Econ 522 Economics of LawLogisticsLecture notes – try View Notes PageMonday, we defined efficiencyAlso Monday, we discussed some forces that lead to inefficiencyFinally on Monday, we posed the question:Slide 6Important distinction: positive versus normative economicsMost of this class will be positive analysisFriedman gives a few arguments for studying efficiencyBut…Posner gives us one argument why the law should aim to be efficientEx-ante consent – simple exampleThings are a little more complicated…Example: new law requiring landlords to pay for their tenants’ heatEx-ante consent, ex-ante compensationLimitations to Posner’s argumentThis highlights some of the things efficiency is notA more pragmatic defense of efficiency as a goal for the lawFour reasons the tax system is a better way to redistribute wealth than the legal systemTo make this last point, an exampleSo, summing up… is efficiency a good goal for the law?A nice blog post about why policy evaluation should at least start with efficiency…“Emphasizing efficiency forces us to be honest about our goals”Slide 24Before we move on, a quick digression…Slide 27Rest of today:Slide 28A brief introduction to game theoryA classic example: the Prisoner’s DilemmaIn two-player games with finite actions, one way to present game is payoff matrixNash EquilibriumA strategy profile is a Nash Equilibrium if no player can gain by deviatingIn two-player games, we find Nash equilibria by highlighting best responsesSome games will have more than one equilibriumSometimes, there will be a “good” and a “bad” equilibriumSome games don’t have any equilibrium where players only play one actionThat’s a very quick introduction to static gamesSlide 39To begin, a storyWhy do we need property law in the first place?Slide 43So how do we fix the problem?Slide 45So the idea here…Overview of Property LawAnswers to many of these seem obviousMonday: CoaseEcon 522Economics of LawDan QuintSpring 2014Lecture 3First homework due at noon next ThursdayFeel free to work together, but write up your own answers!If you want to read ahead for Monday…Ronald Coase, “The Problem of Social Cost”LogisticsLecture notes – try View Notes PageEfficiency: “all available Kaldor-Hicks improvements made”roughly, maximizing total value, or total surplus, or total payoffs, to everyone in society……where everything is translated into dollars, so we’re able to add/compare across peopleMeans that…each scarce resource is owned by whoever values it mostgoods are produced whenever their value is greater than their costand so onMonday, we defined efficiencyExternalitiesPeople make choices based on private cost and private benefitEfficiency is based on social cost and social benefitWhen social cost > private cost, negative externality people will do something more than efficient amountWhen social benefit > private benefit, positive externality people will do something less than efficient amountBarriers to trade, taxesMonopoly/private informationAlso Monday, we discussed some forces that lead to inefficiencyIs efficiency a good goal for the law?…and then we ran out of timeFinally on Monday, we posed the question:7Is efficiency a good goal for the law?8positive statements are statements of factcan be descriptive: “in 2007, U.S. GDP was $13.8 trillion”can be theoretical predictions: “if prices rise, demand will fall”“economics of what is”normative statements contain value judgmentsfor example, “less inequality is better”or, “government should encourage innovation”“economics of what ought to be”Important distinction: positive versus normative economics9Predicting behavior, and outcomes, that follow from a law or legal system is positive economics“Law X will lead to more car accidents than law Y”“Law X will lead to more efficient outcomes than law Y”But in the background, we’d like some sense of what is the normative goal of the legal system“Law X is better than law Y”One candidate for that normative goal is efficiencyMost of this class will be positive analysis10“The central question [in this book]… is a simple one: what set of rules and institutions maximize the size of the pie? What legal rules are economically efficient?There are at least three reasons why that is the question we ask.The first is that while economic efficiency… is not the only thing that matters to human beings, it is something that matters quite a lot to most human beings.The second reason is that there is evidence that considerable parts of the legal system we live in can be explained as tools to generate efficient outcomes… It is a lot easier to make sense out of a tool if you know what it is designed to do.A final reason is that figuring out what rules lead to… efficient outcomes is one of the things economists know how to do – and when you have a hammer, everything looks like a nail.”- Friedman, Law’s Order, p. 312Friedman gives a few arguments for studying efficiency11This answers the question, “Why is it interesting to study efficiency?”Not the question, “Should the law be designed with the goal of achieving efficiency?”To answer this latter question…But…12Richard Posner (1980), The Ethical and Political Basis of Efficiency Norm in Common Law AdjudicationStarts with the observation: if you buy a lottery ticket and don’t win anything, you can’t complainImagine before we all started driving, everyone in the world got together and negotiated a liability rule for traffic accidentsIf one rule is more efficient than another, we’d all vote for that rule ex-ante – ex-ante consentPosner gives us one argument why the law should aim to be efficient13Suppose there are two candidate rules for accident liabilityOne favors pedestrians, one favors driversThe one favoring car drivers is more efficientPosner’s point: before we know who we’ll be, everyone would unanimously agree to the second ruleEx-ante consent – simple example-40-60-20Negligence rule-500-100Strict liability ruleExpected payoff if you don’t know which one you’ll beExpected payoff, pedestriansExpected payoff, drivers14People without cars would prefer a less efficient system if it meant drivers were responsiblePosner deals with heterogeneity with a different
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