Sarah - Law and Econ Final Framework

 Protect property right via liability w/ damages, granting an injunction not favorable to society ( Boomer )  Rules change depending on project and benefit to society Inalienable : no market exists at all regardless of cost offered  Generally, no market will exist when it is against public policy to allow sale w/in market (ex. organ sales) When is inalienability preferable? When morals + high transaction costs (less persuasive) are involved. Rationales for Rules: Efficiency Rationale : efficiency will dictate which rule is chosen for given context and what most efficient way to assign/protect entitlements is from an administrative view  works best for widgets  (1) Cost to get right/entitlement (cheap/no transaction cost – better than state intervention)  (2) Pareto efficiency (party who values it most will receive it) Distribution Rationale : What does society value, and how will it be distributed?  Sometimes unable to have objective pricing, there is simply value and initial entitlements  Ex. If we value noise, may begin w/ entitlement for noise, may permit people to pay neighbors to be quiet Other justice reasons : may be other value judgements at play (ex. public policy) Boomer : Cement producer, plant presents ongoing nuisance, is liability or property rule appropriate? Liability – damages.  Decision is a cost-benefit analysis: considered loss of jobs, cost to plant if injunction granted, cost borne by neighborhood.  If property = injunction  not preferable from public policy, court chooses to support cement factory, value of benefit from plant > negative suffered by neighborhood  If liability = permanent damages  do to want to give neighbors veto, want plant to continue to operate  Application to Coasian bargaining: if injunction granted, factory shuts down, would seek to pay off neighbors to operate  high transaction costs, individual negotiations w/ each neighbor Contract Law Theory Need to be able to control assets, regulate how assets are used and shared with others – what is the best way? Legal Realism – Fuller and Purdue Why enforce public promises?  Liberal autonomy view: enforceable because they are an expression of individual will, integrity  Moral view: promise between parties, should be entitled to honor promise  specific performance remedy  Social Value/Economic View: w/o enforcement of K economy would be restricted, economy and welfare increase where there is certainty of K because individuals are comfortable engaging in contracts Three Interests of Contract Law Remedy : Restitutionary: Strongest moral claim, try to ensure party who breached does not get surplus so it is returned to buyer Reliance : Most important, goes to essence of contract – award losses suffered in reliance of K Expectation : vision of damages – does not require action, once K formed there is expectation as to outcome Law + Econ re Default Remedy – Calabresi Property vs Liability Rule Application What remedy is reasonable for breach of contract based upon Calabresi Property vs Liability Rule Liability Rule: law protects entitlement by liability rule when requires infringer to pay sum of money fixed by third party (ie court)  works when markets are “thick” (transactions are frequent, fungible, inexpensive)  Damages are objectively set = liability  remedy through compensation (expectation – most efficient, or reliance)  Expectation damages fully compensate – promisee can replace performance by market transaction Property Rule : law protect entitlement w/ property rule when it makes entitlement holder’s acquiescence a necessary condition for transfer of entitlement. Occurs when court requires promisor to render promised performance rather than monetary substitute  specific performance  Specific performance results in veto = property right, have an entitlement that cannot be interfered with Restitutionary Rule : focuses on any value promisors posses that is attributed to promisee  Promisee’s restitutionary entitlement is “interest in having restored and benefit conferred on other party” Coase Theorem Application : House Sale – B owns house, sells to A for $100, A is willing to pay up to $115, in time it takes to finalize sale C values house at $150. Issue – Specific performance or damages?  Coase Theorem – house goes to C because they value it most  If we have specific performance, house goes to A who will then sell to C  Under damages, B would sell to C to get $150, pay damages to A of $15 (expectation interest) o Efficient breach of contract – house gets to person that values it most efficiently. But maybe specific performance is preferable because B is in best position to transfer to point where it is valued most Standard Form Contracts Modern contracts are prefabricated with no negotiations  facilitate efficiency, but can lead to abuse  Are standard form contract market failure or efficiency? o Efficient  reduce transaction costs, less friction, increased speed o Failure  terms are not read, no bargains occur, market does not award firms based on contract terms

