioneering research exceeds the value of investment in application research, the patent should be broad -if social value of investment in application research exceeds the value of investments in pioneering research, the patent should be narrow This is like normative hobbes: -allocate rights because TC are high

Define the marginal social benefit of increased patent duration.

-increased incentive to invent -increase present value of innovation and research

Why is it that in an efficient property right system private goods should be privately owned and public goods should be publicly owned?

-it all really comes down to the TCs -for a private good: Private ownership TC < public ownership TC -for a public good: private ownership TC > public ownership TC

Why is not efficient to use property rights for redistributive ends?

-it distorts the economy more in the long run, then does taxation -it would cause people to no longer want to innovate.

How is it that information is a public good? What effect does this have on the information market?

-non excludable: transmission of ideas is cheap -non rival: one persons use does not diminish its availability Pros: ideas make people productive, and can easily spread around the world Cons: hard to profit off new ideas because transmission costs are low, and production costs are high

What are the TC associated with private ownership of goods?

-private enforcement -private exchange

What are the TC associated with public ownership of goods?

-public administration (EPA) -collective decision making(EX: U.s. congress pass a law to protect nation for national defense)

what is eminent domain?

-right to seize private property when the owner doesn't want to sell

Why is it that for goods that are rivalrous and excludable private ownership TC are lower than public ownership TC?

-since it is rivalrous and excludable, private ownership TC would be very low. -public ownership of a private good would cause too many problems on allocating such good

Why is that when one or a few individuals own a private good it is more likely that the good is consumed or used efficiently (by those that value it the most) than when publicly owned?

-since its a private good it is excludable and rival. -it is more efficient because those individuals will use the good in a more efficient way. -Less government regulation when its privately owned, which allows for incentives

why have trademarks?

-solve information problem -indication of product quality -incentive for quality -reputation

appropriatbility:

-the capacity of a firm to retain the added value it creates for its own benefit

Why is it that uncompensated takings may lead to the government substituting towards the use of land?

-the total cost for the govt. would cost less if they substitute to land they already have.

What is the problem of holdouts?

-they create high transaction costs -ex: contiguity: panels of land needed must touch each other, high TC

How is it that copyright law can lead to the tragedy of the anti-commons?

-too much ownership -tragic under use

What is the free rider problem?

-when people take advantage of being able to use a common resource, or collective good, without paying for it -NOT OPTIMAL -good or service can be under provided, end up with the wrong quantity

Broad Ruling:

Broad ruling- the first inventor gets rights to both invention. The second will lose out -----Creates an incentive to be first

Contrast the incentives for joint production under a narrow patent rule and a broad patent rule. If transaction costs are low does patent breadth matter? Explain.

Broad: -Protecting the pioneer inventor -incentive to do pioneering inventions -low incentive for application inventions Narrow: -low incentive for pioneering inventions -innovators will look for applications of existing inventions -Low TC, breadth does not matter, because they can bargain

joint production path:

Fundamental research-----> pioneering research-----> application invention----> Profits

Narrow Ruling:

Narrow ruling- both inventors can have patent protection. -Slow complimentary research taking place -On the other hand, patent protection is valued less then in broad ruling.

what is a public bad?

ex: air pollution is non excludable nor rival and is not good for welfare. -TC are high -damages better than injunction

What is fugitive property?

Property that moves on or has indefinite boundaries. Examples include water and oil.

What happens when public goods are privately owned?

There are TC, -free rider problem -private information -heterogeneity(the quality or state of being diverse in character or content)

special interest

a group that tries to influence the people who run a government in order to help a particular business, cause, industry, etc.

Joint production considerations:

commercial applications, require pioneering inventions, which require fundamental research

duration of trademarks?

forever

Regulatory capture

is a form of government failure that occurs when a regulatory agency, created to act in the public interest, instead advances the commercial or political concerns of special interest groups that dominate the industry or sector it is charged with regulating.[1] When regulatory capture occurs, the interests of firms or political groups are prioritised over the interests of the public, leading to a net loss to society as a whole.

What is better, a policy of just compensation or compensation based on the owner's subjective value? Explain.

it depends on which is more efficient.

what is a private bad?

negative externalities

When is it best to solve negative externalities through an injuction?

private bad. -injunction when TC are low (normative coase) -it helps keep TC low

When is it best to solve negative externalities through collective action (e.g., public regulation)?

public bad. -Statutory law may be better then damages when TC are high

What does it mean for a good to be rivalrous? What does it mean for a good to be excludable?

rivalrous: one person's use of the good precludes anothers use of the good.. consumption excludable: can exclude others from using