Econ 522 – Lecture 25 (Dec 11 2007)Final exam: next Tue (12/18), 10:05, in Soc Sci 5231Office hours now till final: Wed 10-12 (afternoon by appointment)Fri 2-4Mon 10-12 (afternoon by appointment)Before we get to a review, two interesting articles I stumbled on yesterday that seemed topical.We mentioned last class that in the 1980s, many states passed Mandatory Sentencing Guidelines, giving judges less discretion over sentences for certain crimes; and that in recent years, there’s been some blowback in the other direction, toward more discretion. The same thing also happened with federal sentencing guidelines.Part of the objection to mandatory sentences is that they sometimes appear to be de facto racist. The best-known example is that the sentence for possession of a given amount of crack cocaine tends to be much higher than the sentence for possession of the same amount of powder cocaine. 80% of convicts in crack cases are black; 25% of convicts in powder cocaine cases are black.Yesterday, the U.S. Supreme Court upheld two sentences that were below federal sentencing guidelines, affirming that judges do have some discretion, and federal appeals courts “should only step in when judges abuse their discretion.”In the first case, a federal circuit judge issued a 15-year sentence in a crack case, even though federal guidelines specified 19 to 22 years. The guidelines were recently changedto reduce the disparity in prison time for crack and powder cocaine; this was basically a decision to apply the new guidelines retroactively.In the second case, Brian Gall of Iowa had been convicted for conspiracy to sell 10,000 pills of ecstasy. In the time between the crime and Gall being arrested, he had voluntarilyquit selling drugs, stopped drinking, graduated from college, and built a successful business. Guidelines specified a sentence between 2 ½ and 3 years in prison; the judge sentenced him to probation. The Supreme Court ruled yesterday that this sentence was “reasonable”, that is, within the judge’s discretion.The other article I found yesterday takes us back to trademark law. Recall that trademarks exist so that companies can establish a brand name that others can’t imitate, helping customers to know what product they’re buying, and giving companies an incentive to produce higher-quality goods, since the reputation will lead to more sales.In 1989, when Toyota introduced the Lexus name (L-E-X-U-S), they were sued by Lexis (L-E-X-I-S), a company that provides searches of legal sources (now Lexis-Nexis, which those of you who go to law school will get to know quite well). The court ruled for the car company, saying they were not infringing.I ran into an article yesterday that for the second time this year, Toyota is suing a porn star who’s adopted the stage name “Lexus”.Taken together, these seem to suggest that Toyota believes that:- you are unlikely to mistake a luxury car for an online legal search- but you might mistake a luxury car for gay pornOf course, this isn’t really what they’re claiming. Obviously, trademark law prohibits someone else from selling a soft drink called Coca-Cola. Less obviously, it also prohibitssomeone else from selling, say, a clothing line or a sandwich meat called Coca-Cola. Thelegal doctrine here is “dilution of the distinctive quality of a mark or trade name,” which can be claimed even in “the absence of competition between the parties or the absence of confusion as to the source of goods or services.” That is, once you’ve established a brandname, people can’t use it in a way that hurts its image, even if it doesn’t create genuine confusion about whose products are whose.The economic argument for trademark protection seemed pretty clear – reduce buyer uncertainty, increase seller incentives to maintain a reputation for quality. The argument against trademark dilution is a bit harder – seems more to be protecting vested interest. Anyway, thought it was interesting.Now, on to review…What have we done this year?EFFICIENCYWe started out talking about efficiency.Efficiency is basically the notion of maximizing the value of what is produced and consumed in society.Ellickson: “minimizing the objective sum of (1) transaction costs, and (2) deadweight losses arising from failures to exploit potential gains from trade”Posner: “wealth-maximizing”Basically, maximizing the overall size of the pie that everyone’s sharing; putting goods inthe hands of those who value them most, enabling cooperation when this creates value, and dealing with externalities.Several arguments for why law should focus on efficiency:- If resources can be freely transferred between individuals, first maximize the size of the pie, then worry about distribution- If you’re worried about distribution, tax system is a cheaper, better way to achieveit then legal system – so again, focus legal system on achieving efficiency, then use taxes to achieve distribution goals- Another argument of Posner: hypothetical “ex-ante consent.” If everyone got together ahead of time (not knowing which role they’d play in society) and pickeda legal system, this is what they’d come up withCoase Theorem: when transaction costs are low, efficiency should occur naturally as long as entitlements are well-defined and tradable.However, there are lots of sources of high transaction costs:- search costs- private information- large numbers of parties- hostility- enforcement costsProperty and nuisance law exist first to clarify peoples’ rights/entitlements so that they can enter into voluntary exchanges that are mutually beneficial. Beyond that, different rules for allocating entitlements will differ according to how they handle situations wheretransaction costs are too high for efficiency to be reached “automatically.”Contract law can be thought of as dealing mostly with situations where the costs to ex-ante negotiations are low, but the costs of renegotiating contracts under changed circumstances are higher.Tort law can be thought of as dealing mostly with accidental situations, often between strangers, where ex-ante negotiations are impossible.We also discussed several arguments for why the common law might naturally evolve in the direction of efficiency:- first, common law often adopts existing social norms or industry practices, which may have evolved that way due to efficiencyo (example of this from day one: laws governing
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