econ exam one

property

bundle of rights. These rights describe what people may and may not do with the resources they own: These rights may change.

rule of first possession

is that the first person to use previously unowned things to possession becomes their owner

incompatible uses`

May one property owner create a stench on his own property that offends his neighbors? In general, the law tries to prevent property owners from interfering with each other, but in this example, as in many other cases, there is a trade-off between competing activities.

Property Encroachment

whether a property owner can develop his land according to his own wishes or must conform to restrictions on development imposed by a local government. The general question concerns the extent to which government may constrain a private owner's use of her property.

enjoin

the court will issue an order that they must stop interfering on pain of punishment for contempt of court

Bargaining Theory

cooperative solution

list of strategies and payoffs that the participants would choose if they could commit themselves to a coordinated choice of strategies

non-cooperative solution

an equilibrium in a game in which players do not cooperate but pursue their own self-interest

threat value

payoffs to the parties in the noncooperative solution

cooperative surplus

an equilibrium in a game created by moving the resource to a more valuable use

state of nature

corresponds to the threat values of the noncooperative solution, which prevails if the parties cannot agree.

rancher's rights

The farmer is responsible for keeping the cattle off his property, and he must pay for the damages when they get in

Farmers' Rights

The rancher is responsible for keeping the cattle on her property, and she must pay for the damage when they get out

Coase Theorem Corollary

When transaction costs are high enough to prevent bargaining, efficient use of resources depends on legal rules assigning property rights from laws or courts.

Coase Theorem

When transaction costs are zero, private parties (people, households) will achieve an efficient use of resources (pareto optimal) regardless of the legal assignment of property rights by laws of courts

transaction costs

are the costs of exchange. An exchange has three steps. First, an exchange partner has to be located. Second, a bargain must be struck between the exchange partners. Third, after a bargain has been reached, it must be enforced.

legel remedy

the payment of compensatory money damages by the defendant to the plaintiff.

compensatory money damages

sum of money that compensates the plaintiff for the wrongs inflicted on her by the defendant. The court determines the appropriate amount of money that will, as the saying goes, "make the plaintiff whole."

equitable relief

consists of an order by the court directing the defen- dant to perform an act or to refrain from acting in a particular manner.

injunction

which is said to "enjoin" the defendant to do or to refrain from doing a specific act.

Polluter's Right

energy company is free to pollute, this is efficient already, no bargaining required

Pollutee's Right to Damages

laundry claims to have right to damages, this is inefficient, because surplus exists and parties bargain to efficiency

Pollutee's Right to Injunction

laundry claims to right to injunction agfainst energy company, most efficient remedy

efficient remedies

legal actions or measures that are effective in providing redress or resolving a legal dispute in a timely and cost-effective manner. For example, a court may seek efficient remedies to ensure that justice is served without undue delay or excessive expenses.

Calabresi and Melamed

Where there are few obstacles to cooperation (that is, low transaction costs), the more efficient remedy is to enjoin the defendant's interference with the plaintiff's property.

Where there are obstacles to cooperation (that is, high transaction costs), the more efficient remedy is to award compensatory money damages.

private goods

have the characteristic that one person's use precludes another's: For example, when one per- son eats an apple, others cannot eat it

free rider

Those people who do not pay for their consumption of a public good are called

purely public good

for which there is no rivalry in consumption

allocative efficiency

property rights are the legal basis of voluntary exchange, which achieves this by moving goods from people who value them less to people who value them more.

productive efficiency

Owners achieve this by balancing the social costs and benefits of what they do with what they own.

Normative Coase Theorem

Structure the law so as to remove the obstacles to private agreements.

Normative Hobbes Theorem

Structure the law so as to minimize the harm caused by failures in private agreements

A cattle rancher lives beside a farmer. The farmer grows corn on some of his land and leaves some of it uncultivated. The rancher runs cattle over all of her land. The boundary between the ranch and the farm is clear, but there is no fence. Thus, from time to time the cattle wander onto the farmer's property and damage the corn. The damage could be reduced by building a fence, continually supervising the cattle, keeping fewer cattle, or growing less corn—each of which is costly. The rancher and the farmer could bargain with each other to decide who should bear the cost of the damage. Alternatively, the law could intervene and assign liability for the damages.

A threshold level of transaction costs that distinguishes the areas in which the Coase Theorem applies and does not apply.

The most efficient outcome is, by definition, a situation in which the total profits for the two parties, called the "joint profits," are greatest.

So, in civil society, each party receives half the cooperative surplus plus the individual net consumption in the state of nature, which is each party's threat value.

In a state of nature, each one grows some corn, steals corn from the other party, and defends against theft. Each of the parties has different levels of skill at farming, stealing, and defending.

maximization

Choosing the best alternative that the constraints allow

equilibrium

a pattern of in- teraction that persists unless disturbed by outside forces. Economists usually assume that interactions tend toward this, regardless of whether they occur in markets, elections, clubs, games, teams, corporations, or marriages.

productive efficiency

2 conditions must hold

1. It is not possible to produce the same amount of output using a lower-cost combination of inputs, or

2. It is not possible to produce more output using the same combination of inputs.

allocative efficiency

if it is impossible to change it so as to make at least one person better off (in his own estimation) without making another person worse off (again, in his own estimation)

Pareto Optimality

that point in free markets where the exchange of goods is so efficient that one more exchange would make someone feel worse off

completeness

means that the consumer be able to tell us how she ranks all the possible combinations of goods and services. The consumer is not allowed to say, "I can't compare them."

