EconLawTest1StudyGuide

EconLawTest1StudyGuide - ECONOMIC ANALYSIS OF LAW TEST 1...

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ECONOMIC ANALYSIS OF LAW TEST 1 STUDY GUIDE “Positive” Analysis – predict effects of legal sanctions on incentives and behavior “Normative” Analysis – evaluate the effects of legal sanctions on Three Important Economic Concepts in Analyzing the Law: 1. The Law of Demand - Legal sanctions as “ prices 2. Opportunity Cost – a choice’s highest valued forgone opportunity 3. Resources Tend to Move to their Most Valuable Uses if Voluntary Trade is Allowed - wealth-maximizing supply & demand equilibriums result from the pursuit of self- interest Examples: 1. Penalties for White-Collar Crimes . Implicit price of criminal sanctions, magnitude of penalties, probability of punishment, cost of enforcement, economic efficiency of the criminal justice system. 2. Contract Breach on a Contract to Deliver Oil to a Manufacturer by a Specified Date . Allocation of the risk of a contingency materializing that delays delivery of the oil. 3. Electric company emits smoke that dirties the laundry at a nearby firm . Alternative methods of abating the pollution, who is liable, bargaining, economic efficiency. Progressive taxation and tax-and-transfer programs are preferable for redistributing income rather than the use of the system of private legal rights to do so because the latter is less efficient for this purpose. Some Reasons Why Use of the Private Legal Rights System is Inefficient for Income Redistribution: 1. it does not target inequality as well; 2. it is difficult to predict its redistributive effects; 3. the transaction costs of redistribution through the private legal rights system are usually high; 4. redistribution via the private legal rights system distorts resource allocation in the economy more than other methods.
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Nash Equilibrium each player is maximizing his own well-being (utility or profit) given the behavior of the other players; thus, each individual player cannot do any better than he/she now is as long as the other players do not change their behavior. Pareto Optimum an economically efficient situation; it is one where no one can make himself better off without making someone else worse off. It is attained when there is: 1. Technical Efficiency – this is attained when resources are being used so that the total dollar- value of output cannot be increased by reallocating resources within firms or between firms, least-cost combinations of resources are being used and firms are efficient sizes. 2. Allocative Efficiency - this is attained when the total dollar-value of output in the economy cannot be increased by reallocating resources between production of different products, MSB = MSC in each market. 3. Distributive Efficiency – this is attained when there are no “gains from trade” left untapped, i.e., the MRS between all pairs of goods is the same for all consumers. 2.
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EconLawTest1StudyGuide - ECONOMIC ANALYSIS OF LAW TEST 1...

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