Law and
Economics
Exam Two
Wednesday February 26
Winter 2014
Friedman Text: 9, Intermezzo, 10, 11, 12
I. Compensation
A. Liability rules
1. compensate
victim for losses (like insurance)
2. provide
correct incentive for others
B. Personal Injury and Wrongful death
1. pecuniary
damages
a. medical costs
b. lost wages
i. present value of stream of earnings
ii.
expected earnings growth, number of years, discount
rate
c. injury may have
higher costs than death
i. high medical expenses
ii.
better off dead?
iii. obvious problems with this system
2. hedonic
damages
a. compensate victim
for value of life
b. life is worth more
than stream of income
c. necessary to
provide efficient incentive
3. value of life
a. decisions on risk
reveal how people value their life
i. accept payment to take risks
ii.
pay to avoid risks
b. perfect
compensation
i. pay people to accept any risk they are exposed to
ii.
transactions costs, information costs, bargaining
costs make this impossible
iii. insurance market could provide equivalent
a. sell "inchoate tort claim"
b. buyer pays now, collects insurance in
case of wrongful death
4. Courts
a.
hedonic damages have not been generally accepted
b.
pecuniary compensation is too low
II. System of Law
A. Sources of Law
1. statutory law
2. common
law
a. judges decide cases
b. decisions become
precedents
B. Structure of US Court System
1. State Courts
a. trial court
b. appellate court
c. high court
2. Federal Courts
a. District Courts
b. Circuit Court of
Appeals
c.
C. Structure of
1. Circuit Court
a. district court
b. probate court
c. municipal court
d. family division
2. Court
of Appeals
3.
D. The Dispute Process
1. claim
2. trial
a. jury: verdict
b. judge: judgment on
the verdict
3. appeal
a. based on questions
of law
b. facts come from
trial
i. no new evidence
ii.
no witnesses
4. further
appeal is possible
a. state system
b. federal system
c. US Supreme Court
E. Precedent
1. judges follow
rules established by case law
2. no clear
rule: judge makes decision-- creates new rule
3. new rule
becomes precedent for courts beneath deciding court
4. US Supreme Court decisions become
precedent for all lower courts
F. Criminal Law and Civil Law
1. same courts
2. differences
a. parties
b. fines/damages
c. punishments
d. standards
III Property
A. Why create private property?
1. simultaneous
use can be impossible
2. unrestricted
use can deplete resource
3. incentive to
produce
B. Why have common property?
1. transactions
costs to negotiate use may be too high
2. monitoring
and enforcing property rights may be too expensive
3. defining
boundaries of property may be difficult
C. Efficient property definitions depend on relative costs
D. Property issues
1. How are rights established?
2. What can be privately owned?
3. What may owners do with property?
4. What remedies for violation of rights?
5. What bundle of rights?
E. Optimal System
of Property Rights
1. Characteristics
a. universality
b. exclusivity
c. transferability
d. enforceability
2. None of these characteristics are
fully realized in the real world
F. Right to transfer
1. inalienable
goods
2. entire bundle
3. individual
rights from bundle
a. real property
(land)
b. easements
c. covenants
d. air rights, mineral
rights . . .
4. recording
systems
5. Racially restrictive covenants
G. Establishing property
1. fugitive
resource
2. rule of first
possession
3. problems
a. depletion
b. overexploitation
c. alternative rules
can solve problems
i. private rights
ii. joint
ownership
4. Public Auction
5. State grants
6. Treaty
7. Common
law
8. Adverse Possession
H.
Property and the Wild West
1. Homestead Act
IV. Intellectual property
A. Copyright
1. protects
expression
2. exists at
creation
3. lengthy
protection
a. lifetime + 70 years
b. works for hire (95
years)
c. enters public
domain after expiration
4. rights can be
transferred
5. protection is
narrow
6. fair use
B. Patent
1. protects
ideas
a. novel
b. non-obvious
c. useful
2. registration
required
3. short
protection
-- 20 years
4. rights can be
transferred
5. breadth
depends on claim
6. use requires
approval
C.
Trademarks
1. protects
symbols
2. registration
3. no expiration
4. rights can be
transferred
5. protection is
narrow
6. other use is
limited
7. economic
reasons for protection
a. information
b. quality
D. Trade secrets
1. State law protects
2. very limited
protection
a. misappropriation
prohibited
b. independent
invention allowed
c. reverse engineering
allowed
3. Why not use patents instead of
secrets?
a.
patent standards may be too high
b. patent length may
be too short
c. patent cost may be
too high
E. Economics of intellectual property
1. Should ideas be private property?
a. simultaneous
use is possible (so no need for private ownership)
b. ideas aren't depleted (so no need for private ownership)
c. incentive to
produce (main reason for existance of IP)
2. IP creates an incentive to innovate
a value to society: consumer surplus,
producer surplus
b. ideas as a public
good
c. when are ideas
most valuable?
3. IP creates monopoly
power
a. inefficiency and
deadweight loss
b. trade-off: value
of idea with loss from monopoly
c. spread of innovation is too slow
4. Efficient amount of protection
a. rent seeking problem
i) IP owners lobby for extended rights
ii) loss in net social benefit
b. balance dynamic and static efficiency (Nordhaus trade-off)
i)
strong enough protection to promote innovation
ii) weak enough for innovation to spread
F.Cases
1. Counterfeits and
knock-offs in fashion
2. Online
music
3. Open source
V. Contracts
A. Enforceable agreement
1. mutually
beneficial
2. rational
3. promise
B. Major questions
1. what promises
should be enforced?
2. what remedy
for broken promise
C. Agreements and incentives
1. without
contracts
a. agreements are not
enforceable
b. incentive to break
promise
c. inefficient outcome
2. with
contracts
a. penalty for
breaking agreement
b. changes incentives
c. efficient
agreements can take place
3. alternatives
a. reputation
b. bonds
D. role of courts
1. enforce
contracts
2. resolve
disputes
3. add
provisions
4. specify
remedy
E. Factors may make contracts unenforceable
1. incompetence
2. duress
3. necessity
4. impossibility
5. derogation of
public policy
6. fraud
7. information
problems
a. mutual mistakes
b. failure to disclose
8. unconscionability
9. no
consideration
a. promise of a gift
b. unless detrimental
reliance
F. Breach of Contract
1. incentives
a. reliance
b. efficiency
2.Remedy
a. nothing
b. specific
performance
c. expectation
d. reliance
e. liquidated damages
G. Incomplete Contracts
1. contracts
don't cover every contingency
2. perfect
contracts would be ineffcient
a. negotiating costs
b. low probability
outcomes
c. imperfect
information
3. court needs
to decide who bears costs
a. hypothetical
bargain
b. efficient
risk-bearing
i. moral hazard
ii.
adverse selection