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ECO 320 ECONOMIC ANALYSIS OF LAW FINAL EXAM (UNIVERSITY OF TORONTO)
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ECO 320 ECONOMIC ANALYSIS OF LAW FINAL EXAM (UNIVERSITY OF TORONTO)
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ECO 320 ECONOMIC ANALYSISOF LAW FINAL EXAM
(UNIVERSITY OF TORONTO)
Economic Analysis of Law Test 1 Review Notes:
CU Chapter 1: Introduction to Law and Economics
Efficiency over Distribution in analyzing private law:
• A possible way to pursue redistribution is through private law (property, contract,
torts). Courts should make private laws to redistribute income to deserving groups
of people (Consumers in favor over investors)
• 4 Reasons this is inefficient:
1. Redistribution by private legal rights relies on crude averages
2. the distributive effects of reshuffling private rights are hard to predict
3. Transaction costs of redistribution through private legal rights are typically
high
4. Redistribution by private law distorts the economy more than progressive
taxation does
• Law needs economics to understand its behavioral consequences, and economics
needs law o understand the underpinnings of markets
CU Chapter 3: A brief introduction to law and legal institutions
Common Law:
• Judges justify findings of law using precedent and social norms
• Lawyers make arguments for their respective sides, judges act as a neutral referee
• Juries are used most often in common law
• In a jury trial judge decides question of law and jury decides question of fact
Civil Law:
• Judges justify interpretation of a code directly by reference to its meaning
• In civil law judges take active role in directing questions and developing
arguments
Nature of Legal Dispute:
• Cause of action – a valid legal claim
• Parties have a right to appeal from a summary judgment or a dismissal
• Preponderance of evidence – if plaintiff (or defendants) arguments are more
convincing then defendants (or plaintiffs) the plaintiff (or defendant) wins (for
private parties as litigants)
• For criminal cases prosecution must convince jury that the defendant is guilty
beyond a reasonable doubt
,• Judgment non obstante verdicto – judgment nonwisthanding the verdict, judge
thinks jury got it wrong
, • Grounds of an appeal are usually about mistake of law including general
principles and procedures the court applied, but not about the facts, no new
evidence or facts are brought in at the appellant level
• Doctrine of Last clear chance Rule: If both parties to an accident are negligent,
the party who had the last clear chance to avoid the accident will be held
responsible for losses arising from the accident (Some cases at the end of the
chapter to show how rule developed, go over if time)
Chapter 4: An economic theory of property
Legal Concept of property: property is a bundle of rights. These rights are impersonal.
The owner is free to exercise the rights over his or her property. Owners are forbidden to
interfere with the owner’s exercise of his rights
Bargaining Theory:
• Moving property from someone who values it less to someone who values it more
• Cooperative surplus is the name for the value crated by moving the resource to a
more valuable use
• Payoffs to the parties in the non-cooperative solution is called their threat values
• The surplus from cooperation: Net cooperative solution – net non-cooperative
solution
• Process of bargaining can be divided into three steps: establishing the threat
values, determining the cooperative surplus, and agreeing on terms for
distributing surplus from cooperation
The Origins of the institution of property:
• Why are owner ship rights established: Societies create property as a legal right to
encourage production, discourage theft, and reduce the costs of protecting goods.
Law also prescribes ways we can get property rights
An Economic Theory of Property:
• Law is unnecessary and undesirable where bargaining succeeds, and the law is
necessary and desirable where bargaining fails
Coase Theorem:
• Transaction costs encompass all of the impediments to bargaining
• If transaction costs are zero to low, then we do not need to worry about specifying
legal rules regarding property in order to achieve efficiency. When transaction
costs are high however to prevent bargaining, the efficient use of resources will
depend on how property rights are assigned.
, • Net value of bargain is the cooperative surplus minus the transaction costs. If it is
(-), transaction won’t occurs
Elements of Transaction costs:
• Three forms of transaction costs corresponding to three steps of an exchange:
1. Search costs – Search costs tend to be high for unique goods or services and
low for standard goods and services
2. Bargaining Costs – Negotiations tend to be complicated and difficult when
information about threat value and the cooperative solution is private. In
general bargaining is costly when it requires converting a lot of private
information into public information. Rights of the parties define threat values
in legal disputes so cooperation is more likely to happen when rights are clear
(that’s why we have registration of ownership)
3. Enforcement costs : For complex transactions, monitoring behavior and
punishing violations of the agreement can be costly. Enforcement costs are
low when violations of the agreement are easy to observe and punishment is
cheap to administer
• Examples of Low: standard good, clear rights, few parties, friendly parties,
reasonable behavior, instantaneous exchange, low monitoring cost, cheap
punishment
• Example of High: unique good, complex rights, many parties, hostility,
unreasonable behavior, delayed exchange, high monitoring and punishment costs
Normative Coase and Hobbes Theorems:
• Some transaction costs are endogenous to the legal system in the sense that legal
rules can lower obstacles to private bargaining. Coase theorem suggests that the
law can encourage bargaining by lowering transaction costs. If transaction costs
are made lower where net benefit from private exchange is positive then the
exchange occurs.
• One way the law can lubricate private bargains is by defining simple and clear
property rights. By doing so private parties can exchange legal rights, relieving
lawmakers the difficult task of allocating legal rights efficiently
• Normative Coase theorem – structure law as to remove impediments to private
agreements (Injunctions)
• Normative Hobbes theorem – structure the law so as to minimize the harm caused
by failures in private agreements (the law not only decreases transaction costs but
minimize disagreements then can be costly to society)
- to minimize the resulting harm of a non-agreement, law should allocate
property rights to the party who values them the most making exchange
unnecessary (Damages)
Lubricate or Allocate? Coase Vs. Hobbes:
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