ECO320 – Final exam revision questions with certified
correct answers
forms of economic analysis of law - markets without private goods (intellectual property)
markets with bad (crime)
markets without prices (marriage, domestic contracts)
where do laws come from - custom
judicial precedent
statutory legislation
executive decision-making
central problem of economic analysis of law - optimality; lawmakers want to maximize social
surplus
what policies should matter to making a law and applying it? - income and endowment effects
why should redistribution not be important under economics of law? - imprecise targeting
unpredictable consequences
high transaction costs
distortions in incentives
,productive vs allocation efficiency - productive efficiency: It is not possible to produce the same
amount of output using a lower-cost combination of inputs, or it is not possible to produce
more output using the same combination of inputs
allocative efficiency: it is impossible to change a situation so as to make at least one person
better off (in his own estimation) without making another person worse off (again, in his own
estimation)
two main approaches economists use to define efficiency - pareto optimality: making A better
off without making B worse off
cost-benefit: making A well enough off that it exceeds the degree to which B ismade worse off
voluntary transactions - goods move to those who value them most through bargaining; theory
of coase; always increases utiltiy
involuntary transactions - can increase utility if the MB to the person taking a good may be very
high, and the MC to the person from whom it was taken is small
endowment effect - divergence between buying and selling price because the price varies
depending on initial ownership of goods; someone values something more to sell than they do
to buy
income effect - when someone is endowed with the right to sue, they treat this as an increase in
wealth
bargaining theory - when a seller values an item less than a potential buyer, there is scope for
bargain; it is voluntary and surplus is created
, cooperative surplus - The value created by moving a resource to a more valuable use
threat value - payoff that is generated by not participating in a bargain
three steps of bargaining theory - establish threat values, determine cooperative surplus, and
agree on terms for distributing surplus
coase theorem - when transaction costs are zero, an efficient use of resources results from
private bargaining, regardless of the legal assignment of property rights
converse to the theorem of coase - when transaction costs are high enough to prevent
bargaining, the efficient use of resources will depend on how property rights are assigned
transaction costs - costs of an exchange;
1. search costs
2. bargaining costs
3. enforcement costs
variant version of the theorem of coase - resource allocation will be efficient, but not
necessarily identical, regardless of the assignment of property rights; related to the endowment
and income effects
invariant version of the theorem of coase - efficient outcome is the same regardless of how
property rights are assigned; identically efficient outcomes; simple version of variant version of
coase
correct answers
forms of economic analysis of law - markets without private goods (intellectual property)
markets with bad (crime)
markets without prices (marriage, domestic contracts)
where do laws come from - custom
judicial precedent
statutory legislation
executive decision-making
central problem of economic analysis of law - optimality; lawmakers want to maximize social
surplus
what policies should matter to making a law and applying it? - income and endowment effects
why should redistribution not be important under economics of law? - imprecise targeting
unpredictable consequences
high transaction costs
distortions in incentives
,productive vs allocation efficiency - productive efficiency: It is not possible to produce the same
amount of output using a lower-cost combination of inputs, or it is not possible to produce
more output using the same combination of inputs
allocative efficiency: it is impossible to change a situation so as to make at least one person
better off (in his own estimation) without making another person worse off (again, in his own
estimation)
two main approaches economists use to define efficiency - pareto optimality: making A better
off without making B worse off
cost-benefit: making A well enough off that it exceeds the degree to which B ismade worse off
voluntary transactions - goods move to those who value them most through bargaining; theory
of coase; always increases utiltiy
involuntary transactions - can increase utility if the MB to the person taking a good may be very
high, and the MC to the person from whom it was taken is small
endowment effect - divergence between buying and selling price because the price varies
depending on initial ownership of goods; someone values something more to sell than they do
to buy
income effect - when someone is endowed with the right to sue, they treat this as an increase in
wealth
bargaining theory - when a seller values an item less than a potential buyer, there is scope for
bargain; it is voluntary and surplus is created
, cooperative surplus - The value created by moving a resource to a more valuable use
threat value - payoff that is generated by not participating in a bargain
three steps of bargaining theory - establish threat values, determine cooperative surplus, and
agree on terms for distributing surplus
coase theorem - when transaction costs are zero, an efficient use of resources results from
private bargaining, regardless of the legal assignment of property rights
converse to the theorem of coase - when transaction costs are high enough to prevent
bargaining, the efficient use of resources will depend on how property rights are assigned
transaction costs - costs of an exchange;
1. search costs
2. bargaining costs
3. enforcement costs
variant version of the theorem of coase - resource allocation will be efficient, but not
necessarily identical, regardless of the assignment of property rights; related to the endowment
and income effects
invariant version of the theorem of coase - efficient outcome is the same regardless of how
property rights are assigned; identically efficient outcomes; simple version of variant version of
coase
