Law and Economics
Martin K. Perry
Course Packet Property Law
Origins of Anglo-American Property Law
Bove v. Donner-Hanna Coke Corp. (NY, 1932)
I. Externalities: The conventional analysis
A. The simple argument for efficiency:
B. The problem:
1. The EPA or equivalent decides who can pollute how much where, what
methods of pollution reduction have to be used, etc.
2. The p
Review before the Second Midterm
I: Determining property rules involves a set of questions:
A. How rights should be bundled (Coase article, our earlier discussion)
B. How should you be allowed to defend your property rights (property vs
What is a Forward Contract?
Executory Contract: both promises to be performed in the future
Seller promises to deliver some goods at a future date
Buyer promises to pay for the goods when they are delivered.
What does the For
(1): Lawsuits - Preliminary Injunction
Complaint: plaintiff files lawsuit against defendant
Plaintiff may be an attorney general, regulatory agency (SEC), or private party
Defendant can file counterclaims against the plaintiff
Law and Economics
Martin K. Perry
Course Packet Tort Law
MacPherson v. Buick Motor (NY, 1912)
Strict Liability (California cases)
Escola v. Coca Cola (CA, 1944)
Greenman v. Yuba Power (CA, 1963)
Max Profit occurs where MC = MR and MP = 0
Profit = TR TC
Demand: A schedule of forces and the quantities that buyers would purchase at each of these
prices during a selected period of time.
Law of Demand: There is an inverse relationship between price an
Productive Efficiency : A condition of a firm in which it is impossible to produce a given level of
output at a lower cost
Quantitative easing consequence of which capital is cheaper than labor, will keep
Pareto Efficiency: The situation
Risk, probability (calculate probability)
Principal-agent problem (shareholders/managers)
Moral hazard (after transaction, like insurance leading to shitty driving) vs adverse selection
Public good and private good
Summary before First Midterm
I. What is economics, what does it have to do with law?
II. What is economic efficiency (aka "wealth maximization")?
o A. Important to L&E for two reasons:
B. Judging rules, outcomes by the summed effect on everyone, where
I. Antitrust Law
o A. Monopoly produces an inefficient outcome
B. One approach to eliminating the inefficient outcome is to prevent
monopolies from existing.
1. Not workable for a real natural monopoly.
2. But perhaps for preventing monopoly-by-merge
I. Insurance: why it is interesting:
o A. Because one recurring legal issue is who will bear the costs if
something goes wrong-i.e. who is insuring whom. For example:
1. Contracts. Something changes, so either I don't want to produce what I
agreed to or
I. Strategic behavior:
o A. Bilateral monopoly.
1. Economic example: I have the only apple, worth $1 to me. You are the
only customer, and value it at $2. If we can agree on a price, there is a net
gain of $1 to be divided between us, with the division
I: What is property?
o A. we take the institution for granted-for familiar things
o B. But it is a specific kind of rule and concept, as you can see by
applying it in less familiar contexts. My obligations to you are good only
against me, but your owners
Digression on simplified pictures.
o A. In thinking through the logic of a problem, whether in physics,
mathematics, or economics, we frequently use simplified pictures,
designed to bring out the particular issue we are interested in.
o B. For example, w
If we do want to enforce the contract, how do you fill in the details?
o A. By what would be efficient, either
B. Who should bear risks? We've been here before
1. Because we want efficient law, or
2. Because that predicts what they would have agreed
It is often claimed that, when I have a child, I impose net costs on others,
so that leaving people free to decide how many children they have will
result in overpopulation.
o A. But it is not clear what the sign of the net externalities from my
Summary of implications:
A. Assume one dimension (care) is observable by the court, another (activity
level) is unobservable.
1. Note that "care" and "activity level" are merely convenient examples.
2. The real categories are "activities with regard
A. Like tort law, someone does a wrong, we impose a cost on him, but .
B. Note that the Tort/Crime distinction may be less clear than we usually think.
1. Optimal level of some offenses is close to zero
2. Most obvio
Why benefits to criminals count:
A. The lost hunter problem.
B. Even if you want to deter it, how much do you want to deter it?
1. If a hunter is lost and starving and comes to a locked, empty cabin containing
food and a telephone, it is
S and D
Risk and Insurance
Profits and Growth
S & D Shifts along curve/ moves along curve
Elasticity: (absolute values)
e = infinity is perfectly elastic
e > 1 is relatively elastic