law and economics

Law

rules of behabior for members of society to advance collective good through cooperation

Why Have Laws

people are self interested and self intererests conflict/need basic rules of the game

What do laws do

Minimize potential conflict

How work

impose cost and benefits and backed by power of government

Do they work?

Economics can help us see

Economics

study of how individuals and ssocieties choose to use their scare resources im an attempt to satisfy unlimited wants

Old Law and Economics

concerned with laws that affect the operation of the economy and markets

New Law and Economics

law is a giant pricing machine-how respond to price changes

Positive Analysis of Law

Prove true or false—-need general not just partial equilibrium analysis

Normative Analysis of Law

opinion based—recommend

equity vs efficiency

Differences Between La and Economics

1) Ex ante vs ex poste view of the law

• lawyers come to problem after

• econ-who bears cost is a warning to future

• Judhes-after dispute but creates precent

• legislatoers-after it apply to future

2) Details vs Simpliation

• case law focuses on perculiarites

• econom ics uses simplifed models to predict consequences of change in a variable

3) Rasonable vs Rational Man

4) Marginal vs binary

are we always ration, calculating too much?

Dehumanizing-price on life

efficiency vs equity

conservative bias

Market Failures Sources

1) Imperfect competition

2) Presence of external costs and benefits (externalities)

3) Existnece of public goods

4) Imperfect Information

5) Behaviorial Economics-assumptions about rational behavior

Imperfect Competition/Game Theory

monopolies, create x-inefficiency where monopolists tend to not cut costs/innovate/adopt new techs and also dwl

also monopsony

Bilateral monopoly

monopolistic competition—many firms but each is a little monopoly

mostly an issue of antitrust policy

Natural Monopoly

DWL huge in these cases

Regulators come in and set a price to fix

But if set regulated price, then they make loss, have to subsidize firm

used with IPs

Game Theory

Players, strategies, and payoffs

Inefficiency caused by imperfect information

but factors can change this outcome (mafia, contract with person)

Nash Equilibrium

strategy that is optimal given knowledge of what B is doing

Pareto Optimal

can’t make anyone better off without making someone worse off

Incentive for infinitve games

cooperation based on tit for tat ability

Externalities

a consequence of an economic activity that spills over to affect third parties

(consumption or production)

Producer to Producer

Positive: apple orchard and honey bees

negative: poluution harms downstream commercial fishing

Producer to Consumer

positive: heated water for horse

negative: 3-Mile Island-water pollution

Consumer to Consumer

Positive: vaccines, fave masks

Negative: smoking, noise

Consumer to producer

Positive: unsolicited feedback

Negative: cowtipping, graffiti, vandalism

Graph of Negative Externality

production externality-use firms MC to show it

Consumption externality uses indifference curves

too much produced-loss from overproduction

How get rid of negative externality

impose tax equal to external cost on firm producing negative externality (but if tax > external cost, then could drive them out of business or if tax< true external cost—still over production)

1) Pigovian tax

2) Pollution permits

3) Regulation

4) lawsuits-legal compensation-impose cost on polluter

Positive Externality (vaccines)

How eliminate positive externality

1) Subsidize

2) Government provision

3) Regulation

Private Goods

rival(less of it to consume for others) if i consume it) and exclusive (can exclude others from using it)

Public Goods

Non-rivalious (my consumption doesn’t decreasr the amount that others can consume—-national defense)

Non-excludability—costly to exclude people

Congestible Goods

initially non-rival goods but can become rivalious as lots use)

Public Goods

government provides, which either would not be provided by private markets or would be provided insufficiently

Risk averse

willing to pay more to avoid risk

risk neutral

pay expected amount

risk preferring

pay less

Free rider problem

don’t pay—-off others who are willing to pay more——problem with lack of excludability

Drop in the bucket

because a good or service is costly that its provision cannot not be provided by one person

How fix it?

Taxation

When provide public good

When benefits>costs—-there is pareto improvement to provide good when sum of WTP>cost

Private demand curve

horizontal sum of individual D curves

Imperfect Information Types

Incomplete and Asymmetric

Expected Value

EV=p1O1+….

Expected Utility

the sume of pronbbilities of each outcome*the utility of each outcome

Utility of expected value

the utility from the expected value of an outcome

EU and U(EV) comparison for differnent perspectives of risk

if diminishing mu income

risk averse

Risk neutral

Risk preferring

Problems with asymetric info

1) Adverse selection or hidden-type problem—-one person can’t see other side of market while other can

2) Moral Hazard or hidden-action—can’t observe the actions of the other

3) Principal-Agent Problem

Lemons Cars

Errors in Predicting Risk

1) Hindsight Bias-because it happened, think the probability of it happening was high (things that actually happen seem, in hindsight, to have been far more Riley than they were in foresight)

2) Gambler’s Fallacy-thinking that independent outcomes are affected by past events (picking lotto numbers based on pass)

