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UW-Madison ECON 522 - Lecture Notes

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Lecture 4

Lecture 4

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Lecture 9

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Lecture 7

Lecture 7

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Lecture 6

Lecture 6

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Logistics

Logistics

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Logistics

Logistics

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Logistics

Logistics

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Lecture 8

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Lecture 8

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Lecture 9

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Lecture 6

Lecture 6

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Logistics

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Econ 522 Economics of LawLogisticsLast week, we…Today: efficiencySlide 4Most microeconomics is based on the premise of rational choiceThis leads to the idea of revealed preferenceAll this is useful if we want to judge what are “good” outcomesOne way to do this: Pareto criterionPareto superiority is not that useful a measure for evaluating a legal systemSlide 10We generally assume preferences are completeWe also assume more money is better…And finally, we assume preferences are continuousNext, we define Kaldor-Hicks improvementAnother way to think about Kaldor-Hicks improvementsFormal definition of a Kaldor-Hicks improvementAnother exampleEfficiencyPareto vs Kaldor-Hicks improvementsPareto vs Kaldor-Hicks efficiencyIs it efficient for you to have the party?What we’ve really done hereAnother example: is it efficient for me to drive to work instead of taking the bus?Some other, similar measuresSlide 25To see whether something’s efficient…How do we expect people to actually behave?So externalities cause inefficiencyA classic example of this: the Tragedy of the CommonsTragedy of the Commons – exampleWhat’s going on here?So externalities can lead to inefficiencySlide 33Another thing that leads to inefficiency: barriers to tradeAnother thing that leads to inefficiency: taxesAnother example of taxes leading to inefficiencyAnother thing that leads to inefficiency: monopolyBut, saying these things lead to inefficiency doesn’t automatically mean they’re badSlide 39Important distinction: positive versus normative economicsMost of this class will be positive analysisFriedman gives a few arguments for studying efficiencyBut…Posner gives us one argument why the law should aim to be efficientEx-ante consent – simple exampleThings are a little more complicated…Example: new law requiring landlords to pay for their tenants’ heatEx-ante consent, ex-ante compensationLimitations to Posner’s argumentThis highlights some of the things efficiency is notA more pragmatic defense of efficiency as a goal for the lawFour reasons the tax system is a better way to redistribute wealth than the legal systemSo, summing up… is efficiency a good goal for the law?For Wednesday…For WednesdayEcon 522Economics of LawDan QuintSpring 2014Lecture 22TA sections and office hours begin this week“Fake homework” for Wednesday on websiteFirst real homework also up, due next Thursday (Feb 6)If you want to read ahead:Richard Posner, “The Ethical and Political Basis of Efficiency Norm in Common Law Adjudication”For a counterpoint to Posner: Peter Hammond, “Review: The Economics of Justice and the Criterion of Wealth Maximization”Both have links on syllabus, and both are on [email protected]defined law and economicssaw some brief history of the common lawand the civil lawand discussed ownership of dead whalesLast week, we…4quick review of rational choicewhat is efficiency?is efficiency a good goal for the law?Today: efficiency5Rationality, optimization,revealed preference6People have preferences…They understand their options, and how much they like each one…and they optimizeThey choose the option they like the bestThis is what economists mean when we talk about rationality or rational behaviorBehavior that is consistent with someone having well-defined, consistent preferencesAnd this is what we’ll be assuming throughout the semesterMost microeconomics is based on the premise of rational choice7If I see you choosing something……I infer you like it more than your other alternativesWe assume people succeeded in doing what they like, rather than screwing up and doing the wrong thingAnd this allows us to learn peoples’ preferences from their choices (to some degree)This leads to the idea of revealed preference8If we assume that people have coherent preferences……and that we might be able to learn those preferences……then we can try to use those preferences to judge when one societal outcome is “better” than anotherAll this is useful if we want to judge what are “good” outcomes9a Pareto improvement is any change to the economy which leaves…everyone at least as well off, andsomeone strictly better offexampleyou prefer $3,500 to your carI prefer your car to $3,500I buy it for $3,500 – Pareto improvementan outcome is Pareto superior to another, or Pareto dominates it, if the second is a Pareto improvement over the firstOne way to do this: Pareto criterionVilfredo Pareto(1848-1923)10Pareto improvements are “win-win”but most new laws create some winners and some losersso the Pareto criterion usually can’t tell us whether one policy is “better” than anothereven the car example might not be a true Pareto-improvementso we need another way to compare outcomesPareto superiority is not that useful a measure for evaluating a legal system11Kaldor-Hicksand Efficiency12Given any two options, I can figure out which one I like more (or else I truly don’t care)Given two options – say, $4,000, or a 2002 Grand Am…Maybe I prefer the moneyMaybe I prefer the carMaybe I’m truly indifferent between the twoBut one of these must be the caseWe generally assume preferences are complete13If you don’t like it, you can always burn it……but we generally assume everyone prefers more money to less money“Everybody needs money. That’swhy they call it money.” -Danny DeVito, in HeistWe also assume more money is better…14If I prefer your car to $3,000……but I prefer $5,000 to your car……then there must be some amount in between that makes me indifferentWe can say that’s my value for the carIf I’m exactly indifferent between $4,000 and your car……we can say I value your car at $4,000And finally, we assume preferences are continuous15Informally: a K-H improvement is any change to the economy which increases the total value achieved by everyone in society……where the “value” some gets from something is measured by their willingness to pay for itGoing back to the car examplesuppose your car is worth $3,000 to you and $4,000 to megovernment seizes your car and gives it to meI’m better off, you’re worse offBut since I value the car more than you……this is a Kaldor-Hicks improvementNext, we define Kaldor-Hicks improvement16Unlike a Pareto improvement, a


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