 Common market: free trade amongst units  Hard fiscal restraint: central government cannot bail out regional governments Federalism can correct rent seeking: localized rules become disadvantage if outside firms get same benefit as inside firms through common market Conclusion : Key is good governance – federalism is an example, it is self-enforcing because any one power getting too much power will be pushed back by other entities Free Speech and Intellectual Property To what extent does market failure invite regulation in specific context of expression? Ideas are a place of market failure because they are non-excludable + cannot reap full benefit – ideas will be underproduced  positive externality Property and Liability Rules : need to correct market failure present w/ ideas by providing incentives to create underproduced ideas  the transaction cost will dictate which method is used  Liability System – Ex. Licensing: objectively set rate for compulsory license for use o Used when transaction cost is too high to contract for use each time  Property Right – Ex. Patent: often policy choice to implement patent (getting better access to something) o Applied where transaction cost to individually contract for use is not high Political Expression Economic Perspective 1 – Classical Liberal Model – Johns Milton : benefits of political expression are shared, cost is borne by one individual  Constitutional protects are subsidies for individuals  provide strong protection to political expression  Problem of Transaction Cost: cannot reward speaks for expression, constitutional protection as subsidy makes sure cost of political expression is low by ensuring no liability + low legal fees NYT v Sullivan: NYT gets some benefit from freedom of expression (sale of papers) but not all – market failure/positive externality. General public gets benefits via access to information otherwise unknown.  NYT bears cost solely (they face suit/legal fees) – give strong protection to political expression, easy to chill this form of expression due to costs imposed Economic Perspective 2 – Posner : Cost-benefit analysis of expression, invitation for regulation  Should government be hands off and allow expression (classical liberal model) or regulate expression that is harmful? o Value + E > Probability + Loss (1+i)n  to regulate or not o Potential influence/spread of idea v harm of expression o Cost of legislating/banning expression = los ideas or cost of being wrong about banning o Total benefit = probability of loss from hateful expression (which is avoided by banning) Normative Challenges Posner’s Law + Econ is better than utilitarianism and avoid the many ethical pitfalls of utilitarianism Utilitarianism: welfare is increase of societal happiness, who gets what is based on happiness of greatest number  If we could measure happiness on individual basis, look to aggregate to see if making net benefit  Morality is a major challenge – want to improve overall happiness while still being protective of individuals  Sometimes it makes sense to have view to group benefit of happiness  seen in law w/ group benefits Posner Utility Maximization : law + econ is an improvement on utilitarianism, maximize societal wealth not happiness  Wealth Maximization = increasing efficiency  moving things where they are valued most o Society is better off because goods go where valued most, creates perception of increased wealth  Improvement to utilitarianism – each transaction improves happiness with what we currently posses, more times we replicate the better, accumulates efficiency which should increase happiness o Happiness is in eyes of beholder – each person decides how much transaction is worth, stops making deals when it is no longer valuable to them Dworkin – Critique of Wealth Maximization: ability to pay signals no more than that, no moral connection, no response between $ and value Ex. Rare Stradivarius Violin: two people want it, one wants to play it, other has money and wants to display it  Aristotle: Violin goes to whoever would honor violin by playing it  Wealth Maximization/Posner: goes to highest bidder and where it is valued most  Equality: if highest bidder plan to put in museum, should go to them  Socialist/Marxist: state owns violin and makes distributional call – everyone shares or no one gets it  Utilitarianism: better to go where there is greatest societal benefit Behavioural Law and Economics

o Individuals use heuristics to deal with complex problems, this varies their ability to cope with changing actions by other parties o When presented with the opportunity to work with others, individuals share their understanding of how individual actions affect joint outcomes  without this opportunity, heuristics lead to overuse  Individuals are more self-interested in short term when there is anonymity  no group accountability  Individuals are more cooperative in smaller, known groups especially with possibility of sanctions , including social condemnation o When behaviour not consistent with reciprocity is discovered, individuals are willing to use retribution  Polycentric view of regulation  pragmatic approach o There cannot be a one-size fits all solution o Top-down solutions can be part of solution, but there must be overlapping and adaptive smaller schemes Crime Approach to crime from law and econ perspective is a view of the economic individual and what this tells us about regulating behaviour Punishment  Condemnation – retributive  Rehabilitation – restorative  Deterrence – main focal point of law + econ o Law + econ seeks price behaviour – once certain behaviour is negative, law creates a price o Seeking the best cost-benefit ratio to prevent and deter crimes in an efficient and cost effective manner  Not always desirable or efficient to eliminate all instances of negative behaviour Cost-Benefit Analysis: social benefits of crime reduction v cost of enforcement Private Enforcement: enforcement role is delegated to private actors who value it most where public enforcement would be too costly – often present for minor offences Potential Perpetrators: consider the gains vs punishment and possibility of being caught  Cannot employ capital punishment to all minor infractions  would encourage people to commit lager crimes o Instead of shoplifting, criminal may as well commit larger crime w/ higher payoff because penalty at risk is same in both circumstances o If offender will be executed for minor assault or for murder, there is only marginal deterrence of murder Innocent Parties: need to avoid over enforcement  Cost of defence of innocent parties is borne by themselves or state and is part of cost of enforcement from social perspective  Conviction of innocent persons encourages crime – it reduces the marginal deterrence to commission Fines: law and economics favors fines, helps recoup money without imposing serious costs on state through imprisonment Family Application of who gets what? If selling widgets, items should go where they are valued most  applied to adoption Should we be able to sell children?  There is a serious problem w/ adoption system – according to Ladner and Posner there is an undersupply of desirable infants, and an oversupply of the undesirable  supply and demand is not balanced, and this is a point of market failure  Adoption by sale could (i) increase production of desirable children and (ii) ensure children are adopted o Markets work better when there is balancing of supply and demand o However, there is an ethical flaw in assigning value to children and creating a market for them. Additionally, means that only the wealthiest individuals should be entitled to higher value children.