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LectNotes-5-Oct18-TransCost-Sos2330 - INTRODUCING THE...

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1 INTRODUCING THE ECONOMICS OF LAW Prof. Salazar Session/Week 5 – Sosc 2330 October 18, 2010
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2 OBJECTIVES 1. Understand the contribution of the transaction cost approach to enrich our view of the law Introduction: Key issues and Basic definition Problem of Transaction Cost T Cost specified and Law’s role as solution Is the TC superior to Market and Government Failure Approach? 1. Assess the strengths and weaknesses of the transaction cost approach: Source of criticism Example: Cell Phone case Integrating Economic and Non-Economic considerations in legal analysis
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3 IMPERFECT INFORMATION MARKET POWER EXTERNALITIES MARKET FAILURES GOVERNMENT INTERVENTION Law + Direct Control GOVERN. FAILURES OTHER FAILURES Public goods, behavioural/rationality (e.g. self-interest), Transaction cost, unemployment SELF-REGULATORY POWER OFMARKETS e.g. competition eliminates monopolies INDUSTRY SELF-REGULATION e.g. own advertising standards
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4 If markets and governments fail, how do we deal with the inefficiencies and abuses in the economy? What is a better place and role of the law?
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5 Ronald Coase (1910-, UK, London SE, Nobel Prize 1991, currently Chicago Professor) “Market Failures v Government Failures”? Acknowledge the merits of MF and GF Instead: Transaction Cost Law’s role Institutions
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6 THE TRANSACTION COST APPROACH TCA provides a rationale for legal intervention that purports to be superior to market and government failure views TCA attempts to demonstrate that private markets are still a superior mechanism to solve all failures and enhance society’s welfare (Pareto efficiency) provided that legal institutions are in place. Government intervention is thus not required beyond the making and enforcement of basic legal rights e.g. property rights (through court or legislature)
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7 THE TRANSACTION COST APPROACH Cost of transactions and market activities is problematic and requires law’s role: Problem: costs associated with making a transaction may deter parties from carrying out a transaction. Consequences: jobs are not created, wealth is not generated, public services are not funded. This may result in making individuals and society worse-off. Solution: Law should play a role in mitigating TC so as to make society better-off
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8 TRANSACTION COSTS DEFINED Coase: “..
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