72 terms

Law and Economics - Exam 1

What are the four types of efficiency?
Productive, allocative, Pareto, Kaldor-Hicks.
What is productive efficiency?
Maximizing productivity by producing along the PPF line.
What is allocative efficiency?
Realize all gains to be had by trade, maximize Consumer Surplus and Producer Surplus, those with the highest willingnesses to pay will consume, those with the lowest of production will produce
How is allocative efficiency achieved?
Through competitive markets.
What legislation was passed to promote allocative efficiency?
Anti-Trust legislation because monopolies don't allow for allocative efficiency to be achieved.
How do monopolies not achieve allocative efficiency?
They produce where MC=MD, not where S=D, so the amount being demanded far exceeds the amount being supplied, creating a deadweight loss. There is no deadweight loss when there is allocative efficiency.
If there is deadweight loss in a market, what does that mean for its efficiency?
That means allocative efficiency is not being achieved - there isn't maximization of CS and PS.
What is Pareto efficiency?
When you can't make someone better off without making someone else worse off.
What does it mean when moving from choice A: (20, 15) to choice B: (20, 20) when choice C exists: (25,20).
This means choice B is a Pareto improvement over choice A, but choice B is still not Pareto efficient.
What is the status quo?
The existing state of affairs in a market.
How are we able to move from the status quo point?
This requires one consumer to possibly compensate another consumer; it is sometimes impossible to move from the status quo point.
What is Kaldor-Hicks efficiency?
It maximizes dollar valuation sum when preferences are stated in terms of dollar values.
Does Kaldor-Hicks efficiency require 1 consumer to compensate another?
Where on a graph is the Kaldor-Hicks efficient point?
The place where the Wealth Possibility Frontier is tangent to the sum of the two consumers' wealths.
What recommendations can a Kaldor-Hicks analysis give us?
Clear, yet sometimes inequitable recommendations.
What is Common Law Tradition?
A ruling creates a precedence that continues until superseded by legislation (stare decisis); it would be unfair to rule differently when presented with a similar case.
Where does a ruling in a Common Law court pertain?
To courts of the same level or lower in the district of the ruling (MI is in the 6th district).
What is Civil Law Tradition?
Rulings are based on interpretation of civil code (originally Napoleonic).
Where does Common Law prevail?
Great Britain, the U.S., Canada, Australia
Where does Civil Law prevail?
France, Western Europe, Central and South America, Louisiana, Quebec
What is the law system of Eastern Europe and Russia (former Communist nations)?
They are trying to adopt civil code.
What is the law system of China?
They've never had a formal law system; judges could rule on a case to case basis, which led to a lot of corruption, so they are currently trying to establish commercial, civil, and criminal law codes.
What is the law system of the Middle East and Africa?
Fiqh - Islamic Law.
What is the law system of native tribes?
Customary Law.
What falls under the tier of civil law?
Civil disputes, commercial code, marriage.
What are some types of law?
Criminal, constitutional, statutory, administrative, military, martial
How does a case proceed under Common Law?
Lawyers state facts, provide evidence, lead the proceedings; juries then decide the ruling; arguments are based on precedents. Lawyers train by reading cases and law evolves as new cases come.
How does a case proceed under Civil Law?
Judges ask questions, lead proceedings, while lawyers answer them. Judges decide the rulings and changes only happen when new legislatures are passed (often drastic change).
What is the hierarchy of law?
Constitutional Law > Statues/Rulings > Administrative Rules
What is the hierarchy of the courts?
94 District Courts < 13 Appellate Courts < Court of Last Resort, Supreme Court, comprised of 9 judges that see about 10% of possible cases
What things does the federal court handle?
Federal laws, cases where the U.S. is being sued, disputes between residents of different states.
What things do state courts handle?
Cases involving state/local laws, disputes between residents of the same state, cases over federal laws that don't need federal jurisdiction, necessarily
What are the types of MI courts of general jurisdiction?
County district courts, probate courts, and 57 circuit courts.
What do the County district courts handle?
Cases of less than $25,000, misdemeanors, traffic violations
What do the probate courts handle?
Estates, trusts, wills, conservatorships
What do the 57 circuit courts handle?
Felonies, cases of more than $25000, appeals from other courts
How large are the MI appellate courts?
There are 4 districts of 28 judges total, with 3 judges presiding over each case
What does the MI Supreme Court handle?
Appeals from the court of appeals, cases involving an attorney or misconduct. There are 7 justices that serve for 8 years each.
How does a Civil Case progress?
A plaintiff files a complaint against the defendant (they may say the facts are true but they are not liable or they may say the facts are false and true facts will prove their innocence). Judge decides if case will go to trail or be dismissed. A case can have a jury or a bench trial. Both sides give testimony, show evidence, provide argument. Jury enters judgment which the judge can vacate.
How are rulings decided?
For civil cases, the most convincing argument wins. For criminal cases, "beyond a reasonable doubt" is followed. For both sometimes, "clear and convincing evidence" is used.
Why can judgments be appealed?
If there was a mistake in the interpretation of the law or procedures used during the case. No new evidence may be introduced though.
What are the 3 things the 3 judges overlooking an appeal can decide?
Affirm, reverse, remand (send back to the lower courts for a re-do).
What are some characteristics of private goods?
They are exclusive and there is rivalry in consumption (you can achieve an efficient level of production).
What are some characteristics of public goods?
They are non-exclusive and there is no rivalry in consumption.
What is the Efficiency Condition?
MC = the Sum of MB
Where is optimal production in private goods?
Where Market Supply = Market Demand
Where is optimal production in public goods? What is the problem with this?
MC for public goods = Market Demand
Free riding is a problem here.
What is the Tragedy of the Commons?
There is an individual incentive to exploit a public resource until the private benefit is zero, and if an individual's use exploits a cost on others, the resource will be over exploited.
What is TRP equal to?
What is ARP equal to?
(P*Q)/# of people
What condition has to be true for a person to make money (product, cost, etc.)
ARP > C or they will lose money. ARP < C yields a loss.
What is MRP?
The marginal revenue added per additional unit of input.
What are some examples of tragedies?
Overfishing, traffic congestion, overgrazing in China.
What is Tragedy of the Commons a justification for?
Private property.
Where does profit maximization occur?
Where MRP = C.
What are the 2 aspects to property rights?
1. Owner can exercise his rights.
2. Others can't interfere with his owner's rights.
What are the 3 criteria for the law to recognize property rights?
1. Precise definition of interest.
2. Be capable of exclusive possession or control.
3. Owner must establish a claim over exclusivity.
Describe the case of Rasmussen v. Kalitta Flying Services and what it shows.
Rasmussen developed aircraft design modifications, obtained FAA certificate approving the changes, Kalitta used without permission.

