Law and Economics Midterm

What is normative economics?

Deals with how the world should be, incorporating ethical perspectives. Example: Advocating for wealth redistribution to increase overall happiness. (Hint: Normative statements will have the word SHOULD in them).

Example Statement: We Should increase gas taxes in order to reduce driving and carbon emissions.

What is positive economics?

Describes how the world is, using objective, fact-based analysis. Example: Studying historical economic trends.

Example Statement: People drive less when prices for gas are higher.

What is a tautology?

A necessarily true statement, such as "An unmarried man is a bachelor."

What are transaction costs?

Expenses incurred during the buying or selling of goods or services, beyond the item's price.

What is the continuum problem in law and economics?

The challenge of defining boundaries in gray areas, e.g., self-defense vs. murder or the statutory rape age.

What is the difference between a crime and a tort?

A crime is prosecuted by the government, whereas a tort is a civil wrong causing harm to an individual.

A crime is purposeful. A tort is an accident.

What is the difference between cardinal and ordinal utility?

Cardinal utility assigns numerical values (e.g., "I like my car 10x more than my bike"), while ordinal utility ranks preferences without numbers (e.g., "I prefer my car to my bike").

What is an ex post facto law?

A law that now criminalizes an action that was legal when performed. Example: Nuremberg Trials.

Who carries the burden of proof in legal cases?

The plaintiff must prove the defendant’s guilt ("innocent until proven guilty").

Why is scarcity important in economics?

Economics exists because resources are limited; if a resource were unlimited (e.g., oxygen), it wouldn’t be an economic issue.

What is the privity rule in contract law?

Only parties in a direct contractual relationship can sue each other. Example: A consumer sues a retailer, not the manufacturer.

What is the purpose of stand your ground laws?

They allow individuals to lawfully defend themselves without a duty to retreat.

What is eminent domain?

The government's power to take private property for public use, with compensation.

What are the main types of intellectual property?

Patents (inventions), copyrights (creative works), and trademarks (branding).

What is rational ignorance?

The decision to remain uninformed when the cost of acquiring knowledge outweighs its benefits. Example: Voters staying uninformed on minor political issues.

What is legal positivism? And what opposes it?

The belief that the law is always just, as seen in the Nuremberg defense.

Ex Post Facto Law Opposes it.

What are inalienable rights?

Rights that cannot be given away or taken. Example: Freedom of speech.

What is Pareto efficiency?

A state where no individual can be made better off without making someone else worse off. (Similar to a Zero sum game)

What is the difference between blackmail and extortion?

Blackmail threatens a legal action ("Pay me, or I’ll spread a rumor"), while extortion threatens an illegal act ("Pay me, or I’ll harm you").

What is an Empirical Claim?

Things in nature/found in the world, not necessarily true. It’s raining outside (true or not)

What is a Reductio Ad Observium?

A logical argument that establishes a claim by demonstrating that its opposite leads to a contradiction or absurd conclusion, thus proving the original claim.

Example of a kid stealing a piece of candy.

What is a Certificate of Need?

Must prove that the economy needs your product (heavily influenced by firms already in the market)

What is Interpersonal comparison utility (ICU)?

Worse than cardinal utility:

I value my car at 10 utils and Block values my car at 12 utils, so he should take my car so the world will be better off.

What is Environmental Racism?

Its really povertism

Bad: setting up a pig farm in the middle of a poor neighborhood (people are less able to sue/move)

Good: setting up a pig farm and creating cheaper land that poor people can buy

Good or bad depends on who was there first: who homesteaded the land first

What are Opportunity Costs?

Everything you do is at the cost of something else. (Example: Usain Bolt and YoYo Ma)

What are Technological Units?

The size of an area to be homesteaded (depends on the type of resource)

West of the MS, 160 acres was not enough to support a family of four, so people mainly homesteaded in the East.

What is De Minimis?

Law does not take into account trifles (small issues).

Pollution Issues: 100 mil cars in the world, and you can’t sue them all (Everyone is exhaling CO2, should they all be sued as well?)

This applies to cars. What is the solution? Block says: Private roads. If there is pollution, you should be able to sue the road owner, not the owner of the car.

What is the Ad coelom doctrine?

Landowners own everything above and below their property (the dirt below and the sky above)

Slant drilling - digging under someone’s land - is legal as long as you don’t damage property. (Easier in NY than in NOLA)

What is Rothbards argument for radio waves trespassing?

They pass through people, but since they are not harmful, Rathbard says they are not a trespass

Blocks argument: What if they cause cancer?

What is Commodification?

Turning a product into something that can be bought or sold.

Block says everything should be Commodifiable.

What is a Residual income claimant?

Who receives the remaining net cash flow after all other claims (like wages, debt payments, etc.) have been satisfied. 

Pays for capital/tools needed before the thing is made, all other profit goes to owner.

Why not cut out the middle man? Entrepreneurs offer their time, risk (monetary), and management.

What does Marx say about Residual income claimant?

That it is exploitation and that the laborers should receive all profits.

Block says: No because entrepreneurs provide the time, risk, and management.

