Econ 522 Economics of Law Dan Quint Fall 2011 Lecture 3 HW1 is online due 11 59 p m Thurs Sept 22 Also lecture notes try View Notes Page Monday we defined efficiency Efficiency make all available Kaldor Hicks improvements roughly maximizing total value or total surplus or total payoffs to everyone in society where everything is translated into dollars so we can add compare across people Means that each scarce resource is owned by whoever values it most goods are produced whenever their value is greater than their cost and so on And we discussed some forces that lead to inefficiency Externalities People make choices based on private cost and private benefit Efficiency is based on social cost and social benefit When social cost private cost negative externality people will do something more than efficient amount When social benefit private benefit positive externality people will do something less than efficient amount Barriers to trade taxes Monopoly private information And we asked Should efficiency be the normative goal of the law Posner yes ex ante we would all have agreed to efficient laws Analogy to lottery ticket with highest expected value Example for asymmetric situations landlords and tenants Cooter Ulen yes if we want to adjust the distribution of wealth better to do it through tax system Several reasons taxes better than legal system for redistributing wealth Discussion question Aside from maximizing efficiency what are other plausible normative goals for a legal system When would you expect these goals to be in conflict with efficiency A nice blog post about why policy evaluation should at least start with efficiency Let s first dispense with the straw man I ve never heard of an economist who believes that every efficient policy is good and I ve heard of very few who believe that every inefficient policy is bad It s true that most economists do seem to believe that any good policy analysis should start by considering efficiency That doesn t mean it should end there I think economists are right to emphasize efficiency and I think so for at least two reasons First emphasizing efficiency forces us to concentrate on the most important problems Second emphasizing efficiency forces us to be honest about our goals Steven Landsburg http www thebigquestions com 2010 08 30 efficiency experts Four reasons the tax system is a better way to redistribute wealth than the legal system 1 Taxes can target rich and poor more precisely than the legal system can 2 Distributional effects of legal changes are harder to predict 3 Lawyers are more expensive than accountants 4 More narrowly targeted taxes cause greater distortion than broad based taxes To make this last point an example Two goods beer x pizza y One consumer with 60 and utility u x y x0 5 y0 5 a Given prices p for beer and q for pizza calculate demand x y 30 p 30 q Beer and pizza are produced at 1 per unit and perfectly competitive markets So without any taxes p q 1 b Calculate demand and utility with no tax x y 30 30 u x y 300 5 300 5 30 c Calculate demand and utility with 0 50 tax on beer x y 20 30 u x y 200 5 300 5 6000 5 24 49 d How much revenue does 0 50 tax on beer raise 20 X 0 50 10 e Calculate demand and utility with 0 20 tax on both goods x y 25 25 u x y 250 5 250 5 25 f How much revenue does 0 20 tax on both goods raise 25 X 0 20 25 X 0 20 10 g Which is the better way to raise revenue 9 Summing up is efficiency a good goal for the law We ve seen two arguments in favor Posner it s what we all would have agreed on ex ante C U if you want to redistribute it s better to do it through taxes But there are definitely some problems with efficiency Distribution matters not everything is monetizable people might care about procedural fairness My take In this class we ll mostly focus on the positive questions But in the background I think of efficiency as a pretty good but definitely imperfect measure of goodness Before we move on a quick digression I don t have many absolute beliefs about economics Some people do I hope that doesn t make things too confusing 11 Before we move on a quick digression I don t have many absolute beliefs about economics Some people do I hope that doesn t make things too confusing Relatedly if I don t see economics as a set of rules to memorize how do I know what I know I need to see a model or an example that demonstrates it 12 Rest of today introduce some basic game theory begin property law 13 Some basic game theory 14 A brief introduction to game theory Today we focus on static games Also known as simultaneous move games A static game is completely described by three things Who the players are What actions are available to each player What payoff each player will get as a function of his own action and the actions of the other players Any complete description of these three things fully characterizes a static game 15 A classic example the Prisoner s Dilemma Story Players player 1 and player 2 Two actions available to each player rat on the other or keep mum Payoffs u1 mum mum 1 u1 rat mum 0 u1 mum rat 10 u1 rat rat 5 Same for player 2 16 In two player games with finite actions one way to present game is payoff matrix Always Player 1 Player 2 s Action Mum Rat Mum 1 1 10 0 Rat 0 10 5 5 Player 1 s Action Player 1 s Payoff Player 2 s Payoff 17 Nash Equilibrium We solve a game by looking for a Nash equilibrium Nash equilibrium is a strategy profile an action for each player such that No player can improve his payoff by switching to a different action given what his opponent opponents are doing 18 A strategy profile is a Nash Equilibrium if no player can gain by deviating Is Mum Mum an equilibrium Player 2 s Action Player 1 s Action If any player can improve his payoff by changing his action given his opponents actions then it is not a Nash equilibrium Mum Rat Mum 1 1 10 0 Rat 0 10 5 5 No if player 2 is playing Mum player 1 gains by deviating 19 In two player games we find Nash equilibria by highlighting best responses My best response to a particular play by the other player is whichever action s give me the highest payoff To find Nash Equilibria Circle payoff from player 1 s Mum best response to each action by his opponent 1 1 Mum Circle payoff from player 2 s best response to each action 0 10 Rat Any box with both payoffs circled is an equilibrium Because each player is playing a best response …
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