3) Overconfidence—think prob higher

4) Overestimate-low probability events

5) Underestimate high probability events

Errors in Predicting Happiness

Emotions and Changing Preferences

decision making effected by emotions and states

Time Consistency

impatient—-weigh immediate benefits more

procrastinate—weight immediate costs more

falling discount rates

Too Many Choices

decision fatigue—-parole board

Anchoring

anchor price based on other information

General Equilibrium and Government Intervention

Why should they

when market failures

redistribution of income

Pareto Efficient/Optimal

can’t make anyone better off without someone worse off

Pareto Improvement

make someone better off without making anyone else worse off

Kaldor-Hicks (potential Pareto improvement)

As long as gainers could compensate losers and benefit occurs to society, then improvement. But costly to do this

Polinsky’s efficiency

relation between aggregate benefits of a sitution and aggregate costs of a situation—size of the pie

Equity

how slice pie

Social Welfare function

function of utilities

Welfare economics

studies well being of many

Benthamite

greatest happines for greatest bymber

W=max of sum of utilities

people can have zero utility

Rawlsian (minimax)

social welfare depends on wrost off

Nash

multiple utilities so that none can equal zero (balance equitable and efficient)

Trade off between effieicency and equity

Standard Assumptions in analyzing effiency of legal rules

1) Costs and benefits measured in terms of dollars

2) Consumer soverignty—-indivudals detrermine themselves the dollar values ro place on costs and benefits

3) Costs and benefits are stable-unchanged by public policy

4) Firms and consumers maximize benefits less costs

MEthods for Redistributing Income

1) Direct Tax and Transfer—crearetes incentive effects, distrobtions of prices—collecting and redistrubuting uses resources

2) Human investment—do they work, may not raise incomes of poor, long term to realize gains

3) Social Insurance (social security, unemploment insurance)-too expensive, adverse selection, irrational choices towards saving

4) Legal rules/outcomes—too blunt, may not target right people

assume tax and transfer is least costly—use effieicy not equity

Measuring Costs and Benefits

Diret Method—market price reflects MC and MB to society

Benefit of market existence= PS+CS

Indirect Method-

Structure of Government

Rule of law

3 branches

legislative-statutes

Mishkin

institutions are important to organizing property rights

institutions-the set of rules, organizations, and customs that govern the behavior of individuals and firms

property rights: the protection of perperty from expropriation by the government or other parties

Douglass North—-what is important ot economic growth

effective, low cost enforcement of contracts and strong property rights

Countries with english common law outperform others

Obstacles to effective propertu rights

corruption

high cost of legally establishing a business

governemtn taknig of property

wars/unstable legal systems

Epstein

accesses eastern German vs western-fall of berlin wall

don’t need to make constitutions different for each country because each country actually has same background—actuallly not different in governance—maximize utility

either paint toward culture or go to just general things

3 laws

property

contract

criminal/tort

Three questions when setting up law

Efficiency-equity question

Incenctive question —-consider care level—behavior of an individual or firm that affects costs and benefits—-and activity level

Risk-allocation question—-risk preference, access to information

Butterfield v Forrester

Butterfield driving

Forrester put log in road

Not legal to put log in road but Butterfield could see

according to precedent-negligence

create contributory negligence

broad ruling—this applies to all negligence

narrow-only car accidents

Butterfield partially responsible-so loses—-upheled by appellate

Jury role-decide the facts—butterfiled not drunk, but driving fast

Judge—instructs the jury and applies the law

appeal because incorrectly applied (cannot be on wrong facts)

new law—contributory negligence is a complete bar to recovery

Davies v Mann

davies leave donkey in road

going with precedent would incentivize accident

Last clear chance bariation of contributory negligence

Butterfield could have had last clear chance but law evolves over time

British Columbia Electric Railway v Loach

argue breaks didn’t work so didn’t have last clear chance

should have had last clear chance if maintained breaks properly

Second Civil Chamber case

drunk person on train

get to end

civil law-statute—-says train company had duty of care—-laws about contributory negligence

Flood v Kuhn

baseball—write about how important and who favorite players

reserve clause—keep salaries down, teams used 1 yr standard contracts with a clause that reserved the players for the team-players could not bargain with other teams

Flood sued-played for cardinals-traded to Phillies—-sued under Sherman antitrust act

Earlier decision-commerce vs business——limited reading that commerce needs goods not service—manufacturing economy

Baseball not subject—establish precedent

but became narrow interpretation

If courrt incorrect-overturn or law

1952 hearing—keep reserve clause

Toolsen v New York Yankees

still don’t overturn

but other supports are subject

act later passed

Holy Trinity Church v United States

can’t prepay for transport of alien of foreigner

exceptions

meant to cover low wage workers—protect domestic wages from cheap unskilled labor

court found only to include manual labor——narrow reading—rewrite the law

Judges make law through common law or interpretation

technical v ordinary meaning, grammar, etc, connectors