ECO320( Based on questions from economics) EVALUATIONS AND CORRECT ANSWERS ,VERSION 3 ,CODE 3459

Gun control is politically unpopular in neighborhoods with the highest crime rates. Use economics to explain why. - answer-Criminals obtain guns to make crime easier and apprehension more difficult, so guns tend to create crime. The potential victims of crime obtain guns to make their victimization harder and more risky for criminals, so guns can also tend to reduce crime. The standard argument is that the more handguns, the more violent crime. However, if criminals know that honest citizens have guns, they might be increasingly wary of committing crime. This muddies the direction of causation between handguns and crime. Perhaps, more handguns lead to less crime so if this is true, then reducing the number of handguns may lead to an increase in the amount of crime. Both casual and some detailed evidence suggest that increase in handgun ownership have no simple causal connection to violent crime. If homeowners can legally own handguns, then potential burglars will be less likely, all other things being equal, to invade houses in which som For burglary, the victim's loss usually exceeds the injurer's gain, but the opposite is true for breach of contract. Why? What are the implications for relative dollar values of compensation and punishment? - answer-In breach of contract, damages are generally assessed on the basis of compensation, not punishment. For breach of contract, perfect compensation is a sum of money that leaves the victim indifferent between the breach of contract with compensation and no breach of contract. A rational agent would only breach the contract if they could gain more than would be necessary to fully compensate the principal to the point of indifference between performance and breach. Because we can reasonably expect sophisticated business actors to be rational, we would only expect breach to occur in such situations, necessarily making the injurer's gain greater than the victim's loss. In the case of burglary, the probability of being caught and punished lowers the expected payoff to the injurer. Even if the person valued the object only at its resale value (i.e. attached no personal significance to the item stolen and no damage was done to In what ways do you think a "rent-a-judge" who seeks to maximize income might decide cases differently from an independent public judge? - answer-The parties can agree to "rent" a retired judge to decide their case. The resulting private trial is usually held in a mutually convenient place, such as a hotel suite. The retired judge usually conducts the trial in an informal manner, without the concern for procedure shown in public trials. The case is decided by application of the relevant state law. The judge's final decision is, furthermore, registered with the state court and has the full effect of a decision in a public court. Critics say that "rent-a-judge" is unfair to the poor because only the rich can use it. People who rent judges benefit from a speedy trial, and others benefit indirectly from relieving the congestion in the public courts. Notice that renting a judge changes judicial motivation. Suppose you were a retired judge who decided to participate in a rent-a-judge program. In your former role as a public judge, you were supposed to be "independen Suppose "loser pays all" is more efficient than "each pays his own." In a jurisdiction that follows "each pays his own,'' the Cease Theorem would predict that the two parties would sign a contract requiring the loser to reimburse the winner, thus adopting the more efficient rule by private agreement. Give some economic reasons why this does not occur in fact. - answer-If the jurisdiction allows for "each pays his own", rational parties would not want to engage in another private agreement regarding costs which would increase both of the parties' transaction costs. The transaction costs for the parties of bargaining around the default rule might inhibit this deal from occurring. Recognize that for most parties litigation is not so common that they can develop boilerplate to deal with this situation. For most parties, litigation is uncommon. (The average American consults a lawyer only three times during a lifetime.) And many people may well be overly optimistic about their abilities to prevail at trial, thus inclining them not to want to bargain away from the default of "loser pays." Suppose that the seller is very attached to her home and wishes to sell only to someone who will maintain the property as a single family dwelling. A prospective buyer says that he, too, wants to use the property as a single-family dwelling. The sale is completed, and the seller moves out. However, several days later, she learns that the buyer intended all along to demolish the house in order to open a commercial establishment. Does efficiency commend enforcing the contract or rescinding it? - answer-It would generally be efficient to enforce the contract since the house was clearly more valuable to the purchaser than to the seller. This is a case of fraud since a false assertion was made with the intention to deceive. Under the traditional common law doctrine, the victim of fraud is entitled to damages for harm caused by fraud. The economic reason for not enforcing a promise elicited by fraud is straightforward: if parties to a contract know that fraud is a ground for voiding the agreement, then they can rely on truthfulness of the information developed in negotiations for the contract. This saves parties the costs of verifying material statements. This in turn, lowers the costs of concluding cooperative agreements. As such, the law should be designed such that they aim to improve the exchange of information in private contracts. Enforcing these regulations can be costly. Consequently, legislation directed at a "Default rules save transaction costs in direct proportion to their efficiency." Explain this proposition. (TT1, Oct 2017) - answer-When a court rules to fill a gap in a contract, the rules apply by default. If the parties opt out of the default rules by explicit terms, the court enforces the explicit terms even though they contradict the default terms that the court would have used to fill the gap. When a default rule is inefficient, the parties can gain by replacing it with their own explicit terms that are efficient. This is the Coase Theorem. The parties have to bear the transactions costs relating to this negotiation of explicit terms. If the court supply efficient default terms, then neither party can gain further from replacing them with explicit terms. The fewer the terms requiring negotiation, the less transaction costs. So in general, all parties to a contract can benefit when lawmakers replace inefficient default terms with efficient default terms, and the size of the gain is proportional to the cost of transacting around the defaul Analyze caps and limitations on litigation awards using the analysis of rent control (rent control is from chapter 2) - answer-Caps and limitations on litigation awards can be associated with the principle of rent control in that a "price ceiling" can be used as protection against excessive litigation fees taking from the losing party. -if the cap is set below market price there will be excess demand for houses and not enough supply -- price floor -similarly, if the cap is set too low there will be more demand for damages because more crimeis committed if the cap on damages is lower than it should be. not enough supply of damage