Law and Econ Midterm

Friedman - Amish Article

- protestant sect

- Ordnung (system of rules)

- Meidung (threat of excommunication)

- rules make an ingroup vs outgroup

- rules are to stay humble

- competitive dictatorship

Lucas v. South Carolina Coastal Council

1992 case in which the Supreme Court of the United States established the "regulatory takings" test for evaluating whether a particular regulatory action constitutes a regulatory taking that requires compensation.

Timbs v. Indiana

The Eighth Amendment's Excessive Fines Clause is incorporated against the states by the Fourteenth Amendment's Due Process Clause

Coase (Problem of Social Cost)

Externalities are reciprocal

When one activity harms another (e.g., factory smoke harming neighbors), stopping the factory also harms the factory owner.

The real question is whose activity should be limited to maximize total economic value.

Bargaining can solve the problem

If transaction costs are zero or very low, parties can negotiate privately to reach the most efficient outcome regardless of who initially holds legal rights.

Example: a farmer and a cattle rancher can bargain about crop damage.

Legal rules still matter in reality

In the real world, transaction costs (negotiation, information, enforcement) are often significant.

Therefore, laws and regulations should aim to minimize total social costs, not just punish the party causing harm.

Critique of traditional economic thinking

Coase challenges the Pigouvian view that government taxes or regulation are always the best solution to externalities.

Sometimes market negotiations work better.

Law

the rules that curb human inclinations and protect the rights of one against the error and malice of others

Smith and Leeson on the law merchant

- speedy informal resolution was less costly to time

- removed need for official notarization

- eliminated "home-court bias" in international trade

- operated by merchants instead of bureaucrats

- more flexible to change than strict rules

- governments of this era did not honor interest payments

- government authority outside their territories was extremely limited

Descriptive law

Law that tells us how nature behaves

Normative law

describing how things/people should behave

Rational Choice Model

Agents are rational beings that have goals and take steps to achieve those goals. They also respond to changing costs, benefits, and laws when passing those goals (incentives matter and economics does not judge goals)

Revealed Preference

the idea that people's preferences can be determined by observing their choices and behavior (what people do is louder than what they say they will do)

Trakman

FROM THE MEDIEVAL LAW MERCHANT TO E-MERCHANT LAW - Trakman

Law of merchant was a system of law developed by midevil merchants to regulate commerce throughout europe, north africa and asia

Made for merchants, by merchants

Started as codes in different parts of the world in small communities aka tribunals

Later there were judges that were also merchants and they passes a "just price" doctrine requiring that goods and services to be equitable in nature

Law of merchant is being seen to happen again in virtual spaces now in order to protect domain names in cyber space

In respect to trademarks/ copyright

Buchanan (Politics without Romance)

Public choice offers a "theory of governmental failure" comparable to "theory of market failure"

Economic theory: a body of analysis that offers understanding and explanation of an economy

Public choice theory: takes the tools of economic theory to approach politics and government (explanation for the choices made by participants in politics i.e. voters, candidates, public figures)

Is methodologically individualistic

Political exchange is often more complex than economic exchange

The Economic Theory of Constitutions: What gives governments legitimate and what power do they have over others?

Relation to Hobbes: World in anarchy is nasty, brutish, and overall bad

Constitutions and regular free elections are often not enough to keep government in check

Postconstitutional Politics: How do groups reach collective decisions with different procedural rules and how do the powers of government supply the different goods and services demanded by citizens?

Theory of Voting Rules: Sometimes there is no majority outcome that stands out. As such, under certain circumstances, appealing to the median voter allows for a single-peaked outcome.

Representation and Electoral Competition: creates mutually exclusive winners and losers.

Theory of Bureaucracy: Governments are monoliths fighting over profit, not to benefit citizenry and represent their interests.

Conclusion: Public choice theory can be used to discuss genuine reconstruction of constitutions while avoiding social costs and leviathan outcomes.

