Unformatted text preview:

Applied microeconomic theory in order to understand the interrelationships between the legal Introduction August 27 2012 What Are Economics and the Law About system and the economic system Basic Assumptions in Economic Analysis Scarcity implies rationing and competition The individual is the relevant decision making unit The individual s preferences are subjective The individual is rational Not just about market price and determination o Governments can determine price and resource allocation Incentives arise in law but only if law is enforced o Also depends on community s norms Analogy Between Legal Rules and Prices Explicit price i e a fine for breaking the law expected price if commit a crime do not expect to pay anything because do not expect to get caught Calculating an implicit expected price requires knowledge of the law and of the consequences Is ignorance of the law widespread It is rational to be ignorant about laws that do not affect As price increases buy less as price increases violate the law less of violating it you August 29 2012 New Law and Economics New law common law property law and tort Often dated from the publication of Ronald Coase The Problem of Social Cost 1960 o Opened analysis to common law Comparative institutions The Coase Theorem If the parties bargain to an agreement for themselves then the value creating activities that they agree upon do not depend on the bargaining power of the parties or on what assets each owned when bargaining began Rather efficiency alone determines the activity choice The other factors can affect only decision about how the costs and benefits are shared o If people can bargain and reach an agreement the result of the bargain will be an efficient allocation of the goods and services o Bargain power determines how costs and benefits are shared not the actual allocation of goods and services o Bargaining costly Transaction Costs Transaction costs costs that arise when individuals exchange ownership rights to economic assets and enforce their claims to rights o The costs of running the system the costs of coordinating and motivating Costs can prevent efficient allocation of resources bargaining not possible all the time When you exchange goods and services you are also exchanging ownership rights Laws can reduce transaction costs but law can also create transaction costs i e law against buying and selling marijuana increase transaction costs Middlemen lower transaction costs o Markets can be created because of transaction costs and the need for a middleman i e real estate retailers etc Transaction costs of the U S economy in the 1970s 2 Transaction costs can prevent bargaining and internalization of externalities Coase Comparative Institutions Institutions laws norms have incentives to follow Different institutional arrangements affect allocations of resources in the economy You either need more inputs i e capital or technological change OR fix the institution if that is the central problem to achieve the technological production frontier the maximum Each curve represents production possibilities under different institutional arrangements TPF Technological Production Frontier usually not close bc some sort of institution is probably not creating incentives to use the resources efficiently SPF Structural Production Frontier o SPF2 is higher than SPF1 indicating that SPF2 has better institutional arrangements in the sense that they encourage more productivity than SPF1 Voluntary Exchange 3 Expect to be better off Subjective value coerced exchange does not take subjective value into account and can often decrease the value held by the new owners of that good or service Opportunity costs compare current transaction to alternative transactions Highest valued use the person buying values the product more than the person selling it Welfare and society o Pareto superior someone values the product poorly the other values it highly and the transaction occurs no one ends up worse off only either the same or better off No cost benefit analysis Pretty Woman example see producer and consumer surplus both sides think they got a great deal o Kaldor Hicks reallocation is efficient and welfare enhancing if the party receives enough that they can pay back the party that loses it Gains exceed costs cost benefit analysis Welfare criteria to justify involuntary transactions i e government transfers take from one but increase the welfare of many and if wanted to can pay back the person who lost can justify policy Examples Coordination and the Exchange of Property Rights Between Individuals The reasons for transaction costs not all exist in every type of transaction o 1 The search for information time and effort o 2 Bargaining i e flee market but do not see bargaining in a convenience store o 3 Drawing up contracts i e leasing agreement o 4 Monitoring contractual partners i e upholding warranties i e do not buy a car that was made during a World Series bc the assembly line and it s supervisor are all watching the game and the car would be more prone to defects need to keep an eye on how things are made in that factory o 5 Enforcement of a contract and the collection of damages i e damage to a leased apartment o 6 Protection of property rights against third party encroachment i e putting an alarm system in your leased apartment August 31 2012 Credibility Information is costly to obtain o Will never have complete information o May have so little that you feel uncomfortable undertaking the transaction o Most contracts are inevitably incomplete usually contain items about the future but the future is always uncertain Asymmetric information can give rise to moral hazard o Asymmetric information one party has more information than another party 4 o Moral hazard the more knowledgeable party has incentives to take advantage of the other party because they do not know as much as you do i e You do not have insurance so you rarely go to the doctor when you are sick which may be frequently You decide to apply for insurance and your record looks clean bc you rarely see doctors bc you cannot afford them The insurance company takes you as a client bc they think you are low risk even though you know that your medical history says otherwise Consequently your health demands increase after obtaining insurance Individuals may not enter into an exchange simply because they do not believe the other party is being totally honest Ways to avoid moral hazards i e laws in

View Full Document

FSU ECP 3451 - Introduction

Download Introduction
Our administrator received your request to download this document. We will send you the file to your email shortly.
Loading Unlocking...

Join to view Introduction and access 3M+ class-specific study document.

We will never post anything without your permission.
Don't have an account?
Sign Up

Join to view Introduction and access 3M+ class-specific study document.


By creating an account you agree to our Privacy Policy and Terms Of Use

Already a member?