Lefties: employee stock ownership plan

What is The Labor Theory of Value

(nonsense) (Marxist)

• The demand for labor comes from the demand for products, not the labor put into it.

  • We demand shoes not shoe makers

  • Marx says capitalism are stealing from labor

• Marx says things are valued by the amount of labor that is put into them

  • ¾ of the gdp is wages; according to Marx capitalist are stealing the other ¼ from the workers 

• Why is this wrong? Mud Pie v Cherry Pie

  • The same amount of labor goes into each pie, but the cherry pie is worth much more than the mud pie, since there is more demand for cherry pies.

  • Marxist would argue that only socially necessary labor matters, so since no one would use the mud pie, it does not count, but what if people bought mud pies for mud baths.

Deontological (normative analysis) for Patents. (owning an idea) Is this righteous?

Block says no, you can’t own ideas - technically they haven't taken the idea from you, you still have it. (Example: building a log cabin with notched logs, if someone who has been using cement starts to copy you, you don’t have the ability to make him stop)

What is Coase’s “The Problem of Social Costs”

• Divides the world into either 0 transaction costs or infinite transaction costs 

  • In a world with 0 transaction costs, no matter what the judge says, the person who values it more will receive it 

  • If the judge rules with the person who values it less then the other person will simply bribe them/ offer them money to change the court ruling 

  • The judges decision will only affect wealth

• In the real world, Coase says that the rightful owner of something is whoever values it more in order to maximize GDP

• What’s wrong with the Coase view?

  • A judge will side with the past - whoever bought it/homesteaded first

  • A judge cannot actually know how much someone values things at 

  • Judges are not central planners

• According to this view, killing is justified if someone values killing you more than you value living 

What does Rothbard say about Physical Invasion?

• No action should be illegal unless it invades on a person's personal rights or private property

  • If someone threatens to stab you jokingly and you shoot them, then you are a murderer

  • If someone threatens you in a dark alley and you shoot them, then you are justified 

What is the Marital asymmetry hypothesis?

• There is no wage gap between never married men and never married women, but there is between ever married men and ever married women.

• If there was a wage gap, women would be employed at a higher rate because they would be paid less for the same amount of work.

  • Married women are more focused on kids and the home so their output is less 

  • Productivity = wages  

What is the argument for Discrimination based on the wage gap?

If men make $1 and women make $.70, in order for this to be discrimination then their productivity must equal.

What does Rothbard say about Privacy

Do you have a right to privacy? (Rothbard says no)

Privacy = wealth (go buy it) - Rothbard

If someone is staring at your with binoculars they are invading your privacy not your rights

Absolutist Theory v. Reasonable Man Theory

• Absolutist: if you commit a crime you are guilty

• Reasonable man: intent matters

  • Car-accident: heart attack behind the wheel vs. drunk driver 

• Courvoisier v. Raymond 

  • A store keeper shot a plain clothed cop during a riot because he thought the cop was a rioter

  • Absolutist: he committed a crime because he shot an innocent cop

  • Reasonable man: there was no way for him to know it was a cop and he may have felt that his life was threatened

    • Crime (on purpose), Tort (not on purpose)

What is Negative Homesteading (Lightening)?

When something bad happens to you, you must keep it.

If your about to be killed by lightning, you cannot transfer the death to someone next to you.

What is Negative Homesteading (gunman/baby example)?

• If person A grabs person B to use as a human shield to shoot person C – who has the right to shoot? (Who ever had “misery” first must accept it, so C shoots, since B was grabbed first)

• If someone is going to kill you while holding a baby as a shield, you have the right to kill them even if it kills their baby - as long as the person holding the baby acted first in attacking you.

What is Voluntary Slavery?

Block says that all consenting actions between adults should be legal and that everything is comodifiable.

If you have a dying son whose life saving surgery costs $50 mil - you should be allowed to go to a rich man and sign your life away in exchange for the $50 mil

Many people value their child’s life more than their freedom, so they should be able to trade their freedom for their child’s life without consequence 

• It is not taking advantage of anyone because all interactions are beneficial exante 

Blocks 3 Reparations for Slavery?

3 theories (none, some, all)

• No they shouldn't because the people alive today are not at fault for slavery and have never experienced slavery 

• Yes, everyone deserves reparations (Problematic since some slave owners were black)

• Some

  • Block says we should have punished slave owners by enslaving them and taking their land and dividing it between the slaves 

What is Respondent Superior?

Holds an employer responsible for the actions of their employees

• If the employer allows their employee to drive the company bus while drunk and they kill someone when the employer is responsible

  • Rothbard says no, unless they forcefully made them drive the bus

  • Respond Superior says yes, they are guilty 

What are the Libertarianism 3 Basic Principles?

Non-aggression principle: You may act freely as long as you are not interfering with another person’s rights. 

Property Rights (based on John Locke’s homesteading theory - mixing labor with land).

Free Association: You should not be forced to associate with anyone you do not want to.

What are the 4 types of Libertarians?

1. Anarcho Capitalist: Gov. is illicit (forbidden by law), everything should be done through private enterprise.

2. Minarchist: Gov. only dealt with people are property associated with it, so should only have armies, courts, & police.