Lucas and Tasic (Behavioral Public Choice and the Law

Behavioral Public Choice: study of irrationality among political actors

Laws are more likely to pass through Congress if sponsors conceal costs and who pays them

Irrationality among voters: Political actors have little incentive to behave rationally because one vote rarely matters

People vote for psychological and reputational benefits

Altruistic voting: voters support policies they perceive to be in the public interest even though those policies do not advance their own narrow self-interest. Altruism rarely costs voter (introduces systematic bias into the election process which is bad)

Rational ignorance: the cost of gathering and processing political information is greater than the benefits of being informed because one vote barely matters (Collective action and free rider problems)

Informed voters still have disproportionate influence over elections (miracle of aggregation)

Irrationalist among Politicians:

Lack of vigilance from voters gives government slack, but it is limited and cannot fully overcome voter irrationality.

Governments can abuse their slack to support special interest groups

Politicians do not have a strong personal incentive to rational consider matters that affect their chances of being elected. They also are rarely personally affected by bad policies and thus don't really have to be considerate.

Rational politicians can use slack to be reelected while still avoiding irrational policies

Types of Irrationality that cause Government failure:

Intentions Heuristics: public supports welfare policy despite perverse outcomes

Perception that gains always come at the expense of someone else and not pure economic growth

Dunning-Kruger effect: cognitive bias that leads people with a superficial understanding of a subject to overestimate their competence

Availability Heuristic: tendency to estimate the impor

Dudley (Bootleggers and Baptists)

Number and scope of federal regulations has grown rapidly, worrying many Americans that regulations serve well-connected bureaucrats over them

Baptist arguments may change from one administration to the next, but moral and economic forces continue to influence regulatory policy

Normative approaches: governments intervene when markets fail to allocate resources efficiently

Positive approaches: not should, but when and why regulation occurs

Public interest theory: regulators are sufficiently informed and publicly motivated to only regulate when market failures. Nevertheless, many regulations are not for public interest, motivated by private interests

Economic theory of regulation:

Government's main resource is power to coerce (thus groups can offer incentives to win that power)

Legislators are motivated by staying in office and thus maximize political support

Regulation is a method of wealth redistribution

Why do politicians use regulation to transfer wealth instead of cash transfers?

Why do politicians rely on public interest rhetoric to justify regulation?

Special interest groups need to camouflage their efforts to obtain favors

Baptists take moral high ground, bootleggers use baptists as cover for a narrow economic end (cooperation is not necessary)

Covert mode: bootleggers make baptist arguments

Non-cooperative mode: bootleggers and baptists operate independently to the same goal

Cooperative mode: bootlegger supports the baptists

Coordinated mode: government operates to coordinate players

Nature of baptist arguments is highly dependent on current administration

Once a regulation is in place, it is hard to remove because firms that were initially opposed have adapted or gone out of business

Demsetz (Toward a theory of Property Rights)

Property rights convey the right to benefit or harm oneself or others

Draft as an example of externality (taxpayer benefits by not paying the full cost of staffing army)

Main allocative function of property rights is the internalization of beneficial and harmful effects

Communal ownership: a right which can be exercised by all members of the community. The community denies to the state or to individual citizens the right to interfere with any person's exercise of communally-owned rights.

Private ownership: implies that the community recognizes the right of the owner to exclude others from exercising the owner's private rights

State ownership: implies that the state may exclude anyone from the use of a right as long as the state follows accepted political procedures for determining who may not use state-owned property.

Communal property rights often place an uneconomically large weight on the desires of present generations at the cost of future generations that have no living agent to place their claims on the market

Private property owners have no incentive to take into account the effects they produce on the rights of others. Thus, some of the same issues of communal property rights arise to a lesser degree. Private property rights allow concentrated benefits and costs while lowering negotiating costs.

Penn Central v New York City

The Court held the city's landmarks law, which prevented the party from erecting a skyscraper over the station, did not constitute a taking requiring just compensation because there was still a reasonable economically viable use.

Kelo v. City of New London

Eminent domain case: Local governments may force the sale of private property and make way for private economic development when officials decide it would benefit the public.