Reflexivity

It means that any bun- dle of goods, A, is at least as good as itself.

Transivity

means that the preference ordering obeys the following condition: If bundle A is preferred to bundle B and bundle B is preferred to bundle C, then it must be the case that A is preferred to C.

indifference curve

Each curve represents all the combinations of x and y that give the consumer the same amount of utility or well-being. Alternatively, we might say that the consumer's tastes are such that he is indifferent among all the combinations of x and y that lie along a given curve

price taking behavior

a price taker cannot control the price of the good it sells; it simply takes the market price as given, IMPOSSIBLE for a single firm to affect the market price by changing quantity supplied

market clearing price

the price at which the amount supplied is equal to the amount demanded

opportunity cost

refers to the economic cost of an alternative that has been foregon

comparative advantage

asserts that people should engage in those pursuits where their opportunity costs are lower than others

game theory

deals with any situation in which strategy is important. will, consequently, enhance our under- standing of some legal rules and institutions.

strategic form

Using a payoff matrix to represent strategy choices

extensive form

representation of a game by a game tree

present discounted value

Discount a multi-period flow of net receipts for each period

PDV equation

externalities

source market failure: economic side effects or by-products that affect an uninvolved third party; can be negative or positive

general equilibrium

will be achieved only when competitive forces have led to the equality of marginal benefit and marginal cost in the market for every single commodity and service.

public good

source market failure:

1. Nonrivalrous consumption: consumption of a public good by one person does not leave less for any other consumer.

2. Nonexcludability: the costs of excluding nonpaying beneficiaries who consume the good are so high that no private profit-maximizing firm is willing to supply the good.

asymmetric information

source market failure: a situation in which one party to an economic transaction has less information than the other party

Kaldor-Hicks efficiency

That criterion requires that gainers explicitly compensate losers in any change. If there is not explicit payment, losers can veto any change. That is, every change must be by unanimous consent.

Expected Monetary Value (EMV)

The monetary value of a risk exposure based on the risk's probability and impact in the risk matrix. This approach is typically used in quantitative risk analysis because it quantifies the risk exposure.

risk aversion

The tendency to prefer a sure gain of a moderate amount over a riskier outcome, even if the riskier outcome might have a higher expected payoff.

risk neutrality

a person has a constant marginal utility of income and is, therefore, indifferent between a certain prospect of income and an uncertain prospect of equal expected monetary value.

risk preferring

has an increasing marginal utility of income and, therefore, prefers an uncertain prospect of income to a certain prospect of equal expected monetary value -- willing to bet

Moral Hazard

major problem faced by insurance companies: arises when the behavior of the insured person or entity changes after the purchase of insurance so that the probability of loss or the size of the loss increases

Adverse Selection

major problem faced by insurance companies: A high-risk person benefits more from insurance, so is more likely to purchase it.

Behavioral economics

an approach to the study of consumer behavior that emphasizes psychological limitations and complications that potentially interfere with rational decision making

budget constraint equation

PxX + PyY = I

utility function

u = u(x, y)

indifference curve map

budget constraint map

Consumer Optimum

Economic Optimum

where marginal cost = marginal benefit

Individual demand curve

The profit-maximizing output for a firm.

Market equilibrium in a perfectly competitive market.

Profit-maximizing output and price for a monopolist.

The consequences of a rent-control ordinance that prescribes rents below the market-clearing rental rate.

payoff matrix

game tree

law and economics

Behavior theory to predict impacts of changes in law

antitrust laws

laws that prevent monopolies and promote competition and fairness

monetary fines

sums of money that offenders are required to pay as punishment for the commission of crimes

Litigants

people engaged in a lawsuit

Least cost risk bearer

The principle assumes that the entire loss from nonperformance must be allocated by the court to one of the parties.

redistributive approach

an action that is intended to share money more fairly between rich and poor people

tax and transfer system

progressive taxation and social welfare programs can accomplish redistributive goals in modern states

progressive taxation

a policy that raises tax rates as income increases

Oliver Wendell Holmes

one of the greatest justices in Supreme Court history. The study of law will require the use of economics and statistics. Opportunity cost relevant to law.

Richard Posner

Law and economics: law should aim to maximise wealth, prominent judge of law and economics

Civil Law

body of written rules which form the basis of law

Common Law

law which arises from better patterns and practices of individuals in society

Code Napoleon

The codification and condensation of laws assuring legal equality and uniformity in France. Modeled after Justinian Code and became the new Civil law.

adversarial process

the judge acts more or less as a neutral referee who makes the lawyers follow the rules of procedure and evidence.

setting aside lower level law

The power to review legislation for its constitutionality gives courts the power to set aside laws enacted by the legislature

trial courts of general jurisdiction

The main courts in the state court system and may be referred to as circuit courts, superior courts, or courts of common pleas. These are the "entry-level" courts that first hear a wide array of civil and criminal disputes.

appelate court

A court having juristriction to review cases and issues that were originally tried in lower courts. At the appellate level there will be no new evidence or facts introduced.

highest appellate court

US Supreme Court. That court has nine members, consisting of the Chief Justice of the United States and eight Associate Justices. They pick what cases they want to try.

US Appeals Court for DC

a federal appellate court with appellate jurisdiction. It hears appeals from the United States District Court for the District of Columbia and its rulings may be appealed to the Supreme Court of the United States.

federal questions

A question that pertains to the U.S. Constitution, an act of Congress, or a treaty and provides a basis for federal jurisdiction in a case.