ECO320 Final Exam 2025 Questions and
Answers
"Central Problem" - ANSWER-- optimality in the economic analysis of law
- maximize social surplus
Property Rights/Law - ANSWER-- supplies the legal framework for allocating
resources & distributing wealth
- a bundle of rights describing what people may & may not do with the resources
they own: the extent to which they may -->
possess/use/develop/improve/transform/consume/deplete/destroy/sell/donate
/bequeath/transfer/mortgage/lease/loan/exclude
- economic theory tries to predict the effects of alternative forms of ownership,
especially the effects on efficiency & distribution
Rule of First Possession / Rule of Capture - ANSWER-- the first party to use an
unowned resource acquires claim to it
- an example of maintaining low transaction costs by defining property rights
clearly & simply
....COPYRIGHT ©️ 2025 ALL RIGHTS RESERVED...TRUSTED & VERIFIED 1
,- cost minimizing as it focuses on just a few simple facts
- encourages efficiency by emphasizing the production of wealth over the transfer
of wealth
- danger being that the rule may lead to over-investment
Rule of Tied Ownership - ANSWER-- may occur when the Rule of First
Possession can lead to economic costs
Coase Theorem - ANSWER-When transaction costs are zero, an efficient (socially
optimal) use of resources results from private bargaining, regardless of the legal
assignment of property rights
Coase Theorem & Damages vs. Injunction - ANSWER-*Low Transaction Costs --
> injunction is the more efficient remedy:
- right to an injunction gives the parties a clearer position from which to bargain,
although parties may eventually agree to a settlement based on compensation
*High Transaction Costs (to prevent bargaining) --> switching from injunction to
damages makes the injurer better off without making the victim worse off
Open Range Rule - Ranchers' Rights - ANSWER-- the farmer is responsible for
keeping the cattle off his property
- the farmer bears (must pay for) any damages caused by the cattle
....COPYRIGHT ©️ 2025 ALL RIGHTS RESERVED...TRUSTED & VERIFIED 2
,- Rancher chooses optimal # of cattle & optimize their own surplus
- Farmer has no legal recourse against damages done by cattle
- Farmer must take precautions to reduce the damage
Closed Range Rule - Farmers' Rights - ANSWER-- the rancher is responsible for
keeping the cattle on their property
- the farmer bears (must pay for) any damages caused by the battle
- Rancher chooses to optimize total social surplus
- Rancher must reduce damage to Farmer
Fairness vs. Efficiency - ANSWER-- fairness requires the party who causes harm
to pay for it
- efficiency requires allocating the right to the party who values it most
Suppose that a railroad runs beside a field in which commercial crops are grown.
The railroad is powered by a steam locomotive that spews hot cinders out of its
smokestack. From time to time those cinders land on the crops nearest to the track
and burn them to the ground. Assume that each year, the farmer whose crops are
burned loses $5000 in profits, and that the annual cost to the railroad of installing
and maintaining a spark-arrester that would prevent any damage to the crops is
$3000.
....COPYRIGHT ©️ 2025 ALL RIGHTS RESERVED...TRUSTED & VERIFIED 3
, (a) Does it matter to the efficient use of the farmer's land or to the efficient
operation of the railroad whether the law protects the farmer from invasion by
sparks or allows the railroad to emit sparks without liability? Explain.
(b) How high can legal fees be before impact on efficient outcomes are affected?
