Econ 522 – Lecture 24 (April 30, 2009)Final exam: Sunday May 10, 12:25 p.m., in 5206 Social ScienceHW3 will hopefully be returned on Tuesday, and my answers will be given out at the end of class todayThe final is cumulative – everything through the end of today (but not from next week) is fair game – but there will be more weight on the second half of the classNext week:- Chao – extra office hours Monday- “optional” lecture Tuesday with some interesting additional materialo much of it: behavioral law and economics (that is, how peoples’ actual behavior differs from the standard economic models, and what this means for law and economics)- no lecture Thursday, instead extra office hourso my usual OH 1:30-3:30 Wedo also 1-2:30 Thurs (during usual lecture time)o and some on Friday (hours TBA)Today: what have we done this year?- 1 -Well, we started out by defining efficiency, and asking, should the law be efficient?- We gave a few reasons why it should- Also pointed out some of the problems with efficiency- But agreed that we’d focus on efficiency for most of the class.- (Friedman offers three more reasons why we should focus on efficiency:o it’s something that most people care abouto some aspects of the law seem to have been designed to achieve efficiency, so thinking about efficiency helps us to understand them bettero looking at efficiency is “one of the things economists know how to do – and when you have a hammer, everything looks like a nail”)The choice of efficiency as our measure makes things much simpler in a lot of ways.For example, it means that:1. we only have to focus on final outcomes – who gets to own what, how many car accidents there are, etc. – and not on processo that is, we assume people only care about what they get, not why they get it – no concerns about procedural fairness, etc.2. we can ignore transferso that is, suppose that at some point, if a certain thing happens, our legal system is going to make Alice pay Bob $100o a transfer of money has no direct effect on efficiencyo so we can ignore the “direct” effect, and look only at the impact this has on incentives, and therefore on Alice and Bob’s actionsSo we’ve decided to look at the law through the lens of efficiencyThis means that the “goal” will always be to maximize the total surplus – or total wealth – available to everyone in the world- 2 -This brings us to the first big recurring theme from this class – the idea of getting efficient outcomes by setting up the law to make people internalize their externalities- figuring out the efficient outcome requires considering the total social benefit and total social cost of an activityo that is, for efficiency, we want an activity to take place when its total benefit (to everyone) outweighs its total cost- but, we expect a rational self-interested decision-maker to consider only their private benefit and private cost when deciding how to act- when private cost = social cost and private benefit = social benefit, people naturally make choices that are efficient- when private cost < social cost, an activity is imposing a negative externality, and people will tend to do it too mucho for example, tragedy of the commons private cost to me of grazing my cattle on public land is lower thanthe social cost, so I do it too mucho or: in a world without liability, my speeding imposes a cost on you, because I’m more likely to hit you so private cost of speeding is lower than the social cost so I speed too much (more than would be efficient)- in order to fix this, we can write a law where I bear the cost of hitting youo this makes my private cost = social costo so now I speed the efficient amount- we saw this idea explicitly in contract lawo when a promisor breaches a contract, he imposes an externality on the promiseeo by setting expectation damages = harm done to promisee by breach, we force the promisor to internalize this externality and choose efficiently- we saw this idea again in tort lawo strict liability works exactly this way – leads injurer to internalize the harms he does, leading to efficient precaution and activity levels- we didn’t discuss it in these terms, but we even saw this a little bit with Coaseo suppose you like to make noise at night, but I live next door and like quieto if you have a legal right to make noise, you have no reason not too but suppose noise brings you joy of $50, but costs me $100o if this right is tradable, keeping it costs you $100 in opportunity cost, sinceinstead you could sell me the right- 3 -So that’s one recurring theme – designing the law to get people to internalize the externalities they cause, in order to get to efficient outcomes.Another recurring theme – although we’ve discussed it in slightly different terms – is the distinction between protecting a right versus protecting an interest- suppose I own something- my right to that thing is protected if nobody is allowed to take it away from me without my permissiono or rather, since we can’t control other peoples’ actions…o my right is protected if anyone who violates it gets punished severely, so we expect nobody will do that- on the other hand, my interest in that thing is protected if anybody who takes it away from me, has to reimburse me for the value I expected to get from it- (protecting a right is done by injunction; protecting an interest is done by damages)property law tends to protect our rights to things we own- trespassing on my land is a crime – if someone is caught trespassing, they don’t just have to pay for the flowers they trampled, they may go to jail- and stealing my iPhone is a crime – if someone is caught stealing it, they don’t just have to pay me its value, they again will go to jail- but there are exceptionso if someone needs to use my cabin in the woods in an emergency, my interests are protected – they’ll have to pay for the food they eat, and replace the window they broke to get in – but my rights are not absoluteo and similarly, if the government wants to take my land, they only have to protect my interest in it – by paying me its value (eminent domain)tort law, on the other hand, tends to protect our interests- certainly, I can be thought of as owning my arm- but someone might hit me with a car and breaks my arm, and only owe me the amount of the damage- my interest in that arm – the value I would get from that arm – is protected, but my right to
View Full Document
Unlocking...