Law and Economics

Rationality

Inverse relation of price and quantity (know how it is graphed)

the cost of the alternative that must be forgone in order to pursue an action

an incurred cost; one that you have already invested

a transaction that occured between a a willing seller and a willing buyer

When property rights are well defined and transactions costs are low, the allocation of resources will be efficient regardless fo the initial assignment of prepoerty rights. If transaction costs are high, then an initial assignment of property rights does matter in economic efficiency.

Use property rule when transaction costs are low and Liability Rule when transaction costs are high.

The price of compensation is set between the two parties through bargaining; Developer must seek consent from the property owner.

The price of compensation is by a third regulatory party; Developer does not need to seek consent from property owner.

a positive difference between total revenues and total opportunity costs. How much extra income you get for no extra costs.

A price ceiling is when the government institutes a maximum price for a good. This increases demand but lowers supply - creates a shortage.

A price floor is when the government institutes a minimum price for a good. This decreases demand but increases supply - creates a surplus.

prefer a lower risk than the average person

You prefer the same amount of risk as an average person

you prefver higher risk than the average person

At least one party is better off and no one is worse off

Those individuals made better off by the policy or change whould have to be sufficiently better off that they could compensate those who are made worse off. The key is that the compensation is "potential" not actual.

It is objective and is ability to use instrumental reasoning to get on in life.

Incurred costs that you can not get back; spending money to "recup" this money is illogical.

You value your existing condition more than if you didn't have it

Assuming that other people will react the same way you do

Discounting future value - I'll start my diet, tomorrow

realative to what we merely read or hear

when one greatly underestimates the probability of something occurring - It won't happen to me

Interpreting evidence to support a preconceptio even when it doesn't

Without cooperation both will assume that the other prisoner will act selfishly to save his own skin. The result will be that they will both confess.

Game theory assumes a higher degree of rationality and it does not substantially change the fundamental assumption of economics

If there is an even number of lions then none will eat the lamb, if an odd number of lions then they will eat the lamb.

Without property rights, the rational participant will maximize his profits and that rational behavior will lead to the depleation of the commons. The key condition for TOC is lack of property rights. Example: Overfishing, global warming, pollution

You avoid the problems created by moral hazard and tragedy of the commons to achieve economic efficiency.

The transaction costs of having property rights outweigh the advantages because in a primitive society scarcity is not a problem so that maintainig property rights is not beneficial comparted with the cost. To make the demand curve work there is a limitation of resources.

2 solutions: Have regulation by the state OR Privatization

Over compensation without well defined property rights will lead to economic inefficiency.

1. You want to promote the creativity to a certian degree, not encourage monopoly for perpetuity; and 2. the duration will enrich public domain

There is no durational limitation of trademark. The ecnomic sense: 1. It ensures consumer protection so that consumer can identify product quality - this reduces transaction costs for consumers; and 2. You want to protect the goodwill of the trademark to prevent moral hazard. (Trademark defines property rights.)

Consent

Injunction is based on property rule and damages are based on liability rule.

It is the center of transaction costs. TC is the cost prohibiting negotiation from taking place. THere are two kinds of costs: 1?is hold out/boycott not willing to deal w/; and 2) free rider - you rely on someone else to do the work and eventually you will benefit from their work. These increase TC.

High transaction cost can cause market failure.

In a takings instance you have a willing buyer, but not a willing seller. The government decides the price of condemning/taking and its non-negotiable, and subjective value is left out. The administrative cost is for free negotiation, and this cost increases the chances of free negotiation because the condemnor will have to increase the opportunity costs.

It increases because we left out subjective value and so we increase the line a little bit 3 factors increase line 1) subjective valure; 2) secondary rent seeking; and 3) market bypass.

Secondary rent seeking is wheterh or not the condemned property owner should have a fair share of projected profit deriving from proposed project on the condemned property. Secondary rent seeking is factoring in this consideration. So if you allow secondary rent seeking that increase the administrative costs.

Market bypass is when the government either intentionally, negligently, or recklessly misses the best market to acquire the land. This is govt. inaction in preparing for the project and this law will require the government to plan ahead and acquire land at an efficient price. If you increase the red line then we will force the condemnors to purchase from the open market instead of using taking.

Whether the law can be followed depends on the informal rules/non-legal rule (the culture of the whole) and the formal rule is the law. Ideology is a part of the informal rule and so sometimes the informal rules knock over the formal law.

Labor division leads to economic efficiency

Reduce costs/reduce conflicts

Same answer for both: the search will be prolonged. By forbidding divorce you force people to search longer for a mate they will be happy with and in a no-fault regieme marital stauts is less important so there is less incentive to get married younger.

The market price is (X), defined by demand and supply, and the restrictive measures contribute to shortage. Another factor Posner observed is the black market. The black market price is high because transaction costs in the black market is high. The quantitiy of the competitive market is reduced to the quantity of a restrictive market and the supply does not meet the demand.

Because it increases the supply and is consistent w/ contract law. The supply is insufficient because of the prohibitions against payment, and its insufficiency induces infertile couples to turn to market alternatives, such as surrogate motherhood. The market failure is in adoption, not in surrogate motherhood.

External costs. You produce babies and transmit diseases.

because there is no consent in tort

For the purpose of achieving efficient enforcement of law and reduce transaction costs.. 3 type of tort costs" 1) cost to plaintiff; 2) societal costs; and 3) cost of maintaining the tort system. So by a reasonable prudent person standard, that can keep these costs low. It is expensive to find a subjective standard.

The reasonable prudent person standard leaves out persons with exceptional abilities (whether they are genius or idiots).

If it is a defense then participants of the industry will not have incentive to improve. The one who improves the technology incurs the cost and will make his business inefficient and will be undercut by competitors.

