Law & Economics Midterm

Civil (Roman) Law

"Law of codes" governing contracts, torts, crime, etc. These codes come from legislature can govern the decisions of the court, making it a top-down system. For example, a code written into law subjecting murders to 50 years of prison would lead to the court rule all murders this sentence.

Explain briefly and using examples who defines or allocates Property Rights

1. Courts: In Paschal v. Hamilton, the court ruled in favor of Hamilton, giving him property rights of the car. 2. Legislators: Lay the groundwork for property rights through bills and acts that define who qualifies. An example of this could be the US Patent act. 3. Administrative Agencies: Through the issuing of a license, administrative agencies allocate property rights. For example, the issuing of a patent allocates property rights to an inventor of a certain product. 4. Contracts: When you sign a lease, the lease is between the landowner and the tenant. 5. Social Norms: Exchange of civilities define/allocate property rights to rightful owners voluntarily.

The 4 Economic Functions of Property Rights

1. Economic Exchange: Property rights facilitate an exchange of goods and services by promoting confidence in buyers. 2. Resource Conservation: Property rights help in conserving scarce resources, allowing us to avoid the tragedy of the commons which is the overuse of scare resources relative to its most efficient economical use. The fact that we have to issue licenses to members helps to promote this. 3. Capitalization and Investments: Property rights help promote economic growth by using land as collateral to collect loans to use for purchasing productive assets. 4. Intellectual Property Rights: Property rights provide incentive for creative activities that benefit society. a. Patents: Exclusive production rights given to inventors of certain products. b. Copyrights: Lifetime ownership of written work, motion pictures, sound recordings, photographs, and choreographs. c. Trademarks/Tradenames: Sole ownership of a word, name symbol, or design

What are the Remedies that Courts and Governments use to protect Property Rights.

1. Fines: Most courts will use compensatory money damages, which means imposing fines on wrongdoers. One disadvantage of fines is that the judge becomes a price maker, meaning they could over or underestimate the damages. Another disadvantage could be is the fine is small and the wrongdoer is wealthy, they don't have any incentive to stop. 2. Injunction/Injunctive Relief: A court order to the wrongdoer to stop negative externalities. This works to an extent, but a key disadvantage is that it could cause huge economic inefficiencies. 3. Inalienability Rule: The law that prohibits the sale of certain things under any circumstance. For example, voting rights, sexual services, legal claims human beings, etc. The disadvantage here is that shortages can lead to the creation of a black market. Another disadvantage is that donation could put pressure on people. 4. Coarse Theorem: If there is a dispute between 2 parties over property, the best way to protect property rights could be achieved via negotiations/bargaining as along as transaction costs are low or zero.

What are the main "Rules of the Game in the allocation of Property Rights?

1. First Possession Rule: For example, Paschal v. Hamilton. 2. Just Desert: According to what is deserved. For example, athletes during the Olympics could be given a new car or a piece of land for earning a gold medal. War veterans could qualify for farms/free houses. 3. Wealth/Utility Maximization: For example, privatization is the transfer of ownership from government to private owners. This is a straightforward allocation of property rights, and leads to maximization of utility/wealth because the private owner is guided by maximizing profits.

What are the four sources of market failure? Explain how each of them causes individual profit- and utility-maximizers to make decisions that may be privately optimal but are socially suboptimal. What general policies might correct each of the instances of market failure?