awards and so plaintiffs will seek for alternative damage awards like punitive damages "Excessive damages increase expected liability under a negligence rule, which results in excess precaution." Explain the mistake in this proposition. - answer-When potential defendants know they are subject to any of the negligence systems, including simple negligence, modest errors increasing damages (compensation) for claimants, will not motivate rational defendants to change their standard of care. (Text, p. 219) When potential claimants know they are subject to any of the negligence systems, including simple negligence, modest errors increasing damages motivate rational claimants to file more claims. (Text, p. 266) Suppose that two people choose to litigate a dispute. Should the law presume that if two parties are prepared to litigate, transaction costs must be high, and therefore the court should choose damages as the remedy, not an injunction? - answer-Even if the court sees two people ready to litigate over a dispute the court cannot assume that transaction cost is too high to bargain. Instead they should explore the issue under the Normative Hobbes Theory in case these people are being too unreasonable to find an efficient allocation of resources. Typically, when transaction costs are so high as to preclude bargaining, then the more efficient remedy is damages. In general, when transaction costs preclude bargaining, a switch in remedy from injunction to compensatory damages makes the victim no worse off, whereas the injurer may be better off and cannot be worse off. For this to happen, courts have to measure the harm correctly. Otherwise, the magnitude of the damage can distort the injurer's incentives. An injunction on the other hand, gives parties a clear position from which to bargain but injunctions remove the injurer's ability to choose between abating an Describe the role of property rights in the allocation and distribution of private goods in a market. - answer-". . . property rights are part of the law that makes owners internalize the social costs and benefits of alternative uses of the goods that they own." What is meant by "squatter's rights"? Why is it efficient? Give 3 examples, explaining how it applies in each case and whether or not it is efficient in each case? - answer-Squatter's rights embodies the idea that if one property owner neglects property and fails to use it, and a second person starts to tend and use the property, then after a certain period the first person's claim to the property is lost and ownership transfers to the second person, who is actually using the property. The economic advantage of adverse possession is that it clears the clouds from title and allows property to move to higher -valuing users. In general, a rule for acquiring title by adverse possession lowers the cost of establishing rightful ownership claims by removing the risk that ownership will be disputed on the basis of the distant past. A second advantage argues that the rule prevents valuable resources from being left idle for long periods of time by specifying procedures for a productive user to take title from an unproductive user. Explain the difference between foreseeable events and foreseen events - answer-Foreseen events are events foreseen by the parties and might be included in the contract. (5 marks) Foreseeable events are events that ought to have been foreseen by reasonable or rational parties but might not be included in the contract. If any event is included in the contract, this also is a foreseeable event. (5 marks) When a foreseeable risk is ignored and leads to a breach of contract, then liability is imposed. (5 marks) When an unforeseen risk is missed, liability is imposed under strict liability, but not under breach of contract unless the unforeseen risk was also foreseeable. (5 marks) Under the expectation damages rule, when a breach arises, its resolution reflects the application of a standard for performance based on what is foreseeable. (5 marks) "If the legal standard of care in a negligence rule is necessarily vague, the court should set it below the level of efficient precaution." Explain the economic argument in favour of this proposition. (6.21) - answer-For example, with a rule of negligence, vague standards cause excessive precaution; so, the court should apply vague standards leniently in order to avoid aggravating the problem of excessive precaution. In the diagram above, the court would shift the "required precaution" to the left, so that the "chosen precaution", which is excessive, also shifts to the left, towards where precaution is optimal. Suppose that a person who is burned in an accident suffers intense pain for 1 week and then fully recovers. What does "perfect compensation" mean in principle as applied to the burn? Why do you expect actual compensation to be imperfect? - answer-Perfect compensation means a sum of money sufficient to make the victim of an injury equally well off with the money and the injury as he or she would have been without the money or the injury. (Text p. 192) Perfect compensation is the right goal for courts that are trying to internalize costs, but implementing the goal is difficult for intangible, but real, harms like burns. Implementation is difficult because the court cannot observe and measure the plaintiff's subjective valuation of the loss of emotional distress or pain and suffering. (Text p. 192) Confusion over intangible damages contributes to liability disparity, which occurs when the same court awards different amounts of compensation to victims who suffered the identical injury. Efficiency seem to require reducing liability disparity in each court and harmonizing damages. (Text p. 192) Explain how outright prohibition of marihuana might amount to an increase in profits to criminals who supply drugs. Using appropriate diagrams, explain the difference between hard core addicts and occasional users in your answer? - answer- Explain how the "loser pays" rule motivates parties to settle the issue of compensation in comparative negligence cases, but not the issue of liability in these cases. - answer- What is the economic analysis supporting a law that punishes a person more severely for committing a crime deliberately rather than spontaneously? - answer-A crime may be committed spontaneously in the sense that the criminal did not make any plans in advance. Spontaneous criminals do not search out opportunities to commit crimes, but when opportunity comes their way, they avail themselves of them. At the opposite extreme, crimes may be carefully planned out in advance and all the possibilities weighted. Thus, a premeditated crime shows a greater degree of deliberation than a spontaneous one. From the economic point of view, deliberate crimes result in reallocation of socially beneficial activities to more negative activities. This is a type of social cost justifying the application of a higher level of punishment imposed on the criminal. Explain how the relative optimism bias of a claimant effects the frequency of settlements? The range of settlements? Use 1 example to illustrate your answer. - answer-Discovery increases the optimism of plaintiffs and thus increases the value of their legal claims If for individual proceedings, discoveries come after the claim is filed, the number of claims is unaffected. But if claimants anticipate successful discoveries - this increases relative optimism bias and more claims will be filed. Discovery increases deliberation, which improves the quality of argument.