ECO 320 MIDTERM UPDATED ACTUAL
Exam Questions and CORRECT Answers
4 questions of property law - CORRECT ANSWER 1: how are ownership rights established?
2:what can be privately owned? #. what may owners do with their property? 4. what are the
remedies for the violation of property rights?
coase theorem - CORRECT ANSWER when transaction costs are zero, an efficient use of
resources results from private bargaining, regardless of the legal assignment of property rights
open range rule - CORRECT ANSWER the farmer is responsible for keeping the archers
cattle off his property and bears the damages if the cattle got in
closed range rule - CORRECT ANSWER the rancher is responsible for keeping the cattle off
the farm property and the rancher bears the damages if the cattle got in
if parties can cooperate - CORRECT ANSWER they will be indifferent to the closed range
rule and the open range rule. So: the fence will be built regardless of which rule applies/ The
resulting surplus will be shared and might go towards building a fence
payoff function for R - CORRECT ANSWER SSr = Wr + T - Crx
payoff function for F - CORRECT ANSWER SSf = Wf - T - Bf(1-x)
rule of first possession - CORRECT ANSWER maintaining low transaction costs by defining
property rights clearly and simply is the rule of first possession (rule of capture). This encourages
efficiency by emphasizing the production of wealth over the transfer of wealth. But, this rule
may lead to over investment
prisoners dilemma - CORRECT ANSWER arises with each owner believing that the other
owner is "free riding"
, rule 1: polluters right to pollute - CORRECT ANSWER (no bargain) no pollution equipment
is installed by the electric company but is installed by the laundry company. Joint surplus is
maximized here
rule 2: owners right to sue for damages - CORRECT ANSWER no solution equipment is
installed by either the electric company or the laundry place. Joint surplus is 1,100. BUT L can
sue E for 200.. E bargains by installing the flter for them at 100
rule 3: owners right to sue for an injunction - CORRECT ANSWER pollution equipment is
installed by the electric company. Joint surplus is 800. BUT instead of losing 500, E bargains
with L and installs the filters for 100
if normative Hobbes thm is applied to the prisoners dilemma problem - CORRECT
ANSWER rule 1 is the most optimal
what does the prisoners dilemma problem showcase? - CORRECT ANSWER that the
damages and injunction remedies are equally efficient when the transaction costs are zero. Also,
if the transaction costs are so high to prevent bargaining, the more efficient remedy is damages
when transaction costs are low - CORRECT ANSWER injunction is the efiicient remedy.
BECAUSE the right to innjunction gives the parties a clearer position from which to bargain
when transaction costs are so high that they prevent bargaining... - CORRECT ANSWER the
court may socially optimize the dispute by granting an injunction/ or compensation (damages) to
the party who values the outcome most in relative terms
normative Hobbes theorem - CORRECT ANSWER when transaction costs are so high that
they prevent bargaining, the court may socially optimize the dispute by granting an injunction/ or
compensation (damages) to the party who values the outcome most in relative terms
under the coase theorem, with the opportunity to bargain, different legal rules: - CORRECT
ANSWER led to the same economic outcome and optimal social surplus
Exam Questions and CORRECT Answers
4 questions of property law - CORRECT ANSWER 1: how are ownership rights established?
2:what can be privately owned? #. what may owners do with their property? 4. what are the
remedies for the violation of property rights?
coase theorem - CORRECT ANSWER when transaction costs are zero, an efficient use of
resources results from private bargaining, regardless of the legal assignment of property rights
open range rule - CORRECT ANSWER the farmer is responsible for keeping the archers
cattle off his property and bears the damages if the cattle got in
closed range rule - CORRECT ANSWER the rancher is responsible for keeping the cattle off
the farm property and the rancher bears the damages if the cattle got in
if parties can cooperate - CORRECT ANSWER they will be indifferent to the closed range
rule and the open range rule. So: the fence will be built regardless of which rule applies/ The
resulting surplus will be shared and might go towards building a fence
payoff function for R - CORRECT ANSWER SSr = Wr + T - Crx
payoff function for F - CORRECT ANSWER SSf = Wf - T - Bf(1-x)
rule of first possession - CORRECT ANSWER maintaining low transaction costs by defining
property rights clearly and simply is the rule of first possession (rule of capture). This encourages
efficiency by emphasizing the production of wealth over the transfer of wealth. But, this rule
may lead to over investment
prisoners dilemma - CORRECT ANSWER arises with each owner believing that the other
owner is "free riding"
, rule 1: polluters right to pollute - CORRECT ANSWER (no bargain) no pollution equipment
is installed by the electric company but is installed by the laundry company. Joint surplus is
maximized here
rule 2: owners right to sue for damages - CORRECT ANSWER no solution equipment is
installed by either the electric company or the laundry place. Joint surplus is 1,100. BUT L can
sue E for 200.. E bargains by installing the flter for them at 100
rule 3: owners right to sue for an injunction - CORRECT ANSWER pollution equipment is
installed by the electric company. Joint surplus is 800. BUT instead of losing 500, E bargains
with L and installs the filters for 100
if normative Hobbes thm is applied to the prisoners dilemma problem - CORRECT
ANSWER rule 1 is the most optimal
what does the prisoners dilemma problem showcase? - CORRECT ANSWER that the
damages and injunction remedies are equally efficient when the transaction costs are zero. Also,
if the transaction costs are so high to prevent bargaining, the more efficient remedy is damages
when transaction costs are low - CORRECT ANSWER injunction is the efiicient remedy.
BECAUSE the right to innjunction gives the parties a clearer position from which to bargain
when transaction costs are so high that they prevent bargaining... - CORRECT ANSWER the
court may socially optimize the dispute by granting an injunction/ or compensation (damages) to
the party who values the outcome most in relative terms
normative Hobbes theorem - CORRECT ANSWER when transaction costs are so high that
they prevent bargaining, the court may socially optimize the dispute by granting an injunction/ or
compensation (damages) to the party who values the outcome most in relative terms
under the coase theorem, with the opportunity to bargain, different legal rules: - CORRECT
ANSWER led to the same economic outcome and optimal social surplus