1. Monopoly Power: This is privately optimal and socially suboptimal because it completely eliminates all competition in a market, making the marginal price too high and quantity supplied too low. Policies that might correct this market failure are to replace monopoly with competition where possible, or regulate the price charged by the monopolist 2. Externalities: This occurs when an activity bestows a benefit or imposes a cost on others without a monetary reward or compensation. This can be privately beneficial when an actor receives an additional benefit from an action. However, this can be severely socially suboptimal if an action has an external cost that negatively impacts other actors in an economy. Public policies to correct externalities involve achieving a social optimum where firms operate along the social marginal cost curve. Such policies could be Pigouvian tax, direct regulation, coase theorem, etc. 3. Public Goods: A public good is a commodity with non-rivalrous consumption and non-excludability. Public goods can be privately optimal because they can lead to free riders who hope to benefit with no cost to themselves. At the same time, this is socially suboptimal because free riders are benefitting from the payment of others. Public policy can correct market failure due to the provision of public goods by subsidizing private provision and providing the public good via the government and paying the costs of providing the service through revenues raised by compulsory taxation. 4. Asymmetric Information: This can be privately optimal because when a seller knows more information than a buyer, they can easily exploit the buyer by charging a higher price and earning more income. This is also socially suboptimal because it means potential buyers can pay much more for a good than they should be. Policies to correct asymmetric information could be government intervention initiatives.

The 5 main types of property rights

1. Res Privatae - Private property. Here property rights are held by a single private individual or a group of owners (e.g. a private house). 2. Res Publicae - Public property. Here property rights are held by the state on behalf of the general public (e.g. Central Park) 3. Res Communes - Common property. Property owned and operated by a self-governing organization (e.g. golf clubs) 4. Res Nullius - Open access property. Here property is open for use and access by all (e.g. oyster beds). 5. Mixed-Regime Property. Mixing private and common property (e.g. agriculture shared by farmers).

Under what circumstances would we conclude that a decision-maker in economic theory has acted irrationally?

A rational person pursues consistent ends by efficient means. Someone acting irrationally would have contradictory ends pursued by inefficient means.

Under what circumstances would we conclude that a decision-maker in legal theory has acted unreasonably?

A reasonable person is socialized into the norms and conventions of society. An unreasonable decision-maker goes against the norms and conventions and would promote actions that reduce overall peace, stability, and justice

Define the role of the mathematical concepts of maximization and equilibrium in microeconomic theory

According to economists, each actor in a society is always maximizing something. Given this assumption, it can be concluded that a rational actor is one that maximizes resources of any kind. In an economy with limited resources, oftentimes actors are constrained in their options and must rank alternatives. Thus, maximization refers to choosing the best alternatives the constraints can allow. Equilibrium is another fundamental economic concept that refers to a pattern of interaction that persists unless disturbed by outside forces. The role that both of these mathematical concepts play in microeconomics is that maximizing behavior tends to push economic actors toward a point of rest, an equilibrium.

The minimum wage is typically set above the market-clearing wage in the market for labor. Using a graph with an upward-sloping supply of labor, a downward-sloping demand for labor, with the quantity of labor measured on the horizontal axis and the wage rate measured on the vertical axis, show the effect on the labor market of a minimum wage set above the equilibrium wage rate.

As a result of a minimum wage set above the market-clearing wage in the market for labor, a surplus would occur resulting in a price floor. This would eventually cause an increase in demand for employment and a decrease in supply of it until the equilibrium is hit.

Why should lawyers study Economics?

Because it can be useful to learn the economic implications of different laws and rulings. For example, if a state were to shut down all bars, this could lead to job loss, lost profits, and illegal activities.

Law and Economics

Both are cousins in that they study human behavior. The application of economic theory (microeconomics/welfare economics) to examine the formation, structure, processes, and economic implications of legal rules and decisions on society.

Distinguish between the Pareto criterion for evaluating a social change in which there are gainers and losers and the Kaldor-Hicks (or potential Pareto) criterion

Both of these are ways for operationalizing efficiency, but Kaldor-Hicks attempts to amend and improve the Pareto criterion. Kaldor-Hicks attempts to assess changes in the welfare of a society as a whole by considering compensation. Essentially, if the potential winners are able to compensate the potential losers, the redistribution will increase overall welfare. This is basically cost-benefit analysis in that both the private and social costs and benefits of the action are being contemplated.

Explain how Coase's approach to externalities differs from Pigou's.

