midterm12004 - Economics 320F An Economic Analysis of Law...

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1 Economics 320F – An Economic Analysis of Law Midterm Exam 2-4pm SUGGESTED ANSWERS Fall 2004 University of Toronto Joanne Roberts Please answer all parts of the exam in the exam booklet provided. Non-programmable calculators are permitted. This test will be marked out of 50. The marks for each question are noted throughout the exam. Part 1: [20 marks -- 10 each] Answer two of the following: 1. Crime can be deterred by public actions (police, public prosecution) or by private actions (better locks, security systems, guard dogs). Indicate whether private actions to deter crime are likely to be at the socially efficient level for any given level of public crime prevention. Explain why or why not. In general private citizens do not have incentives to invest optimally in deterring crime. Private actions are likely to differ from the social optimum in two ways: 1. private citizens will not take into account the benefit to other citizens (i.e., the public deterrence effect) of their taking such actions; and 2. private citizens will tend to take activities which have a private deterrence effect, but tend to simply redistribute the cost of crime to other citizens and thus, have no net social benefit. The first implies that private deterrence will tend to be less than the optimum; the second implies that private deterrence will tend to be excessive. Which dominates depends on the particular situation, but in general private deterrence will not be optimal (without state intervention – see pages 475-477 of the text). 2. “Structure the law to remove impediments to private agreements, and to minimize the harm caused by failures in private agreements.” What does this mean and why does it promote the efficient allocation of property resources? Give an example that illustrates this rule.
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2 The efficient allocation of property resources will tend to be achieved where property can easily be transferred to its most valuable use. The first part of the statement refers to the argument that the law should facilitate, and not impede, these kinds of transactions both by allowing and enforcing them. The second part of the statement refers to the fact that sometimes, perhaps due to transaction costs, parties may fail to reach an agreement (even though such an agreement might otherwise be efficiency enhancing). Where this is the case, some property owners may not take into account some of the costs their use of that property imposes on others (i.e., externalities). The law should be structured in such a way as to minimize the extent of those externalities – perhaps by enforcing property rules with damage awards. 3. A recent commentator has written the following: “Becker’s well-known economic model of crime is based on deterrence: potential criminals alter their behaviour in response to changing incentives. Empirically, however, it is often difficult to distinguish between deterrence, which is a behavioural response, and incapacitation, in which reductions in crime are attributable solely to criminals being
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This note was uploaded on 10/19/2010 for the course ECONOMICS econ320 taught by Professor Rogers during the Fall '04 term at University of Toronto- Toronto.

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midterm12004 - Economics 320F An Economic Analysis of Law...

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