Law and Economics

  1. What is the basic assumption of economics?
  2. Law of demand
    Inverse relation of price and quantity (know how it is graphed)
  3. Opportunity Cost
    the cost of the alternative that must be forgone in order to pursue an action
  4. Sunk Cost
    an incurred cost; one that you have already invested
  5. Voluntary Exchange
    a transaction that occured between a a willing seller and a willing buyer
  6. Coase Theorem
    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.
  7. Property Rule v. Liability Rule
    Use property rule when transaction costs are low and Liability Rule when transaction costs are high.
  8. Property Rule
    The price of compensation is set between the two parties through bargaining; Developer must seek consent from the property owner.
  9. Liability Rule
    The price of compensation is by a third regulatory party; Developer does not need to seek consent from property owner.
  10. Economic Rent
    a positive difference between total revenues and total opportunity costs. How much extra income you get for no extra costs.
  11. Impact of a price ceiling
    A price ceiling is when the government institutes a maximum price for a good. This increases demand but lowers supply - creates a shortage.
  12. Impact of price floor
    A price floor is when the government institutes a minimum price for a good. This decreases demand but increases supply - creates a surplus.
  13. Risk Averse
    prefer a lower risk than the average person
  14. Risk neutral
    You prefer the same amount of risk as an average person
  15. Risk seeking
    you prefver higher risk than the average person
  16. Pareto Efficientcy
    At least one party is better off and no one is worse off
  17. Kaldor Hicks Efficiency
    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.
  18. Realism of Economist's Assumptions
    It is objective and is ability to use instrumental reasoning to get on in life.
  19. Sunk Costs Fallacy
    Incurred costs that you can not get back; spending money to "recup" this money is illogical.
  20. Endowment effect
    You value your existing condition more than if you didn't have it
  21. Mirror Imaging
    Assuming that other people will react the same way you do
  22. Hyperbolic discounting
    Discounting future value - I'll start my diet, tomorrow
  23. Undue weight to immediate vivid impressions
    realative to what we merely read or hear
  24. Excessively Optimistic
    when one greatly underestimates the probability of something occurring - It won't happen to me
  25. Preconceptions
    Interpreting evidence to support a preconceptio even when it doesn't
  26. Prisoner's Dilemma
    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.
  27. Game theory
    Game theory assumes a higher degree of rationality and it does not substantially change the fundamental assumption of economics
  28. 25 Lions example
    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.
  29. How does the tragedy of the commons occur
    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
  30. What is the main purpose of the property right system?
    You avoid the problems created by moral hazard and tragedy of the commons to achieve economic efficiency.
  31. Why are property rights less extensive in primitive than in advanced societies?
    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.
  32. Propose solutions to over-fishing problem (tragedy of the commons).
    2 solutions: Have regulation by the state OR Privatization
  33. Use treasure-hunt as an example and explain how a lack of peroperty rights could lead to wasteful use of resources.
    Over compensation without well defined property rights will lead to economic inefficiency.
  34. What economic sense does a durational limitation on copyrights make?
    1. You want to promote the creativity to a certian degree, not encourage monopoly for perpetuity; and 2. the duration will enrich public domain
  35. Explain the economic function of trademarks.
    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.)
  36. What's the differnce between property rule and liabliity rule?
  37. Explain the difference between injunctions and damages as methods of protecting property rights.
    Injunction is based on property rule and damages are based on liability rule.
  38. What's bilateral monopoly? (hold-out and free-riding)
    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.
  39. How does bilateral monopoly affect the Coase Theorem?
    High transaction cost can cause market failure.
  40. What is market price? (by the consensus of a willing buyer and a willing seller)
    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.
  41. Why do opportunity costs increase with free negotion?
    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.
  42. Secondary Rent Seeking
    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.
  43. Market bypass
    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.
  44. Informal Rules, Transaction Costs and the Failure of the Chinese Takings Law: describe the relationship between formal and informal rules.
    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.
  45. Why can household be a production unit?
    Labor division leads to economic efficiency
  46. What economic sense does "positive assortative" mating make?
    Reduce costs/reduce conflicts
  47. How does the strict divorce regime (forbidding divorce) protract marital search? Would the opposite regime (no-fault divorce) discourage marital search?
    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.
  48. According to Posner, how does the prohibition of parental rights transfer contribute to "baby shortage"?
    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.
  49. Why should surrogate motherhood contracts be enforceable?
    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.
  50. Why regulate sexual behavior?
    External costs. You produce babies and transmit diseases.