The court ruled Rasmussen had property rights.
This case shows how the court defines property rights and how that will affect a ruling.
What does it mean to internalize an externality?
The process of compensating for the externality.
What does zoning help to reduce?
The effect of externalities.
Describe the case of L.A. v. Alameda Books and what it shows.
A study claimed that crime rates were higher around areas of high concentrated adult businesses, so L.A. made a rule that adult businesses must be at least 1000 feet apart and no building may house more than 1 adult industry. Alameda was found to be housing a bookstore and arcade, which violated the rule.

The ruling: Alameda had to separate their two businesses.
The case shows the court's belief in zoning to reduce externalities.
Spur Industries v. Webb Development Co.
Spur had a feedlot that was smelly, Webb started to develop a neighborhood nearby and sued Spur for the bad smell and wanted them to halt their business.

The ruling: Webb "came to the nuisance," therefore, they created the externality, so they had to pay Spur to shut down or move.
The case shows how the court places the blame on externalities and that a person can technically create an externality by coming to it.
What are pecuinary externalities?
Externalities affecting people through prices (oligopoly causing high prices, firms cheating each other and causing pecuinary externalities on other firms)
Why are externalities problematic?
There are no prices, thus no markets, and property rights aren't defined.
How do externalities create a DWL?
They cause MPC < MSC, creating a DWL and lowering prices.
What did the 1990 Clean Air Act show?
It created sulfer dioxide permits and slowly reduced the total number over time. The program was successful.
How do you calculate abatement?
The triangle dictated by the x-axis, the amount of permits, and the demand for permits curve.
What are the 3 problems of social cost?
1. The polluter paying the Pigouvian tax doesn't necessarily lead to efficiency.
2. Externalities don't necessarily lead to inefficient outcomes, since people will bargain.
3. The real problem is transaction costs.
Describe Sturges v. Bridgman (1879) and what it shows.
A confectioner made noise that interrupted a Dr.'s office. The damages to the Dr. are $100, cost to move confectioner is $80, cost to move office is $50.

It showed: the polluter (confectioner) paying the Pigou tax of $80 isn't the most efficient. Also, people will bargain; if the Confectioner has the right to make noise, the Dr. will pay to move $50. If Dr. has a right to silence, they will bargain for between $50 and $80. Finally, if transaction costs are too high, nothing will be achieved.
What does it mean if transaction costs are low? Are high?
People will bargain. Property rights are important because it's too costly to bargain.
Describe the case of the Lawyers and the Window Bars and what it shows.
A family in a co-op didn't want to pay for window bars and so they sued the co-op to split the cost. After the case went through the court of appeals twice, fees surmounted to $75,000. Family eventually paid $30,000 of fees.
What things make up transaction costs?
Search costs, costs of bargaining, and costs of enforcement.