ECO320 Test 1 Questions and Verified Answers/Accurate Solutions| Already Graded A+
Expectation Damages awards compensation for breach of contract; awarding perfect
expectation damages restores the Principal (promise) to the position that he or she would have
enjoyed if the Agent (promisor) fulfilled the contract
Expectation Damages Rule actual amount the Agent has to pay the Principal in
compensation to put the Principal in the same economic position it would have been if the
contract had been performed; awarding perfect expectation damages restores the Principal
(promise) to the position that he or she would have enjoyed if the Agent (promisor) fulfilled the
contract
Why is the Expectation Damages Rule Efficient? it is a trade-off between the cost to the
Agent of taking the necessary actions to avoid non-performance of the contract & the cost to
the Principal on non-performance
Connection of the Expectation Damages Rule to the Theorem of Coase Pareto improving to
both parties in accordance with the Coase Theorem. Both optimize joint social surplus & saves
the contract
Connection of the Expectation Damages Rule to the Normative Theorem of Coase
Expectation Damages rule operates as a default rule and as such reduces transaction costs
under the Normative Coase Theorem. Expectation Damages minimize transaction costs by
acting as a "default rule" requiring less input from lawyers
Connection of the Expectation Damages Rule to the Normative Hobbes Theorem NHT may
apply in that the expectation damages rule did arise through judicial intervention in setting a
precedent
Optimal Valuation Pay what a rational seller would want for an asset (subjective valuation),
even when this exceeds fair market value
, Expropriation a government's seizure of an asset; government should only expropriate
private property with compensation to provide a public good when transaction costs preclude
purchasing the necessary property; should target a harm or holdup, not offset an earlier
windfall due to an unrelated regulation - like an insurance plan
Expropriation distorts people's incentives and causes economic inefficiency
Normative Coase Theorem Structure the law so as to remove the impediments to private
agreements
Normative Theorem of Coase & Marriage A deliberate gap may be left in a contract for
psychological reasons, as when a couple promises to marry and remains silent about dividing
property in the event of divorce.
Gaps in contracts may be deliberate because parties believe that the event is too remote or too
emotionally upsetting.
Deliberate Gaps in Contracts The parties expect to save transaction costs by leaving gaps
whenever the actual cost of negotiating explicit terms exceeds the expected cost of filling a gap.
Uncertainties associated with why an event may occur may vary - so expectation damages may
vary - so to keep these possibilities open may be more efficient if default rules cover these
eventualities
Parties believe that the event is too remote - construction contract may not mention the
possibility of zoning officials rejecting the construction plan, since both parties believe that this
possibility is too remote.
Injunction Compensation Examples A landowners' right to exclude from his property a
neighbor's gas line:
Expectation Damages awards compensation for breach of contract; awarding perfect
expectation damages restores the Principal (promise) to the position that he or she would have
enjoyed if the Agent (promisor) fulfilled the contract
Expectation Damages Rule actual amount the Agent has to pay the Principal in
compensation to put the Principal in the same economic position it would have been if the
contract had been performed; awarding perfect expectation damages restores the Principal
(promise) to the position that he or she would have enjoyed if the Agent (promisor) fulfilled the
contract
Why is the Expectation Damages Rule Efficient? it is a trade-off between the cost to the
Agent of taking the necessary actions to avoid non-performance of the contract & the cost to
the Principal on non-performance
Connection of the Expectation Damages Rule to the Theorem of Coase Pareto improving to
both parties in accordance with the Coase Theorem. Both optimize joint social surplus & saves
the contract
Connection of the Expectation Damages Rule to the Normative Theorem of Coase
Expectation Damages rule operates as a default rule and as such reduces transaction costs
under the Normative Coase Theorem. Expectation Damages minimize transaction costs by
acting as a "default rule" requiring less input from lawyers
Connection of the Expectation Damages Rule to the Normative Hobbes Theorem NHT may
apply in that the expectation damages rule did arise through judicial intervention in setting a
precedent
Optimal Valuation Pay what a rational seller would want for an asset (subjective valuation),
even when this exceeds fair market value
, Expropriation a government's seizure of an asset; government should only expropriate
private property with compensation to provide a public good when transaction costs preclude
purchasing the necessary property; should target a harm or holdup, not offset an earlier
windfall due to an unrelated regulation - like an insurance plan
Expropriation distorts people's incentives and causes economic inefficiency
Normative Coase Theorem Structure the law so as to remove the impediments to private
agreements
Normative Theorem of Coase & Marriage A deliberate gap may be left in a contract for
psychological reasons, as when a couple promises to marry and remains silent about dividing
property in the event of divorce.
Gaps in contracts may be deliberate because parties believe that the event is too remote or too
emotionally upsetting.
Deliberate Gaps in Contracts The parties expect to save transaction costs by leaving gaps
whenever the actual cost of negotiating explicit terms exceeds the expected cost of filling a gap.
Uncertainties associated with why an event may occur may vary - so expectation damages may
vary - so to keep these possibilities open may be more efficient if default rules cover these
eventualities
Parties believe that the event is too remote - construction contract may not mention the
possibility of zoning officials rejecting the construction plan, since both parties believe that this
possibility is too remote.
Injunction Compensation Examples A landowners' right to exclude from his property a
neighbor's gas line:
