Strategic behavior: The problem
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
Insurance: why it is interesting:
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 you do
One problem with insurance: Moral Hazard.
A. I insure my factory for 100% of its value, then stop taking
(costly) precautions to make sure it won't burn down. If it does
burn, that is the insurance company's problem, not mine.
B. Solution-only insure for
The other problem with insurance: Adverse Selection.
A. The market for lemons.
1. There are two kinds of used carscream puffs and lemons. The
potential seller knows which he has; the potential buyer does not.
2. Both would rather own a cream puff, so the
Coase vs Pigou-a summary:
A. In some contexts, such as traffic accidents and much pollution, we have
large numbers on both sides, so no Coasian negotiation is practical.
1. So property rights will end up where they start,
2. So we want the "right" Pigouvi
What is economic efficiency?
A. The problem-evaluating different systems of rules, their
1. By whose values?
2. How aggregated?
B. The economic solution.
1. Revealed preference: Heroin or Insulin, the fact that
someone is willing to pay lot
Economic analysis of law is the application of economic theory
(specifically microeconomic theory) to the analysis of law.
Economic concepts are used to explain the effects of laws, to assess
which legal rules are economically efficient, and to predict wh
Coasian critique of externality theory: An argument in three acts.
A. Nothing works: Two sided causation.
1. A doctor builds a new consulting room onto his house,
adjacent to where a neighboring candy maker is operating
machinery. The machinery was no pro
Externalities: The conventional analysis
A. The simple argument for efficiency:
1. If people who take actions receive the benefits and
pay the costs of those actions
2. Then they will take those actions and only those
actions for which net benefits>net co
Summary before First Midterm
I. What is economics, what does it have to do with law?
II. What is economic efficiency (aka "wealth maximization")?
A. Important to L&E for two reasons:
1. The conjecture that legal rules tend to be efficient
2. The argument
Damages vs fines:
A. The non-strategic case with bargaining:
1. There is a factory polluting a small lake; preventing the
pollution will cost the factory $1,000,000/year.
2. The pollution does $700,000/year worth of damage to the
resort at the other end o