Law and
Economics
Final Exam
1:30 pm Sunday
November 20
Fall 2011
The final exam will be comprehensive. You may want
to review the topics from exam
one and exam two.
I. 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. Remedy
1. nothing
2. specific
performance
3. expectation
4. reliance
5. liquidated
F. 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
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
H. Alternatives to
court-enforced agreements
1. Reputation and social bonds
2. Assurance bonds
II. Torts
A. Strict Liability
1. harm
2. proximate
cause
B. Negligence
1. harm
2. proximate
cause
3. fault
C. level of precautions to avoid negligence
1. the Hand rule
a. probability P
b. gravity of injury L
c. burden of
precautions B
d. B<P*L :
reasonable precaution
2. statutes
specifying legal standard
3. norms and
community standards
4. "reasonable
man" standard
D. Efficient precautions
1. incentives
a. strict liability
b. negligence
2. unobserved
precautions
3. activity
level
E. Bilateral precautions
1. dual
causality (remember Coase)
2. incentive
problems
3. other rules
a. contributory negligence
b. comparative
negligence
F. Damages
1. make the
victim whole
2. punitive
damages
3. incentives
G. Class action
1. several or many plaintiffs
2. reduces number of cases
3. reduces litigation costs for plaintiffs
4. big dollar amounts common
H. Cases
1. Exxon Valdez oil spill
2. Kalamazoo River Superfund site
3. Medical malpractice
I. Intentional Tort
1. precautions not an issue
2. assault, battery, false imprisonment, libel, slander
3. action may be both a tort and a crime
III. Criminal Law
A. Intent
B. Differences from Civil law
1. State enforces
2. State collects fine
3. non-monetary
punishments
4. high standard
of proof for guilt
C. A world without law
1. rational
criminals
2. inefficient
transfers
3. overinvestment
in protection
4. increased
effort by criminals (rent-seeking)
5. public harm
6. many
inefficiencies
D. Punishment
1. can be more
efficient
2. deter crimes
3. optimal
punishment
a. probability of
being caught
b. probability of
conviction
c. value of crime
4. imprisonment
a. inability to pay
sufficiently high fines
b. incapacitation
c. rehabilitation
d. retribution
e. very costly to
maintain prisons
IV. Antitrust
A. Monopoly and Collusion
1. inefficiency
2. rent-seeking
B. Sherman Antitrust Act (1890)
1. Section One: illegal to restrain trade
2. Section Two: prohibits monopolization
C. Clayton act.
- Section 7 restricts mergers that
substantially lessen competition
D. Enforcement
1. Public
a. Department of
Justice Antitrust Division
b. Federal Trade
Commission
2. Private
E. Outcomes
1. consent
decree
2. order
3. fines,
damages, jail
4. structural
remedy
a. block merger
b. divestiture
c. break-up
F. Price Fixing
1. Section One
2. illegal per se
G. Monopolization
1. Section 2
2. rule of reason
3. cases
a. Standard Oil
b. American Tobacco
c. Microsoft
4. Economies of scale
1. Mass
production economies
2. efficiency
3. trade-off
a. lower production costs
b. elevated prices
H. Mergers
1. Rule of reason
2.
IV. International markets and the law
A. Sources
1. National law
a. not uniform
b. frequently designed
to hurt foreign interests
a.
protectionism
b.
antitrust exemptions
c.
subsidies
d.
property
2. Treaties
a. negotiation costs
b. lack of enforcement
B. Antidumping legislation
1. selling at
"less than fair value" with material injury
2. countervailing
duties
3. definition of
fair value
a. varies
b. common definitions
fail economic test
c. economically valid
definition not used frequently
C. Piracy and Law of the Sea
1. jurisdiction issues
2. harm against society
3. Principle of Universal Jurisdiction
V. Trust
A. Social norms can be very efficient
B. Trustworthiness can solve, or at least reduce, many
economic problems
1. moral hazard
problem
2. free-rider
problem
3. principal
agent problem
4. rent-seeking
(in many cases)
C. Advantages to high-trust society
1. lower law
enforcement costs
2. lower
negotiating, contracting costs
3. lower
monitoring costs
a. employees
b. property
4. more
efficient institutions = higher real economic output
D. Even a good legal system may be a "second-best" solution