The enterprise of law

generated the mechanisms of enforcement, dispute resolution, and change

Malum in se

inherently wrong and outlawed everywhere

Malum Prohibitum

Evil because prohibited rather than inherently evil

The role of law in minimizing transaction costs

speedy legal process reduces transaction costs

Transaction costs

search, bargaining, enforcement

Alignment theorem

the evolution of social norms occurs when private incentives are aligned with producing a public good

Efficiency Property

we adopt a rule because it is the standard behavior due to expectations

The Law Merchant

medieval legal system prevalent in Europe that established practical rules of commerce and trade

Pareto Efficiency

describes an allocation in which the only way to make any individual or group of individuals better off would require making at least one other person worse off

Kaldor-Hicks Efficiency

When one party benefits from a change in the status quo, and other parties that are potentially made worse off by that decision can be compensated to the extent they've been made worse off in order to be made whole. The gains are larger than the losses, but the distribution of winners and losers may change.

Government Efficiency

Extent to which government policies are conducive to competitiveness

Allocative efficiency

A state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it

Productive efficiency

The production of a good in the least costly way; occurs when production takes place at the output at which average total cost is a minimum and marginal product per dollar's worth of input is the same for all inputs.

Economic efficiency

wise use of available resources so as to obtain the greatest benefits possible

Common Law

A legal system based on custom and court rulings

Legislative law

Law created by lawmaking bodies such as Congress and state assemblies. Also called statutory law.

Harold Demsetz

What he is known for

Demsetz explained how property rights emerge.

Core idea

Property rights develop when the benefits of establishing them exceed the costs.

Example: Fur trade in North America

As fur became valuable, hunting territories were defined to prevent overhunting.

Before that, property rights were unnecessary.

Why this matters

Property rights evolve as economic conditions change.

Exam sentence

Demsetz argued that property rights emerge when the benefits of defining and enforcing them outweigh the costs.

Jeremy Bentham

What he is known for

Demsetz explained how property rights emerge.

Core idea

Property rights develop when the benefits of establishing them exceed the costs.

Example: Fur trade in North America

As fur became valuable, hunting territories were defined to prevent overhunting.

Before that, property rights were unnecessary.

Why this matters

Property rights evolve as economic conditions change.

Exam sentence

Demsetz argued that property rights emerge when the benefits of defining and enforcing them outweigh the costs.

John Stuart Mill

What he is known for

Mill expanded Bentham's utilitarianism and applied it to social welfare and liberty.

Core idea

The goal of policy should be maximizing social welfare, but we should also consider individual freedoms.

Mill emphasized that:

happiness is more than just pleasure

policies should improve overall well-being.

Why he matters for law & economics

His ideas influence social welfare analysis, which economists use to evaluate policies.

Exam sentence

Mill expanded utilitarianism by emphasizing that policies should maximize overall social welfare while protecting individual liberty.

Bruno Leoni

What he is known for

Mill expanded Bentham's utilitarianism and applied it to social welfare and liberty.

Core idea

The goal of policy should be maximizing social welfare, but we should also consider individual freedoms.

Mill emphasized that:

happiness is more than just pleasure

policies should improve overall well-being.

Why he matters for law & economics

His ideas influence social welfare analysis, which economists use to evaluate policies.

Exam sentence

Mill expanded utilitarianism by emphasizing that policies should maximize overall social welfare while protecting individual liberty.

Key principle of whether laws are effective

Legal rules should be judged by the incentives they create and how people change their behavior in response to them

Consumer Sovereignty and the Law

Individuals' preferences should determine the outcome

Leoni argued that laws should evolve similar to markets in a decentralized manner than is based on individual choices and not a centralized legislation process. Common law is the most close to this process

Legal Positivism

The school of jurisprudence which holds that because society requires authority, a legal and authoritarian hierarchy should exist. When a law is made, therefore, obedience is expected because authority created it. Thus, the validity of a law depends on its source, not its morality

Analytical Egalitarianism

Everyone is modeled in the same way.