Coase's perspective on externalities almost serves as a direct contrast to Pigou's: Coase offers a solution to externalities that shirks the need for institutional interference due to the higher transaction costs. Rather than resorting on a governmentally imposed tax as in Pigou's perspective, Coase believes that any such externality should be solved as efficiently as possible by bargaining or negotiation cost as long as the transaction costs are not high in this method (a high number of parties involved would lead to inefficiency from high communication costs).

What are consumers assumed to maximize? What are some constraints under which this maximization takes place? Describe the individual consumer's constrained maximum. Can you characterize this constrained maximum as a point where marginal cost and marginal benefit are equal

Consumers are assumed to maximize utility, which is happiness or satisfaction. However, this maximization is often limited by constraints. Such constraints could be time, energy, and knowledge, but perhaps the most common to a consumer would be their budget, limiting them from obtaining a particular good, and thus earning utility. A constrained maximum can be described as a point where marginal cost equals marginal benefit. When a consumer proposes to marginally increase his perceived maximum, there will be a marginal cost along with a marginal benefit associated with it. If the benefit outweighs the cost, the consumer will raise their maximum. A rational consumer will continue to do this until the cost equals the benefit, giving us a maximum constrained by the consumers' capabilities.

Why do externalities cause a shift in the producer's supply curve?

Depending on the kind of externality, a producer affected by such an externality will undergo a shift in its supply curve. If the producer is the cause of a negative externality, the supply curve will be shifted left because the producer is not factoring in the social cost of one of its practices, such as pollution. If the producer factored in this cost, the supply curve would be lower. In the case of a positive externality, a farmer for example will have an upward shifted supply curve due to the presence of a nearby bee- keeper who is aiding in pollination—this externality comes at no cost to the farmer and raises the supply curve overall as a result.

Why should economists study Law

Economists should study Law because it can be useful to understand the underpinnings of markets. The implementation of certain laws can have drastic effects on the overall health of an economy, which makes it essential for an economist to understand the Law.

Patent

Exclusive production rights given to inventors of certain products (lasts for 20 years in the US). To receive a patent you need to prove that whatever you're inventing is useful, novel, unique, and has never been attempted before. An example of this would be a patent given to the inventor of a new kind of paper made out of sustainable materials.

A "Pigovian tax" equal to the marginal cost of pollution is the least-cost solution to the problem of electric utilities polluting the air by burning coal.

False

Say that transaction costs are high because there are many parties to a property use dispute. If the externality is caused by say a paper firm polluting a river by placing dioxin in the river, then the Coasean analysis of property rights disputes implies that the most efficient solution will be to place liability on the paper firm since it is the party causing the externality.

False

When assigning property rights in stolen goods, it is always most economically efficient to give the property right to the original owner, thus placing the risk of loss on the person who buys from the thief.

False

True or False: The cost of a week of vacation is simply the money cost of the plane, food, and so forth. (Explain your answer.)

False, the cost of a week of vacation is the money cost of the plane, food, etc. along with the cost of giving up work for a week, being away from friends, etc.

What are firms assumed to maximize? Under what constraints do firms perform this maximization? Describe how the individual firm determines the output level that achieves that maximum. Can you characterize the firm's constrained maximum as one for which marginal cost equals marginal benefit?

Firms are assumed to maximize profits, which are defined as the difference between total revenue and total costs of production. The constraints firms are subject to are imposed on them by consumer demand and the technology of production. According to microeconomic theory, a firm will maximize its profits if produces that amount of output whose marginal cost equals marginal revenue. This suggests that when marginal revenue exceeds marginal costs, a firm should expand production, and vice versa. Thus, it follows that a firm's constrained maximum is when marginal cost equals marginal benefit.

Eminent Domain

Government has "highest ownership" and can take land as long as they can prove that they are taking it for public use and can provide "just-compensation". An example is when GM wanted to put a plant in a residential neighborhood. The neighborhood lost because GM could prove that the plant would generate positive externalities.

