Econ 522 – Lecture 25 (Dec 11 2008)Final exam: Friday December 19, 2:45 p.m., in 5208 Social ScienceChao’s review session: Saturday December 13, 2-4, in 22 IngrahamYes, the final is cumulative – everything but this past Tuesday is fair gameI won’t hold regular “scheduled” office hours next week, but will be in my office a lot – email me a time if you’d like to meetSo… what have we done this year?Well, we started out by defining efficiency, and asking, should the law be efficient?And we gave a few reasons why it should, voiced a little healthy skepticism, but agreed that we’d focus on efficiency for most of the class.(Friedman offers three more reasons why we should focus on efficiency:- it’s something that most people care about- some aspects of the law seem to have been designed to achieve efficiency, so thinking about efficiency helps us to understand them better- looking at efficiency is “one of the things economists know how to do – and whenyou have a hammer, everything looks like a nail”)The choice of efficiency as our measure makes things much simpler in a lot of ways. In particular, it means that:1. we only have to focus on final outcomes – who gets to own what, how many car accidents there are, etc. – and not processo that is, we assume people only care about what they get, not why they get it – no concerns about procedural fairness, etc.2. we can ignore transferso that is, suppose that at some point, if a certain thing happens, our legal system is going to make Alice pay Bob $100o a transfer of money has no direct effect on efficiency, so we can ignore the“direct” effect, and look only at the impact this has on incentives, and therefore on Alice and Bob’s actions- 1 -So we’ve decided to look at the law through the lens of efficiencyThis means that the “goal” will always be to maximize the total surplus – or total wealth – available to everyone in the worldAnother way to say this is that the goal is to minimize costs – where costs are just any way in which total surplus is lower than the highest it could possibly beAnd costs generally take two forms: direct costs of implementing a particular aspect of a legal system, and indirect costs that aspect has by leading to imperfect incentives and therefore less-than-perfectly-efficient outcomes This is one of the recurring themes that we saw many times in this class: trading off the costs of a more complete, more complicated system, versus the benefits of improved incentives and therefore better outcomes- We saw this with Demsetz, who considered private ownership rights to land among Native Americanso The cost: “boundary costs” – the direct costs of clarifying whose land is whose, punishing trespassers, and so ono The benefit: improved incentives not to over-hunt, and therefore more efficient use of the lando Efficiency says we should have private land ownership when the benefit isbigger than the costo Demsetz points out that the fur trade increased the benefit above the cost, so this is when Native Americans developed ownership rights over land- We saw a similar tradeoff with whaling ruleso “Fast fish/loose fish” was a very simple rule, and very cheap to implement– there were few disputeso “Iron holds the whale” leads to more disputes, but also more efficient incentives when whales are too fast/violent to hunt with harpoons tied to shipo So “Iron holds the whale” has higher direct costs, but lower indirect costs (more efficient outcomes); which one is better depends on the circumstance, that is, how severe the indirect costs are with right whales, indirect costs were low – simple rule worked “well enough” with sperm whales, indirect costs were high – the old rule wouldn’tprovide enough incentives to hunt sperm whales- 2 -- We saw the same tradeoff – between cheaper, simpler rules and more expensive, more complex rules – when we compared injunctive relief to damages in propertylawo Injunctions force the concerned parties to bargain among themselveso But damages are more costly for the court to calculateo When transaction costs are low, bargaining is likely to succeed, so injunctions are cheapero When transaction costs are high, bargaining may fail, so the benefit of a damages system may outweigh the additional costs- We saw the same tradeoff when we considered the fees charged to initiate a lawsuito Higher fees mean fewer lawsuits, which means lower direct costso But higher fees mean more accidents go “unpunished,” which weakens incentives for precaution- And we saw the same tradeoff with crimeo Catching and punishing more criminals is usually costlyo But it reduces the social cost of crime by reducing the crime rateSo that’s clearly one of the recurring themes of the class – trading off the benefits of a complicated system that provides close-to-perfect incentives, versus the higher costs of implementing it.- 3 -Another recurring theme – although we’ve discussed it in slightly different terms – is the distinction between protecting a right versus protecting an interest- suppose I own something- my right to that thing is protected if nobody is allowed to take it away from me without my permissiono or rather, since we can’t control other peoples’ actions…o my right is protected if anyone who violates it gets punished severely, so we expect nobody will do that- on the other hand, my interest in that thing is protected if anybody who takes it away from me, has to reimburse me for the value I expected to get from it- (protecting a right is done by injunction; protecting an interest is done by damages)property law tends to protect our rights to things we own- trespassing on my land is a crime – if someone is caught trespassing, they don’t just have to pay for the flowers they trampled, they may go to jail- and stealing my iPhone is a crime – if someone is caught stealing it, they don’t just have to pay me its value, they again will go to jail- but there are exceptions- if someone needs to use my cabin in the woods in an emergency, my interests are protected – they’ll have to pay for the food they eat, and replace the window they broke to get in – but my rights are not absolute- and similarly, if the government wants to take my land, they only have to protect my interest in it – by paying me its value (eminent domain)tort law, on the other hand, tends to protect our interests- certainly, I can be
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