3. Constitutionalist: Minarchist + post offices

4. Classical Libertarian: Minarchist + Constitutionalist + welfare and public goods - but still very free enterprise

Libel and Slander - (Slander is spoken, libel is written)

• Present law: you can be sued for this

• “Regan is stepping out on his wife” - he will lose his reputation

• Shouldn't be illegal because people do not own their reputations

  • Rothbard says that a man does not own his own reputation because it consists of our thoughts - it’s not able to be ruined

• Paradox: a person’s reputation can help them

  • People work hard for the reputations & it can help/hurt them, but they don’t own it

  • Block says reputations would be safer without libel laws because people would need proof to ruin your reputation in order for people to believe them 

Evictionism: 3 Views on abortion.

Pro Choice: Life begins at birth, Can you evict/kill: Yes/Yes

Pro Life: Life begins at Conception (2 cells), Can you evict/kill: No/No

Evictionism (Mix of both): Life begins at Conception (2 cells), Can you evict/kill: Yes/Yes (if rape occurred, baby is a trespasser)

Blockean Proviso (The Bagel Theory)

Are you allowed to homestead B?

• The Blockean proviso says no because you would control A without homesteading it 

  • Must allow for a path from C to A

• Block uses the example of parents who murder their baby by not feeding it

  • A: dead baby

  • B: bad parents

  • C: doctors, foster parents, etc.

    • We must allow C to get to A through homesteading principles

Predictions: Why can’t economists predict? 

Everything they say or do is based on being in equilibrium - we are never in equilibrium (we must assume)

No controlled experiments in economics 

What is Friedman’s Negative Income Tax

10% - trigger 40k a year 

Make 40K taxed at 10% 4k is taken, and same for more.

But for less, say 30K, you get paid 1k, for 20k you make 2k.etc

What is Unconscionability?

A legal doctrine that prevents the enforcement of contracts that are unfair or oppressive to one party.

Example: Walker Thomas Furniture 

• Woman bought a lot of furniture and paid it off, but when she bought a TV she did not pay it off

• Replevy: if you break a contract everything is seized – so they took back all the furniture, even the items she paid for

  • Court says this is unfair and you should get what you paid for

• This store was in a low income neighborhood with no collateral, so without this safeguard, this will create a furniture dessert 

What is Egalitarianism (Welfare)?

• As you take $ from the rich and give to the poor, you are taking less utils from the rich and giving more to the poor - society benefits because money means more to poor people

  • Problem! There is no such things as utils.

  • When you take from the rich and give to the poor you disincentivize getting rich and incentivize staying poor.

• Diminishing marginal utility of income (justification for welfare)

  • According to neoclassical economics, the marginal utility of income diminishes as a person’s wealth increases. This means that a dollar in the hands of a poor person increases their well-being more than it does for a wealthy individual. Redistributing wealth can increase overall social welfare because it transfers money to those who derive greater utility from it.

• Austrian critique: there is no such thing as utils

What is the argument for Legalizing the Market for Kidneys?

• Many people die every year on kidney dialysis waiting for a new kidney. As of now, the only way to receive a kidney is through donation or through the death of organ donors. These methods do not keep up with the demand for new kidneys, and a way to solve this problem would be through legalizing the market for kidneys. This would allow people to buy and sell kidneys which would result in mutual benefit through the saving of a life and receiving monetary benefits. 

• Some people believe that this would take advantage of the poor because they would be more reluctant to sell their kidneys for a boost in cash. 

  • Block says this is not exploitation and nothing is outside of the preview of selling.

• Some people believe that “kidney pirates” would begin killing people in order to sell their kidneys on the black market.

  • This would not happen because the black market price would be higher and no one would buy there.

Explain Homesteading Pollution (noise, smell, air, etc.)

The first homesteader has rights: If you build a house within a certain radius of an airport, you cannot sue them for noise or pollution because the airport was there first.

Machinist vs Doctor: Doctor tried to sue the machinist for the noise even though the machinist was there first.

• Coase: whoever maximizes revenue (gdp) will win the case

  • This is not right, whoever was there first should win the case

What is a Production Possibilities Curve?

2 Goods: All points on the line represent maximized revenue 

Concave because you give up a  little amount guns to produce a lot more butter (vice versa)

What is the Minimum Wage argument?

It creates unemployment and harms less productive workers

Reductio - if minimum wage really works, why not make it 1mil so everyone can be rich

• Productivity determines wages!!

  • If wages are higher than productivity then employers will lose money 

  • If min. wage is $7 and someone’s productivity is $5 then the business would lose money hiring them, so unskilled workers have a harder time finding jobs due to low productivity

How to calculate elasticity? (and measure)

((change in quan/quan)/(change in price/price))

• Inelastic <1

  • Total revenue goes down

  • Not responsive to change in price

• Elastic >1

  • Total revenue goes up

  • Responsive to market changes

What are Speculators? Explain with Fat and Lean Years example.

They buy low and sell high.

He will buy during the fat years when food is cheaper, and save it to sell during the lean years to make a profit.

People see this as “exploitation”, but it actually creates a smaller drop off during the lean years, since his food adds more supply to meet demand. He does not let prices get as high as they do with no speculation.