"A lawyer who has not studied Economics ...is very apt to become a public enemy". This quote is from Justice Brandeis in his Illinois Law Review article, "The Living Law". Explain why you agree or disagree with this statement.

I agree with this statement. If the lawyer does not consider the economic considerations of their decision, they could lead to an outcome that is in fact more inefficient to every party in a dispute which almost defeats their purpose entirely. A lawyer who has not studied economics could have tunnel vision on the law itself: in the case of property rights, for example, the lawyer would determine whether the aforementioned farmer or rancher should pay for the fence based on what they deem to be most fair under property law. This would backfire, however, and cause economic inefficiency, as the solution most beneficial to both parties would come about with free market bargaining rather than the burdensome transaction costs of the lawyer and a decision based in "fairness" alone.

True or False: In Japan, workers cannot be fired once they have been hired; therefore, in Japan a minimum wage law (where the minimum would be set above the wage that would cause the market for labor to clear) would not cause unemployment.

In Japan, workers cannot be fired once they have been hired; therefore, in Japan a minimum wage law (where the minimum would be set above the wage that would cause the market for labor to clear) would not cause unemployment. This is false because the minimum wage would create a price floor where demand would slowly increase and supply slowly decrease.

.Under what circumstances are injunctions likely to be efficient, or more efficient, than some alternative damages remedy?

Injunctions will likely be most efficient in cases of property dispute rather than some other nuisance or breach of contract. This is because injunctions enjoin the defendant to ceasing their actions causing a negative externality to another producer, which still allows for an efficient agreement to be made through the bargaining of the two parties. In this case, simply forcing the breeching party to pay damages could put them out of business and lead to higher economic inefficiency than a fairly negotiated agreement overall. (Injunction cannot be efficient if it leads to a closure unless damage is absorbeb by workers joining the harmed party like a polluted farm) Walen vs Union Bank (for efficiency, benefit of introducing should outweigh cost of doing it)

Common Law

Judge-made case law that is based on the customs, traditions, and trade practices of people globally. This is a bottom-up system in that decisions made in the court can lead to the rewriting of certain laws. For example, if a court case involving arson had zero precedent, the ruling would most likely read to the writing of legislature surrounding arson.

Law

Legal relations governing society. A set of formal institutions governing individual behavior and social interactions. The rule of conduct prescribed by the state, commanding what is right and prohibiting what is wrong.

Copyrights

Lifetime ownership of written work, motion pictures, sound recordings, photographs, and choreographs. For example, Marvel probably has several copyrights for all of their superhero movies.

What is the difference between Law and Morality. Give examples

Morality refers to principles of correct conduct based on customs and religions. Morality teaches us that there is a difference between right and wrong, good and bad, proper and improper. Law, on the other hand, is the system of rules that a particular country or community recognizes as regulating the actions of its members and may enforce by the imposition of penalties. For example, someone might have the right to get an abortion since it is legal, but that does not necessarily mean it is the right or moral thing to do based on different customs and religions. Another example would be if someone thinks it is moral to steal from the ultra-wealthy doesn't mean it is legal to steal.

Use the notion of opportunity cost to explain why "There's no such thing as a free lunch."

Opportunity cost refers to the cost of giving up an alternative. If you were to receive a full scholarship to a university, technically the education you would receive is free. However, you could be giving up time spent working at a local restaurant that pays $40,000 a year. Thus, even though the university is free, the opportunity cost of attending for one year is $40,000.

What is meant by Pareto efficiency or Pareto optimality? What is the importance of the initial distribution of resources in determining what the distribution of resources will be after all Pareto improvements have been made?

Pareto efficiency concerns the satisfaction of individual preferences. A Pareto or allocatively efficient situation occurs when it is impossible to make a change so as to make at least one person better off without making another person worse off. The importance of the initial distribution of resources in determining what the distribution of resources will be after all improvements are made is that the initial distribution effectively determines what those resources will be.

