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ECP 3451 Economics and the Law Dr McCaleb Final Exam Review From Test 1 1 State 3 reasons for using marginal analysis instead of totals or averages a You always get the right answer b More accurate more descripted than other methods c Saves cost and time especially when dealing with information 2 Know the condition that defines or identifies the equilibrium quantity Quantity Demand Quantity Supplied Equilibrium means a state of rest 3 Know the three characteristics of an efficient allocation or quantity and explain why they must all three be simultaneously true at the efficient quantity 1 No other quantity would increase any one person s benefit without decreasing someone else s this is the pareto definition0 2 No other quantity or allocation has a higher social consumer plus producer surplus that is the social surplus is maximized at the efficient quantity 3 MSB MSC or if there are no externalities so that MEB MEC 0 MB MC 4 5 Define positive and negative externalities be able to diagram them and know whether the private equilibrium quantity is greater than or less than the socially efficient quantity for each one Positive Externalities An individual s decision about consumption or production provides benefits to other individuals who are not part of the decision MB MSC Negative Externalities An individual decision about consumption or production imposes costs on other individuals who are not part of the decision State both the weak and the strong versions of the Coase Theorem Be able to state each of the assumptions that underlie the strong version and be able to explain the conclusion that follows from each assumption Weak Version a if there are no transaction costs the equilibrium allocation of resources is economically efficient no matter to whom the legal rights are assigned b One assumption and one conclusion no transaction cost allocation is regardless of the assignment of legal rights Strong Version a If there are no transaction cost and no wealth effects the allocation of resources is both efficient and invariant to the assignment of legal rights Two assumptions and two conclusions a Efficiency No transaction costs allocation is efficient regardless of the assignment of legal rights 6 7 8 b Invariance No wealth effects allocation is identical regardless of the assignment of legal rights State the basic principles or guidelines for assigning legal rights based on transaction costs and errors in valuation that follow from the Coase Theorem that is the Normative Coase Rule the Normative Hobbes Rule and when it doesn t matter Basic principles guidelines for assigning legal rights 1 With no transaction costs the assignment rights has no effect one economic efficiency 2 With positive transaction costs using the assignment of property rights to redistribute wealth or income may result in an inefficient equilibrium imposing efficiency costs Normative Coase Rule Assign rights so as to minimize transaction cost Normative Hobbes Rule Assign rights so as to maximize resource value State the economic efficiency advantage s and disadvantage s of a rule of first possession Advantages reduces transaction costs and easy to administer Disadvantages 1 Prevent bargaining from occurring 2 later use will not prevail even if it is more valuable 3 inventive to overinvest if it is communal State the major characteristics of an entitlement protected by a property rule and an entitlement protected by a liability rule as those terms are used in the Calabresi Melamed theory of entitlements Entitlement protected by a property rule 1 No one can take an entitlement to property from the holder of the entitlement unless the holder transfers it willing at a price acceptable to the holder 2 Remedy for infringement of an entitlement protect by a property rule is injunction a Requires ex ante negotiation between interacting parties before infringement or taking of the entitlement b Value of the entitlement is determined subjectively by negotiation and agreement between the parties 3 Property rules protect exclusive rights Dewey has an absolute right to exclude Huey from taking or using Dewey s entitlement Infringements of entitlements protected by property rules are represented in common law by actions for trespass and nuisance Entitlement protected by a liability rule 1 One party can take the entitlement form the holder provided the taker pays compensation to the holder for the harm done 2 Remedy for infringement of an entitlement protected by a liability rule is damages a Requires an ex post settlement between the interacting parties after infringement of the entitlement after the harm is done b Value of the entitlement is determined objectively by the courts 3 Liability rules protected non exclusive rights Dewey cannot exclude Huey from taking or using Dewey s entitlement provided Huey compensates Dewey for the lost value of the entitlement Infringements of entitlements protected by liability rules are represented in common law by servitude or condemnation of an easement 9 State the basic principles or guidelines based on transaction costs and errors in valuation that follow from the Coase Theorem for choosing between injunction and damages as remedies for incompatible property rights uses or conflicts of property rights 1 Objective Value known values a Zero Efficient Allocation b Low but 0 Damages NHR c High Damages 2 Subjective Value unknown values a Zero Efficient Allocation b Low but 0 Injunction c High No obvious choice a b c d 10 Comment on the significance for Economics and the Law of The Enclosure Movement Created private property rights as the expensive of wealth distribution in favor of nobility over presents in England Prior to 1700 s Spur Industries Inc v Del E Webb Development Co Explain the relevance of how the court rules in favor of the more economically efficient defendant plaintiff Boomer v Atlantic Cement Co Inc Explain the relevance of how the court rules in favor of the more economically efficient Cy pree doctrine permits application of proceeds of a charitable trust to a related purpose if the express purpose of donor becomes impossible or illegal Doctrine of equitable deviation permits altering use of property e where original purpose has become impractical or where original purpose restricts property to grossly inefficient use Differs from Cy pree in that equitable deviation applies even though original purpose is not strictly speaking impossible or illegal 11 Explain the


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FSU ECP 3451 - Test 1

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