Econ 404 Prelim Study Guide and Topics

Econ 404 Prelim Study Guide and Topics - Econ 404 Prelim...

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Econ 404 Prelim Study Guide and Topics Main Themes : Laws are in place to minimize externalities They are stable, but they do not stand still Laws are also used to help avoid huge amounts of extra work or research in a case by case basis. Laws also are meant to prevent a hold-out problem They also are meant to minimize moral hazard They also are meant to minimize the gains by free riders TANSTAAFL – there is no such thing as a free lunch – someone always has to pay Risk bearing – party who is better situated (cheaper and easier) to bear the risk should bear it, unless agreed upon otherwise Coase Theorem If there are zero transaction costs, the efficient outcome will occur regardless of legal entitlement. Coase Theorem [REVISED — If there are positive transaction costs, the efficient outcome MAY NOT be reachable under every choice of legal entitlement. Where this is so, THE PREFERRED LEGAL RULE IS THE ONE THAT MINIMIZES THE EFFECTS OF TRANSACTION COSTS, including both the costs themselves and their effects i.e. inefficient choices. o Ex trains and sparks and farmer o Person with more to gain will pay for the right to something, be it damages, radio waves, light, building permission… Moral hazard problem o Legal rules effect the way that people behave o In terms of responsibility o Who’s responsible for repairing damages? Medieval Europe – tenant Landlord far away Lots invested Simple property, simple repairs Cheaper for tenant Modern times Landlord close Possibly employs person to do all this work Possibly short lease Complicated repairs, maybe doesn’t know how to do it Cheaper for landlord to do his repairs Efficiency Locally efficient for landlord to fix Globally efficient for tenant to do more damage Whoever does repairs has some moral hazard – how much to charge, and if to do right? Property Law : o If you don’t, someone else will o Old Latin rule if you own property, you own everything from heaven to hell This was changed with the Edwards vs. Sims case of the cave 1 rmf34 19:45:02
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You have property right to what you can use, if someone else uses it to make money, you can’t take a windfall from their work.
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