Because the transaction costs for measureing the pain are prohibitively high.

3 step calculation. 1) the railroad does nothing 2) Farmer will take precautions only to the extent that he will not be found negligent and so he will move straw only 75ft away at cost of $50 3) RR will take some precatution but not full precaution because farmer moved the straw and RR will only put $24 into spark arrester. By adding this up $75 will be spent and not everyone will take full care.

Both parties will take precaution rather than one party taking all the precaution - reduces total costs spent to take care

We don't need to know the exceptions to the following rule because the trespasser is the efficient avoider of the accident because his burden is zero or below zero.

1st implication is reduction in quantity and increase in because running 10 trains b/w point A and B. The regulation increases the line and implication is taht reduction in quantity increases price. Consumers will bear the burden of Strict Liability (increase price). Theory of strict liability is prevention, compensation, and spread of losses.

strict liability examines risk v. utility and the utility is high

Utility is low because of asymmetrical information (only producer can take care, so you caqn't make the plaintiff take care because they don't know anything.)

Because there is asymmetrical information, because there is no information available.

Reduces the costs of production so there is a reduction in quantity and an increase in price

1) employer's ability to pay a judgment is greater than employee; 2) employer can be efficient avoider of the accident by inducing the employee to be careful and training employee; and 3) employer can reduce the activity level.

GS statute protects the person giving aid and insulates the person who provides aid. GS liability is opposite and says if you provide assistance and in the course of doing so you are negligent, then you are not protected. It would affect efforts because it will reduce the rescue efforts. Restitution work? No. Providing money to give incentive to do someting from thier own motivation, not by money, and so if you give money, then they will feel like their good will is geing commercialized and thus reduce the rescue efforts.

Will cause more accidents because there is a disconnection b/w the cost of the accident and cost on the part of the victim.

Premium is not experience based. 1) current system is based on average doctors so the premium is based on average professional standard and not on individual standard; 2) medical malpractice judgment is only served as a wealth transfer and not an increase of overall cost of healthcare; 3) part of litigation, lawyering cost, is cost of maintaining tort system and doesn't increase overall cost of healthcare; and 4) the high price of healthcare has to do w/ the investment scheme of the insurance company.

because the professionals become risk averse and practice defensive medicine and result in the overuse of medical resources

B is equal or below zero and if burden is low and injurer still does it and this implication justifies punitive deamages.

It will punish the free rider and primary tortfeasor. To prevent strategic behovior and increase efficiency. (If only the original newspaper gets punished then no one will be the first to publish - game theory)

will often be astronomical

D is imprisonment or criminal fine (together it is called punishment). D has a relationship with P (probability of getting caught) and L (loss). If there is an increase in the probability of being cught, then that justifies a lower punishment, which will save judicial resources. And vice versa: if you decrease the probability of being caught, then taht justifies a higher punishment.

It disregards marginal deterrence of criminal system. If all crimes bore the same punishment then there would be no incentive to not kill someone while stealing.

The marginal deterrence works in a way that if there is no capitol punishment certain crimes cannot be deterred. For example, in prison murder cannot be deterred.

raises expected punishment cost for completed crime. Increases opportunity costs.

1) the probability of being caught in premeditated murder is low, so high punishment is justified 2) impulsive criminal is less likely to be deterred.

This makes economic sense because of the transaction costs. In the first scenario there is a possibility to have a voluntary exchange whereas in the second scenario there is no such negotiation taking place because there is no party (thus, transaction costs are high). Transaction Costs in first scenario is lower than in second scenario because free negotiation is more likely in the first scenario than in second.

No. Even in the drug market the law of demand works so people will behave rationally and buy cheap drugs if the price is lower. The law of demand still works in the drug market and rational behavior entails the purchase of lower price drugs.

The middle class will refuse to use drugs and will increase supply for lower class.

Created by the movement as a result of monopoly and consequences is sheer wast of resources not captured by consumers not the monopolists

Because transaction costs are high. The more number of players in the market, the harder to monitor your competitors. Price fixing takes coordination and monitoring and this costs can be hight if number of participants are great. The fewer players, then the lower costs to monitor. Price fixing is a cartel and everyone plans to raise price (which quantity of sale will drop) but everyone won't cooperate. Only way to enforce cooperation is to monitor, and if one is lying, then others will come together and enforce by dropping price lower than cheater and will kick him out of market.

The more homogenous the market is then the more likely the market is monopolized.

The more inelastic the market is then the more likely the makrket is monopolized.

The higher the barrier to entry, then the more likely the market is monopolized.

Falling industry is more likely to be a monopolized market and rising industry does not, because a rising industry is booming and is hard to detect who is cheating. Cartels calculate their own costs and want to keep it up and they know the players in a falling industry.

The higher the ratio the more likely the market is monopolized. This is like the barrier to entry situation. In a fixed cost, the barrier to entry is high and more likely to have price fixing.

It boils down to interbrand competition and intrabrand competition. RPM started w/ Doctor Miles case which held that RPM is per se illegal, which is like a summary judgment. If manufacturer is found to RPM then it is per se illegal as a matter of law, with no defense. And the court rationalized this rule with price fixing and did not consider any other relationship. The change was in 2007 where court found that RPM is a RUle of Reason. There is no bright line rule. Whether or not RPM is legal or not we can balance equities b/w interbrand competion and intrabrand competition.

If no RPM then any of the distributors can cheat by cutting down their services, lowering price to undercut their distributors. This increases strength of particular brand. If a brand has monopoly power that means resale price theat restrict competion b/w dealers will reduce consumer choice. So it can be bad and good.

resale price maintenance strengthens a particular brand. (Benefit to balance equities b/w inter and intra brand competition.)