Econ 522 Economics of Law. Dan Quint Spring 2014 Lecture 2. Logistics. TA sections and office hours begin this week “Fake homework” for Wednesday on website First real homework also up, due next Thursday (Feb 6) If you want to read ahead:
“Everybody needs money. That’swhy they call it money.” -Danny DeVito, in Heist
kind of useless for comparing different policies
what we’ll be focusing on this semester
(1) transaction costs, and
(2) deadweight losses arising from failures to exploit potential gains from trade”
6.3 hours per day per fisherman; 793.8 fish/day
12 hours per day per fisherman; 144 fish/day
Total fish caught
“Maximum Sustainable Yield”
H (260 – H)
Efficient Level of Fishing
“Equilibrium” Level of Fishing
Hours fishing, per day, per fisherman
if we want the law to lead to efficient outcomes,
we can try to design the law to eliminate externalities!
P = 100 – Q
P* = 70
MC = 40
Q* = 30
“The central question [in this book]… is a simple one: what set of rules and institutions maximize the size of the pie? What legal rules are economically efficient?
There are at least three reasons why that is the question we ask.
The first is that while economic efficiency… is not the only thing that matters to human beings, it is something that matters quite a lot to most human beings.
The second reason is that there is evidence that considerable parts of the legal system we live in can be explained as tools to generate efficient outcomes… It is a lot easier to make sense out of a tool if you know what it is designed to do.
A final reason is that figuring out what rules lead to… efficient outcomes is one of the things economists know how to do –
and when you have a hammer, everything looks like a nail.”
- Friedman, Law’s Order, p. 312
Expected payoff, drivers
Expected payoff, pedestrians
Expected payoff if you don’t know which one you’ll be
Strict liability rule
Landlord pays for heat
1000 – rent
rent – 600 – 100
1000 – 850= 150
850 – 600 – 100= 150
Tenant pays for heat
980 – 60 – rent
rent – 600
980 – 60 – 760= 160
760 – 600= 160
“Suppose that pituitary extract is in very short supply… and is therefore very expensive. A poor family has a child who will be a dwarf if he doesn’t get some of the extract, but the family cannot afford the price [or borrow the money].
A rich family has a child who will grow to normal height, but the extract will add a few inches more, and his parents decide to buy it for him.
In the sense of value used in this book, the pituitary extract is more valuable to the rich family… because value is measured by willingness to pay, but the extract would confer greater happiness in the hands of the poor family.”
- Posner, Economic Analysis of Law
1. Taxes can target “rich” and “poor” more precisely than the legal system can
“narrow taxes cause more distortion than broad taxes”