Nirvana Fallacy

rejecting a realistic solution beacuase it doesn't meet the standards of an imaginary perfect solution

Benevolent Dictator Assumption

comparing an imperfect market solution to a perfectly working government solution

Theory of Government Failure

- Rational Ignorance

- Concentrated Benefits and Dispersed Costs

- Bundle Nature of Politics

- Rent-seeking

- Rational Irrationality

- Short-sightedness in government

Rational Ignorance

the state of being uninformed about politics because of the cost in time and energy

Concentrated Benefits and Dispersed Costs

The theory that a minority benefiting from a government program will make a stronger effort to keep it than the majority will ever make to abolish it.

Bundle Nature of Politics

Politics is a low information system with poor feedback effects because voters are voting for "bundles", thus it is hard to tell which individual policies matters

Rent-seeking

activities undertaken by individuals or firms to influence public policy in a way that will increase their incomes, usually as a result of government quotas

Rational Irrationality

it is rational to believe some comforting lies and vote for welfare or with your beliefs even if they are economically inefficient

Short Sightedness in Government

Politicians have myopia because they cannot sell/pass down their seat. They will choose policies with modest benefits now and many future costs.

The problem of Collective action

A situation in which the members of a group would benefit by working together to produce some outcome, but each individual is better off refusing to cooperate and reaping benefits from those who do the work.

Public Choice Theory

An economic theory that the public officials who set economic policies and regulate the players act in their own self-interest, just as firms do.

Three legged stool of Public Choice

Methodological Individualism Political outcomes result from individual actions.

Behavioral Symmetry People behave similarly in markets and politics.

Politics of Exchange Policies arise through bargaining among political actors.

Influential Models of Public Choice

Tragedy of the commons

Prisoner's dilemma

Logic of collective action

Baptists and Bootleggers

Concentrated benefits, dispersed costs

Institutional Economics

Institutional economics studies the rules that shape economic behavior.

Definition: Institutions are the rules of the game (Douglass North).

Types:

formal institutions (laws)

informal institutions (norms).

Core assumptions:

institutions reduce uncertainty

institutions influence incentives.

possessory rights

The right to do stuff with your stuff and not let other people do stuff with your stuff

rights of transfer

the right to give/sell your stuff to someone else who can also give/sell the stuff

3 types of property rights

Property Rule Property can only be transferred with owner consent.

Liability Rule Property can be taken if compensation is paid.

Inalienable Rights Property cannot be transferred.

4 types of goods

Goods are classified by rivalry and excludability.

Type: Example

Private: food, cars

Common: fisheries

Club: streaming services

Public: national defense

Bundle of Rights

Property ownership includes a bundle of rights, such as:

use

exclude others

transfer ownership

destroy property.

Justifications of property rights

- Incentivize work

- incentivize maintenance

- incentive for transfer

- Avoid disputes

- protect against uncertainty andrisk

- wealth distribution

Property as Custom (Bart Wilson)

Property systems often emerge through custom and social norms, not formal law.

People learn what behavior others will tolerate and adjust accordingly.

Squatter's Rights

- occupancy is open/public

- without permission of owner

- the true owner makes no protest

- the land is accepted continuously for a given number of years

Public Property

Public property may be:

freely accessible

regulated through fees.

Governments provide it when private markets cannot.

Examples: parks, roads.

Intellectual Property

Two main types:

Copyright Protects creative works.

Trademark Protects brand identity.

Patents Protect inventions.

Purpose: Encourage innovation.

Acquisition of Property by the State

Eminent Domain Government takes property with compensation.

Regulatory Takings Regulations reduce property value.

Civil Asset Forfeiture Government seizes property linked to crime.

Learned Hand Rule

Determines negligence:

Precaution should be taken if:

B < P × L

Where: B = burden of precaution P = probability of harm L = expected loss.

Pigovian Tax Approach

A Pigovian tax places a tax equal to the external cost of a negative externality.

Example: carbon taxes.

Purpose: Align private incentives with social costs.

Coase Theorem

If transaction costs are zero:

Parties can bargain to achieve efficient outcomes regardless of who holds property rights.

If transaction costs are high:

The assignment of legal rights matters.

Limits of Coase Theorem

- Willingness to pay/willingness to sell

- willingness to bargain

- high # of participants

- absence of a market for rights over whatever it is

- norms/other governance

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