  51. Why are transaction costs with potential victims in torts context prohibitive?
    because there is no consent in tort
  52. What economic sense does "reasonable prudent person standard" make?
    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.
  53. Under what circumstance could the standard fail to deter a certain group of persons from acting negligently?
    The reasonable prudent person standard leaves out persons with exceptional abilities (whether they are genius or idiots).
  54. Why the law does not recognize custom as a defense?
    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.
  55. Why tort damages are not always full compensator?
    Because the transaction costs for measureing the pain are prohibitively high.
  56. How could contributory negligence rule induce both parties to exercise due care? Famer and railroad example.
    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.
  57. How could a comparative negligence rule achieve the same result?
    Both parties will take precaution rather than one party taking all the precaution - reduces total costs spent to take care
  58. How does this rule make economic sense? --landowner is not liable for negligent injuries to trespassers
    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.
  59. How does strict liability compel injurers to take consideration of possible changes of activity level?
    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.
  60. Why strict liability rule does not apply to zoo animals?
    strict liability examines risk v. utility and the utility is high
  61. Why strict liability rule applies to abnormally dangerous activities?
    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.)
  62. Why there is a tendency to apply the "untrahazardous" lable to new activities?
    Because there is asymmetrical information, because there is no information available.
  63. In the context of product liability, in which way does strict liability reduce accidents?
    Reduces the costs of production so there is a reduction in quantity and an increase in price
  64. What economic sense does "respondeat superior" rule make?
    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.
  65. How does Good Samaritan liability affect rescue efforts? Would restitution work in promoting rescue efforts?
    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.
  66. What's the impact of liability insurance?
    Will cause more accidents because there is a disconnection b/w the cost of the accident and cost on the part of the victim.
  67. Posner claims that capping malpractice judgment may not be a solution the increase of premiums for medical malpractice liability insurance, why?
    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.
  68. How does medical malpractice insurance increase quality too much?
    because the professionals become risk averse and practice defensive medicine and result in the overuse of medical resources
  69. Discuss the relationship between B and PL in intentional torts and its implications.
    B is equal or below zero and if burden is low and injurer still does it and this implication justifies punitive deamages.
  70. If a newspaper publishes a defamatory article, and a second newspaper merely reports the contents of that article, should the second newspaper be liable or only the firs? The law is that both should be liablie. What ecnonomic sense does this rule make?
    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)
  71. In the case of crimes that will cause death or even just a substantialn risk of death, optimal damages . . .
    will often be astronomical
  72. How to understand D=L/P
    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.
  73. Comment on "all crimes should be punished by a uniformly severe fine"
    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.
  74. Why is the evonomic argument for capital punishment strongly supported by considerations of marginal deterence?
    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.
  75. A conspiracy that does not succeed is still punished. How does this rule make economic sense?
    raises expected punishment cost for completed crime. Increases opportunity costs.
  76. Premeditated murder is punished more severely than murder committed in a fit of anger. What economic sense does this rule make?
    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.
  77. A starving person who begs a crust of bread, is turned down, but takes it anyway is guilty of theft and has no defense. However, a person can take food from an unguarded cabin if starving in the woods.
    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.
  78. Some argue that it is economically efficient to legalize drugs because the demand for drugs is inelastic and therefore drug usage wouldn't increase much. Do you agree?
    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.
  79. Why is education not likely to reduce overall drug use?
    The middle class will refuse to use drugs and will increase supply for lower class.
  80. Explain dead weight loss caused by monopoly pricing.
    Created by the movement as a result of monopoly and consequences is sheer wast of resources not captured by consumers not the monopolists
  81. Why the fewer the number of firms, the lower the cost of coordinating price fixing?
    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.
  82. How does homogeneity of product affect price fixing?
    The more homogenous the market is then the more likely the market is monopolized.
  83. How does elasticity of demand affect price fixing?
    The more inelastic the market is then the more likely the makrket is monopolized.
  84. How do barriers of entry affect price fixing?
    The higher the barrier to entry, then the more likely the market is monopolized.
  85. Why does a falling industry contribute to price fixing?
    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.
  86. How the ratios of fixed to variable costs affect price fixing?
    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.
  87. Explain the changes of attitude toward resale price maintenance. See the Leegin case.
    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.
  88. Intrabrand competition and how does RPM facilitate?
    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.
  89. Explain the dichotomy between interbrand competition and intrabrand competion.
    resale price maintenance strengthens a particular brand. (Benefit to balance equities b/w inter and intra brand competition.)
Card Set
Law and Economics
Law & Econ