Pigouvian tax

Pigouvian Tax is a potential solution to a negative externality suggested by Arthur Pigou. Essentially, taxes imposed by the government should be equal to the marginal external cost that is caused on others. Below is a graphical representation of Pigouvian tax as it relates to the negative externality of carbon emissions:

"Relativity of title" or "co-ownership" in Property Rights Law

Relativity of title means that it is possible that more than one person is entitled to the same property. If several persons who are all entitled to the same good all claim possession over the good, the person with the stronger entitlement will receive possession.

Covenants

Rules that restrict the use to which the owner can put the land in residential lots. For example, a 4 family house cannot be changed into a commercial property.

Property Rights

Sociological relationship between people respecting things. A relational bundle of rights and duties. Rights refer to possession, use, ownership, alienation, excluding, transferring, and bequeathing. Duties refer to moral duties such as the duty of knowing not to interfere with someone else's property.

Trademarks

Sole ownership of a word, name symbol, or design. For example, Nike probably has a trademark on the swoosh as well as the slogan "just do it".

Explain briefly and using an example what is meant by the Coase Theorem.

The Coase Theorem calls for a solution that is effective and permanent but does not resort to transaction costs, rather to negotiate or bargain for the most efficient solution under the tenets of the free market. An example would be a farmer and rancher putting up a fence between their land rather than hiring lawyers to settle the dispute, with the party putting up the fence choosing to do so based on the highest efficiency for both parties.

Suppose that the local government determines that the price of food is too high and imposes a ceiling on the market price of food that is below the equilibrium price in that locality. Predict some of the consequences of this ceiling.

The consequences of a price ceiling on food would be a gap between food demanded and food supplied. Consumers demand more because of a lower price, but producers supply less because it doesn't pay them enough. The result is a shortage of food and an excess of demand.

Trespass

The direct or physical invasion of someone's property. Courts should be looking for strict liabilities in such cases.

Paschal vs Hamilton, was the matter efficiency enhancing?

The externality that occurred was a consumer - consumer negative externality. Paschal lost his car and didn't get the money he deserved. The judgement was efficiency enhancing because it promotes commerce, the seller gave possession away willingly, and promotes efficiency for future transactions. However, it is not efficiency enhancing in that it promotes crooks, increases transaction costs, doesn't say anything about the Kaldor-Hicks compensation theory since it is still in question whether Hamilton should compensate Paschal.

Inalienability Rule

The law that prohibits the sale of certain things under any circumstance. For example, voting rights, sexual services, legal claims human beings, etc.

What are the main characteristics of a legal system?

The main characteristics of a legal system are Stare Decisis, uniformity of decisions and flexibility of decisions. Stare Decisis refers to stability of decisions, which implies that if all facts are the same, all decisions must be the same. Uniformity of decisions means that even if people are different, if facts are the same decisions must be the same. Lastly, flexibility of decisions refers to changing circumstances. If circumstances make it imperative to change past practices, then we must do so.

Economics

The study of how individuals and societies choose to use scarce resources that nature and previous generations have provided. It is also a social science that studies human behavior and is related to anthropology, psychology, sociology, ethics, and LAW.

Lucas vs South Carolina Coastal Council

This is an example of a producer - producer negative externality because Lucas was going to use the other part of land for rental. The decision was efficiency enhancing in that it protects Lucas' property rights as well as the environment. However, the decision was also not property enhancing in that $1.2 million is a "shadow price", there's no way to tell if it's a fair price. Also, the decision discourages potential investors.

Cheney Brothers v. Doris Silk was the matter efficiency enhancing?

