Law and Economics Exam 2

How might courts use the idea of a hypothetical bargain when filling gaps in a contract?

the hypothetical bargain consists of terms the parties would have reached if the had filed the gaps in the contract by negotiation

How do trademarks help solve an information problem?

trademarks help to solve the problem of consumer ignorance about the quality of a product.

What is reliance?

A change in the promisee's position induced by the promise. The change increases the benefit of performance and the cost of breach which makes the contract riskier.

Under bargaining theory, what contracts should be enforced?

A promise is legally enforceable is it is given as part of a bargain; others a promise is un-enforceable. a court should enforce promises induced by consideration, regardless of whether the consideration was equivalent in value to the promise. (offer, acceptance, and consideration).

Under bargaining theory, what is a bargain?

Bargaining is a dialogue on value to agree on a price.

Explain why an efficient contract will generally assign a loss from something going wrong to the party with the most control over the event causing the loss.

Because they have the most control of causing the loss and therefore are more responsible for the loss happening.

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

Copyright grants writers, composers, and other artists property rights in their creations on demonstration that their works are original expressions. They can improve the markets for information and creative work by creating a space where its easy for writers to copyright their own expressions.

Explain: The fifth purpose of contract law is to minimize transaction costs of negotiating contracts by supplying efficient default rules.

Efficient default rules parties cannot gain by replacing the default rule with explicit terms so there would be no further TC if the rules are already efficient enough.

What are mandatory rules?

Explicit terms that courts set aside. They regulate the contract.

What are the two rules for establishing ownership?

First Possession and Tied Ownership

Fugitive Property: More on the question, how are property rights established and verified?

First possession and tied ownership. First possession: legal max "first in time, first in right" which is relatively cheap and easy to apply. Tied ownership: a new thing is owned by the owner of the proximate or prominent property. Tying ownership of fugitive property to settled property avoids preemptive investment so long as the ownership claims in the resource to which the fugitive property is tied are already established.

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

For the state to supply or subsidize art and science, especially basic research thus the state owns or subsidizes many universities. Charitable contributions meaning wealthy people make substantial voluntary contributions to the arts and sciences. And third, broadly described as trade secrets protection, comes from contract and tort law.

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

Granting a patent or copyright grants monopoly power which means that the seller can raise the price which maximizes profits.

What is the problem of holdouts?

Holdouts drastically increases the transaction costs of purchasing contagious property.

What is the issue of non-appropriability and how does it apply to the economics of information?

Information is generally costly to produce and cheap to transmit. Producers have difficulty selling information for more than a fraction of its value.

How is it that the economic theory of contracts improves upon bargaining theory? Under the economic theory of contracts what contracts should be enforced?

It leaves little room for dispute. Its very clear in what it says. contracts that should be enforced are those that have both parties wanting it to be enforceable when it was made which makes it pareto efficient because you're not doing harm to make someone else worse off.

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.

No, bargaining would be economically efficient. offsetting the economic cost is the benefit of proving public goods at lower cost. if the property is taken for a public use and the owner is compensated then it is economically efficient.

Intellectual property: More on the question, what can be privately owned?

Patent system, copyright system, trademark system, and trade secrets.

What are patents?

Patents are a government authority or license conferring a right or title for a set period, especially the sole right to exclude others from making, using, or selling an invention.

In a situation where reliance is not a concern, how should damages be set? What problem results if damages are too low? Too high?

Perfect expectation should be awarded.

What is fugitive property?

Property that do not have defined property rights. It is not owned by anyone until someone possesses it and the first person to possess it thereby becomes the owner.

Explain: The fourth purpose of contract law is to secure optimal level of reliance.

Reduces losses from breach by the opposing person.

Define the marginal social cost of increased patent duration.

Society suffers more costs from less dissemination as the duration of patents increases.

What are default rules?

Terms to contracts that are supplied by the courts. When a default rule is efficient ,parties cannot gain by replacing the default rule with explicit terms. If they are inefficient, the parties can fain by replacing it with explicit terms that are efficient.

What are gaps?

The absence of explicit terms the contrary. Can be intentional or unintentional.

How is it that takings cause uncertainty in the market?

The value may not be exactly what the owner would like or that would be reached in an arm's length transaction between the owner and another buyer.

Explain: The purpose of contracts is to make trade possible in situations that require credible promises to be made.

This is because some people might go back on their deal if not held to a contract so it protects both sides.

How is the efficient level of damages set?

Through either reliance or perfect expectation

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

Tracing costs are the costs of searching around all novels to make sure ideas does not unintentionally infringe on someone else's copyright can be extensive. to limit these costs; creators are given limited duration and relatively narrow breadth for their creations.

What is a trademark?

Trademark is easily recognizable symbols for company products.

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

Tragedy of the anti commons is when multiple owners are each endowed with the right to exclude others from a scarce resource and no one has an effective privilege of use. Patents can lead to this problem if a patent duration is too long.

How do perfect expectation damages lead to over reliance?

When a person gets both perfect expectation for breach and reliance increases with costs in breach.

Under bargaining theory, are all enforced contracts efficient? Explain

Yes, because they follow the offer acceptance and consideration stipulation.

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

a policy of just compensation because it is most efficient and therefore cannot be altered by subjective value.

What is a contract?

a written or spoken agreement that is intended to be forceable by law.

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

because the state cannot profit from compensated takings.

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

because the state would have to buy the property and not take it. and public use means you cannot take to bypass the market and transfer private property from one probate person to another. It must be taken for public use.

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

because they will bargain to the efficient outcome.

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

broad takes distort behavior less because many people cannot change their behavior to avoid broad taxes. takings have a very narrow base.

What is the majoritarian default rule?

commands lawmakers to provide the gap-fillers that most people want, but does not define the population over which to calculate the majority

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

copyright and patent law have extended too far and threaten to choke creativity.

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

first possession creates an incentive to incest too much too early because an appropriate investment transfers the ownership of a resource to the investor.

Under bargaining theory, are all efficient contracts enforced? Explain.

if they follow the offer, acceptance, and consideration stipulation.

Explain the tradeoff between innovation and dissemination with patents.

increasing incentives for creation also increases incentives for dissemination to a point. After that point, broadening the scope or duration of property rights increases monopoly power which rewards creation and reduces dissemination.

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

information use is non rivalrous and is non excludable making it a public good. because one persons use off an idea doesn't diminish its availability for others to use making is non rivalrous and excluding some people from learning about a new idea can be expensive because the transmission of ideas is so cheap making it non excludable. Non-appropriability is the same as non excludable. Thus a private market would provide less than the efficient amount of information.

Define the marginal social benefit of increased patent duration.

marginal benefits from more innovation decreases as the duration of patents increases.

What are the tradeoffs associated with leaving gaps versus spelling term out in the contract? Why might it be rational to leave gaps?

romite risks do not justify the cost of negotiating and drafting arms to allocate them. Or may be left in for psychological purposes. Ex-ante risks rear to the risks of future losses faced by the parties when the negotiate a contract. Ex pot losses refer to losses the actually materialize safety making the contract. You must choose between ex ante risks and ex post losses. Parties expect to save TC by leaving gaps in contracts whenever the actual cost of negotiating explicit terms exceeds the expected costs of filling in gaps.

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

rules that tie ownership to possession have the advantage of being easy to administer and the disadvantage of providing incentives for uneconomic investment in possessory acts, whereas rules that allow ownership without possession have the advantage of avoiding preemptive investment and the disadvantage of being costly to administer.