Problem Set 2 Due 7 16 60 points total 1 French law obliges the owner of a house to compensate his neighbor for the costs that neighbor might have incurred in fixing the roof of the house after a storm while the owner was abroad Comment on the efficiency of that law 10 When looking at the efficiency of this law it is indeed efficient Due to the law the homeowner was able to have his home fixed by the time he got home from his leave taking the stress off of him The costs would have been incurred either way therefore it is efficient just to pay the neighbor rather than taking him to court and fighting the law 2 Suppose that a chemical plant and a farmer share a property line in a rural area Assume that the farmer makes 500 in profits per year from his crop and the plant owner makes 600 per year from her products Sometimes there is runoff from the plant and this runoff causes 60 of damage per year to the farmer s crops The chemical plant may install a recycling system that captures the runoff and renders it harmless but the cost and maintenance of such a system is 120 per year The farmer may build and maintain a canal system that redirects the runoff around his property which costs 95 per year Suppose there are three potential legal rules that may be enforced in court 1 Polluter s rights The plant is free to pollute 2 Polluttee s right to damages The farmer is entitled to compensatory damages from 3 Polluttee s right to injunction The farmer is entitled to an injunction forbidding the the plant plant to pollute Reproduce tables 4 4 and 4 5 How high must transaction costs be before an injunction is an inefficient remedy 15 On paper 3 Question 4 14 5 Litigation is used if the transaction costs tend to be high rather than try to negotiate and collectively bargain When there is a low transaction cost it is better for an injunction to occur this will incentivize bargaining in the future to come up with the most efficient outcome 4 Question 5 5 5 This compulsory licensing allows for the invention to reach the public if the inventor is trying to keep it to himself It encourages improvements as well as increases the public s well being because they can now use the product that the inventor had been keeping away from them Through compulsory licensing the plaintiff has to prove that the inventor has not been sharing his invention with the public for a certain amount of time If this is the case innovations have been restrained 5 Question 5 10 5 Having the patents allow for the inventor to have control over their patents After a certain time it is reasonable for the patent to expire so that others may use the product for innovations or improvements This is not the case for real property rights because the release of the property rights will not cause any more economic value Because patents may create a temporary monopoly that rewards the inventor and over charges buyers the optimal life of a patent strikes the best balance between encouraging creativity and discouraging dissemination As the duration of patents increase society suffers more costs from less dissemination Society responds to long patents by searching for substitutes for patented goods It is good to limit the length of patents so that society can utilize the innovation and not have to suffer the costs of having to find substitutes or not utilizing the innovation at all Real property rights are different because stopping them after a certain period of time adds no value to society The optimal duration of a copyright involves a different problem from patents tracing costs The research cost can be very extensive when researching if your original idea for a novel may unintentionally infringe on a previous authors idea For this reason copyrights are given a limited duration If copyrights are broad in scope then this may choke creativity and limit new creations Copyrights can also obstruct communications among scholars and slow scientific development For example before the internet people used books and newspapers as a way of researching topics This is costly to produce and costly to purchase 6 Question 5 21 5 When using the continuous rule the owner would have to check up on their property every day or more frequently then when using the discontinuous rule which states that you check up on it every 10 years or so The continuous is more efficient because the land would be kept up better than if you were to check it very seldom Persons who neglect to monitor their property boundaries run risk of losing idle parts to someone who makes use of them 7 A Question 5 31 and 5 32 5 31 The externality in Boomer is private because the law refers to a harmful externality of a small amount of people the neighbors not a large body of people 5 32 I believe the transaction costs are rather low because it is a small amount of people however in the case itself it talks about there being over 45 million invested in the company B Consider the remedy used by the judge in light of your answer to Question 5 32 What does economic theory say about the remedy used 10 Equitable property rule an order by the court directing the defendant to perform an act or to refrain from acting in a particular manner This is the remedy because it states I would enjoin the defendant cement company from continuing the discharge of dust particles on its neighbors property pg 171 8 Question 5 35 5 With temporary damages the affected party receives compensation for the harms the defendant has inflicted upon them in the past If harms continue the victim the affected can return to court to receive for additional damages Thus temporary damages impose high transaction costs Reductions in future harms translate directly into reductions in liability They also create incentives for injurers to continually adopt technical advancements that reduce external costs With permanent damages the affected party will receive compensation for past harm plus present discounted value of all reasonably anticipated future harms a lump sum payment This extinguishes claims for past and futures harms at a level specified within judgment This could cause for high error costs resulting in no incentive for injurers to adopt technical improvements that reduce external costs below the level of judgment