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Ch33 - Chapter Thirty-Three Law and Economics Effects of...

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Chapter Thirty-Three Law and Economics
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Effects of Laws Property right assignments affect asset, income and wealth distributions; e.g. nationalized vs. privately owned industry.
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Effects of Laws Property right assignments affect asset, income and wealth distributions; e.g. nationalized vs. privately owned industry. resource allocations; e.g. the tragedy of the commons e.g. patents encourage research.
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Effects of Laws Punishments affect incentives for illegal behavior; e.g. high speeding fines can reduce the amount of speeding.
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Effects of Laws Punishments affect incentives for illegal behavior; e.g. high speeding fines can reduce the amount of speeding. asset, income and wealth distributions; e.g. jail time results in lost income.
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Crime and Punishment x is the quantity of an illegal activity produced by an individual. C(x) is the production cost. B(x) is the benefit. Gain is B(x) - C(x). What is the rational choice of x?
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Crime and Punishment x 0 max B x C x ( ) ( ). - First-order condition is = B x C x ( ) ( ). Notice that marginal costs matter more than do total costs.
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Crime and Punishment = B x C x ( ) ( ) B(x) C(x), low MC x x *
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Crime and Punishment = B x C x ( ) ( ) B(x) C(x), low MC x x * C(x), higher, but same MC No change to illegal activity level.
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Crime and Punishment = B x C x ( ) ( ) B(x) C(x), low MC x x *
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Crime and Punishment = B x C x ( ) ( ) B(x) C(x), low MC C(x), high MC x x * Higher marginal costs deter crime.
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Crime and Punishment Detection of a criminal is uncertain. e is police effort. π (e) is detection probability; π (e) = 0 if e = 0 π (e) as e .
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Crime and Punishment Given e, the criminal’s problem is x 0 max B x e C x ( ) ( ) ( ). - π
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Crime and Punishment Given e, the criminal’s problem is First-order condition is x 0 max B x e C x ( ) ( ) ( ). - π = B x e C x ( ) ( ) ( ). π
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Crime and Punishment Given e, the criminal’s problem is First-order condition is Low e low π (e) low marg. cost. High e high π (e) high marg. cost. x 0 max B x e C x ( ) ( ) ( ). - π = B x e C x ( ) ( ) ( ). π
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Crime and Punishment = B x e C x ( ) ( ) ( ) π B(x) x x * Higher police effort deters crime. MC = π ( ) ( ) e C x h MC = π ( ) ( ) e C x l e e l h <
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Crime and Punishment Higher fines and larger police effort both raise marginal production costs of illegal activity. Which is better for society -- higher fines, or more police effort?
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Crime and Punishment Higher fines and larger police effort both raise marginal production costs of illegal activity. Which is better for society -- higher fines, or more police effort? Police effort consumes resources; higher fines do not. Better to fine heavily.
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Liability Law An injurer, IN, and a victim, V. x is effort by IN to avoid injuring V.
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