Markets and Regulation
2022
1
,Week 1
Legal Relevance
- individuals weigh costs and benefits
o individuals weigh costs and benefits when making actions
o individuals are boundedly rational
they are certain limits to their rationality
- judges stress the role of efficiency in law
- economics is a way of looking at law
- lawyers confronted with economic arguments
- efficiency more important due to liberalization and privatization of previously
government-owned things
Central question
- how to balance efficiency with the rule of law in the regulation of markets in an
international and European context?
Efficiency
- core principle no.1
- most important concept – center of economics
- many different meanings of efficiency:
o Economic efficiency: cost-benefit
maximizing net benefits: maximizing the difference between costs and
benefits
aim: the highest possible benefits and the lowest possible costs
o Cost-effectiveness: costs only
if one is only considering the costs
o Transaction costs: information costs, bargaining costs, monitoring costs,
enforcement costs
o Pareto efficiency:
no-one can be made better-off without making someone else worse-
off
example:
if someone is given a euro, but that is taken away from
another, then it is not Pareto-efficient
2
,Welfare
- core principle no. 2
- ‘the happiness of people’
- analytical basis: welfare economics
o do legal rules increase welfare?
- welfare=utility=satisfying people’s desires
o desires can be
monetary
for example a raise in salary
non-monetary
for example: being calm (?)
- welfare is subjective and indifferent
o subjective
similar phenomenon increases welfare for some, decreases for others
o indifferent
people’s preferences are not judged
it is neutral for economists
- scarcity
o people have limited means
o for example:
limited amount of money, labour
o people want to achieve the highest possible welfare, but they have limted
means so they need to make decisions
Transaction
- core principle no. 3
- Transaction = transfer of property rights
o for example:
paying the tuition fee and receiving education
- Simultaneous economic and legal change:
o Physical transfer of good or service
o Economic transfer of money
o Legal transfer of property rights
- Transaction costs:
o there are certain costs associate with transaction
o but these costs imply higher benefits (for the person)
has to be higher than the costs, otherwise the transaction is not
happening
o e.g. notary costs
3
, Economic approaches
- Neo-classical economics:
o Production costs
o Rationality (perfectly rational)
- Neo-institutional economics:
o Transaction costs
not just production but transaction costs as well
o Bounded rationality
taking into consideration the limits of rationality
- Behavioral economics:
o the mix of psychology and economics
o Cognitive costs
o Predictable irrationality
Measuring costs and benefits
- the importance of striving for rational decisions, and striving for efficiency
o one tries to maximize net benefits
o three ‘lessons’
don’t forget opportunity costs
ignore sunk costs
relevant costs and benefits are marginal
- 1. Opportunity costs
o the value of the next-best alternative that must be forgone in order to
undertake an activity
example:
instead of watching the lecture something else could be done
the revenues/benefits are higher than the other activity’s
benefits
Rational decisions always depend upon opportunity costs
Opportunity cost is value of next-best alternative
- 2. Sunk costs
o those costs that will be incurred whether or not an action is taken
o the expenditures that one made in the past and don’t pay a role anymore
when deciding about the future
Irrelevant to decision whether to take an action
Rational decision-makers compare benefits only to the additional costs
that must be incurred
only possible future actions matter
- 3. Relevant costs and benefits are marginal
o At every step: compare the additional costs and benefits of that step before
taking it
4
2022
1
,Week 1
Legal Relevance
- individuals weigh costs and benefits
o individuals weigh costs and benefits when making actions
o individuals are boundedly rational
they are certain limits to their rationality
- judges stress the role of efficiency in law
- economics is a way of looking at law
- lawyers confronted with economic arguments
- efficiency more important due to liberalization and privatization of previously
government-owned things
Central question
- how to balance efficiency with the rule of law in the regulation of markets in an
international and European context?
Efficiency
- core principle no.1
- most important concept – center of economics
- many different meanings of efficiency:
o Economic efficiency: cost-benefit
maximizing net benefits: maximizing the difference between costs and
benefits
aim: the highest possible benefits and the lowest possible costs
o Cost-effectiveness: costs only
if one is only considering the costs
o Transaction costs: information costs, bargaining costs, monitoring costs,
enforcement costs
o Pareto efficiency:
no-one can be made better-off without making someone else worse-
off
example:
if someone is given a euro, but that is taken away from
another, then it is not Pareto-efficient
2
,Welfare
- core principle no. 2
- ‘the happiness of people’
- analytical basis: welfare economics
o do legal rules increase welfare?
- welfare=utility=satisfying people’s desires
o desires can be
monetary
for example a raise in salary
non-monetary
for example: being calm (?)
- welfare is subjective and indifferent
o subjective
similar phenomenon increases welfare for some, decreases for others
o indifferent
people’s preferences are not judged
it is neutral for economists
- scarcity
o people have limited means
o for example:
limited amount of money, labour
o people want to achieve the highest possible welfare, but they have limted
means so they need to make decisions
Transaction
- core principle no. 3
- Transaction = transfer of property rights
o for example:
paying the tuition fee and receiving education
- Simultaneous economic and legal change:
o Physical transfer of good or service
o Economic transfer of money
o Legal transfer of property rights
- Transaction costs:
o there are certain costs associate with transaction
o but these costs imply higher benefits (for the person)
has to be higher than the costs, otherwise the transaction is not
happening
o e.g. notary costs
3
, Economic approaches
- Neo-classical economics:
o Production costs
o Rationality (perfectly rational)
- Neo-institutional economics:
o Transaction costs
not just production but transaction costs as well
o Bounded rationality
taking into consideration the limits of rationality
- Behavioral economics:
o the mix of psychology and economics
o Cognitive costs
o Predictable irrationality
Measuring costs and benefits
- the importance of striving for rational decisions, and striving for efficiency
o one tries to maximize net benefits
o three ‘lessons’
don’t forget opportunity costs
ignore sunk costs
relevant costs and benefits are marginal
- 1. Opportunity costs
o the value of the next-best alternative that must be forgone in order to
undertake an activity
example:
instead of watching the lecture something else could be done
the revenues/benefits are higher than the other activity’s
benefits
Rational decisions always depend upon opportunity costs
Opportunity cost is value of next-best alternative
- 2. Sunk costs
o those costs that will be incurred whether or not an action is taken
o the expenditures that one made in the past and don’t pay a role anymore
when deciding about the future
Irrelevant to decision whether to take an action
Rational decision-makers compare benefits only to the additional costs
that must be incurred
only possible future actions matter
- 3. Relevant costs and benefits are marginal
o At every step: compare the additional costs and benefits of that step before
taking it
4