Explain. - ANSWER-(a) If there are zero (0) or low transaction costs, the Theorem
of Coase applies
- The railroad will operate the train with a spark arrestor regardless whether the law
protects the farmer from invasion by sparks or allows the railroad to emit sparks
without liability. The efficient outcome is the same under either rule
* However, the choice of rule will affect the distributive outcome
- The strict liability rule protecting the farmer means the farmer saves $5,000 and
the railway will install the spark arrestor for $3,000
- A permissive or no liability rule protecting the railroad means the farmer saves
only $2,000 and the railway will install the spark arrestor for $3,000 paid by the
farmer by contract. The farmer is $3,000 poorer and the railway is $3,000 richer
(b) If legal fees exceed $2,000, the Theorem of Coase does not apply -->
....COPYRIGHT ©️ 2025 ALL RIGHTS RESERVED...TRUSTED & VERIFIED 4
Answers
"Central Problem" - ANSWER-- optimality in the economic analysis of law
- maximize social surplus
Property Rights/Law - ANSWER-- supplies the legal framework for allocating
resources & distributing wealth
- a bundle of rights describing what people may & may not do with the resources
they own: the extent to which they may -->
possess/use/develop/improve/transform/consume/deplete/destroy/sell/donate
/bequeath/transfer/mortgage/lease/loan/exclude
- economic theory tries to predict the effects of alternative forms of ownership,
especially the effects on efficiency & distribution
Rule of First Possession / Rule of Capture - ANSWER-- the first party to use an
unowned resource acquires claim to it
- an example of maintaining low transaction costs by defining property rights
clearly & simply
....COPYRIGHT ©️ 2025 ALL RIGHTS RESERVED...TRUSTED & VERIFIED 1
,- cost minimizing as it focuses on just a few simple facts
- encourages efficiency by emphasizing the production of wealth over the transfer
of wealth
- danger being that the rule may lead to over-investment
Rule of Tied Ownership - ANSWER-- may occur when the Rule of First
Possession can lead to economic costs
Coase Theorem - ANSWER-When transaction costs are zero, an efficient (socially
optimal) use of resources results from private bargaining, regardless of the legal
assignment of property rights
Coase Theorem & Damages vs. Injunction - ANSWER-*Low Transaction Costs --
> injunction is the more efficient remedy:
- right to an injunction gives the parties a clearer position from which to bargain,
although parties may eventually agree to a settlement based on compensation
*High Transaction Costs (to prevent bargaining) --> switching from injunction to
damages makes the injurer better off without making the victim worse off
Open Range Rule - Ranchers' Rights - ANSWER-- the farmer is responsible for
keeping the cattle off his property
- the farmer bears (must pay for) any damages caused by the cattle
....COPYRIGHT ©️ 2025 ALL RIGHTS RESERVED...TRUSTED & VERIFIED 2
,- Rancher chooses optimal # of cattle & optimize their own surplus
- Farmer has no legal recourse against damages done by cattle
- Farmer must take precautions to reduce the damage
Closed Range Rule - Farmers' Rights - ANSWER-- the rancher is responsible for
keeping the cattle on their property
- the farmer bears (must pay for) any damages caused by the battle
- Rancher chooses to optimize total social surplus
- Rancher must reduce damage to Farmer
Fairness vs. Efficiency - ANSWER-- fairness requires the party who causes harm
to pay for it
- efficiency requires allocating the right to the party who values it most
Suppose that a railroad runs beside a field in which commercial crops are grown.
The railroad is powered by a steam locomotive that spews hot cinders out of its
smokestack. From time to time those cinders land on the crops nearest to the track
and burn them to the ground. Assume that each year, the farmer whose crops are
burned loses $5000 in profits, and that the annual cost to the railroad of installing
and maintaining a spark-arrester that would prevent any damage to the crops is
$3000.
....COPYRIGHT ©️ 2025 ALL RIGHTS RESERVED...TRUSTED & VERIFIED 3
, (a) Does it matter to the efficient use of the farmer's land or to the efficient
operation of the railroad whether the law protects the farmer from invasion by
sparks or allows the railroad to emit sparks without liability? Explain.
(b) How high can legal fees be before impact on efficient outcomes are affected?
Explain. - ANSWER-(a) If there are zero (0) or low transaction costs, the Theorem
of Coase applies
- The railroad will operate the train with a spark arrestor regardless whether the law
protects the farmer from invasion by sparks or allows the railroad to emit sparks
without liability. The efficient outcome is the same under either rule
* However, the choice of rule will affect the distributive outcome
- The strict liability rule protecting the farmer means the farmer saves $5,000 and
the railway will install the spark arrestor for $3,000
- A permissive or no liability rule protecting the railroad means the farmer saves
only $2,000 and the railway will install the spark arrestor for $3,000 paid by the
farmer by contract. The farmer is $3,000 poorer and the railway is $3,000 richer
(b) If legal fees exceed $2,000, the Theorem of Coase does not apply -->
....COPYRIGHT ©️ 2025 ALL RIGHTS RESERVED...TRUSTED & VERIFIED 4
