econ169.exam.ak

econ169.exam.ak - Economic Analysis of the Law Midterm 3...

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Economic Analysis of the Law Midterm 3 Spring 2009 1. What is the economist characterization of negligence? Explain. (2) Negligence means that the person has undertaken less than the optimal amount of precaution. Optimal means that the last dollar spent on precaution (damage prevention) reduces damages by a dollar. Under a simple negligence rule, the injurer is liable to the victim for the damage if and only if the injurer is negligent. Explain as thoroughly as possible, why the efficient amount of care will be undertaken by both the injurer and the victim under this rule. That is, explain why the efficient outcome is a Cournot-Nash Equilibrium. (4) We will now establish that the efficient outcome is a cournot nash equilibrium. Suppose that the victim has undertaken the efficient amount of precaution, then the injurer will want to act efficiently (that is, not be negligent). If the injurer were to spend less than the optimal amount of precaution, then the injurer would be liable for the damage to the victim), in which case every dollar spent by the injurer would reduce damages by more than a dollar . Therefore, the injurer would want to increase his spending until the last dollar spent reduced damages by one dollar, which is the efficient outcome. At that point the injurer gets a big bang for his buck, since he is no longer liable for the damage to the victim. Clearly the injurer would not want to spend more than the optimal, since he is no longer liable to the victim and the cost of the injurer's precaution falls entirely on the injurer.
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