This is an example of a producer - producer negative externality because one producer is negatively impacting another. The decision was efficiency enhancing because the products were not unique, therefore there were no copyrights or patents issued. Also, the products do not serve a public interest so society isn't any better off. On the other hand, the decision isn't efficiency enhancing because it lowers profits for Cheney Brothers which lowers incentives for creative activity. Also, it doesn't take into account the Kaldor-Hicks compensation theory, it is questionable whether Cheney Brothers should be compensated for their design.

Whalen v Union Bag and Paper Co.

This is an example of a producer - producer negative externality. The decision was efficiency enhancing in that it protects Whalen's property rights, protects others (farmer's citizens, the environment). However, the decision is also not efficiency enhancing because it is an injunction which leads to job losses/lost profits and sunk costs. It is questionable whether the courts should consider the Kaldor-Hicks compensation theory. It might not work due to the downsides of imposing fines.

Discuss: The existence of a legal system is economically very valuable for society.

This is true because law is about making choices by being reasonable, which leads to peace, stability, and justice in a society. Legal systems promote efficiency, which is economically valuable for society.

In Poletown, Michigan, the city of Detroit took properties from individual home and business owners and gave them to one of the world's largest and wealthiest private corporations. Under what circumstances would this scenario be economically efficient?

This scenario would be economically efficient only in the circumstance that the cost of the homes and businesses are awarded to their owners accurately, which is difficult because such damages could be easily over/undershot. Further, the wealthy corporation would need to be providing some net benefit to society greater than the opportunity cost of these businesses losing their property. Ultimately, if the total net benefit to society is greater from this decision being made and damages are paid fairly, the scenario would in fact be economically efficient.

The Coase Theorem implies that, if transaction costs are low, the parties involved in a property rights dispute will have no incentive to argue their case in court, since an economically efficient result can be achieved by bargaining.

True

Police Power Regulation

When the cops get involved in the regulation of a complaint. For example, the police come after someone complains about loud music. They can use public nuisance law to enforce the restriction of loud music.

Is property rights law necessary for economic exchange? If so, how does it help to overcome the socioeconomic problem of scarcity?

Yes, property rights law is necessary for economic exchange. This segment of the law helps to overcome the problem of scarcity by serving to allocate resources to their rightful owner, which can help protect economic efficiency and therefore have the highest net-benefit to society overall. Further, because scarcity can lead to amoral attempts to exploit or steal the fairly earned property of other people, property rights are necessary to protect the fair ownership of those who are positively contributing to society, whether it be with material production or intellectual property. Thievery and exploitation can truly only lead to economic inefficiency and ultimately greater threats from scarcity.

Zoning Law

Zoning is a process by which a local government determines how land in different parts of the town is used. For example, delegating different parts of land into residential, commercial, industrial, and park zones.

In Common Law, legal sanctions refer to: a. findings of fact that are binding on both parties b. orders of courts that must be enforced. c. rules of law that are binding on both parties d. rules of law that direct future court outcomes e. principles of correct conduct based on customs and religion

b. orders of courts that must be enforced.

Installation of street lighting that reduces the incidence of violent crime in the area represents: a. consumer- producer positive externality b. consumer- consumer positive externality c. producer- consumer positive externality d. producer- producer positive externality e. all of the above

c. producer- consumer positive externality

All oyster beds in the Chesapeake Bay are an example of: a. common (res communes) property (Membership, golf clubs fisheries etc) b. private (res private) property c. Public (res publicae) property d. Open Access (res nullius) property e. all of the above

d. Open Access (res nullius) property

Economists define opportunity cost as a. the dollar price of a good or service. b. money cost plus interest on money borrowed to buy a good or service. c. cost of the resources used to produce a good or service. d. value of the next best alternative use that is not chosen. e. the time spent shopping.

d. value of the next best alternative use that is not chosen.

In instances where your neighbors enjoy listening to your loud music, which of the following best describes the externality that occured: a. consumer- producer negative externality b. consumer- consumer negative externality c. producer- consumer negative externality d. producer- producer negative externality e. None of the above

e. None of the above