Suggested Answers to Questions Posed in Harrison and Theeuwes’
Law and Economics
Chapter One: Introduction
These are obviously introductory questions. The goal is to provide a preview
of what is to come and to increase the breadth of the students’ understanding of the
range of questions a study of law and economics addresses.
1. There exist two legal traditions in Western society: the Common Law tradition such
as in the US and the UK and the Civil Law tradition such as in France and other
countries that were once conquered and occupied by Napoleon Bonaparte. In the
Common Law tradition legal disputes are decided on the basis of precedent, and novel
disputes are the occasion for altering the law. In the Civil Law tradition disputes are
decided on the basis of the Civil Law Code book and changes in the law have to pass
through the legislature.
A) Can you say that one tradition is better than the other?
Both legal traditions must find the right balance between stability, uniformity and
flexibility. Stability over time and uniformity of law for all citizens leading to the
same conclusions for the same cases are obviously desired characteristics of a legal
system. Justice cannot be capricious. At the same time law must be flexible enough to
adjust to the specifics of a case and to adapt to changes in society over time. Both the
civil law and the common law systems achieve uniformity and stability by the use of
precedent. Flexibility is achieved by changing the law. In common law systems
changes are introduced by the judges. In civil law systems only the legislature can
change the legal code.
B) Can you identify differences in societal costs or benefits comparing these two
traditions?
It is hard to identify differences in stability and uniformity in both systems and hence
that there would be differential costs and benefits in this respect. Arguments about
differences in costs and benefits could focus on whether flexibility introduced by
judges is faster, less complicated and less political than when flexibility has to come
about through changes in law approved by parliament.
C) Are these two traditions really that much different?
It is sometimes argued that the main difference between the common and civil law
system is that the latter is codified (in legal text voted upon by the legislature) and the
former is not. But codification is also common practice in common law systems. The
main difference that in the common law system the judges are law making. In the civil
law system the legislature is the only law maker.
2. A professor could spend a full session on this question. Virtually any day to day
activity could be selected and then the questions asked: What role does the legal
system play? Is this superior to no system or a private system?
,If your campus is like most, parking is a problem. The legal system plays a role in
allocating spaces. Even more broadly, what role does the legal system play in
contracts? For example, ask a student what happens if a mechanic agrees to repair a
car but does not. Also, what happens someone collides with an automobile?
As some point, the students may (hopefully) note that the law plays a role in defining
rights, protecting rights, and requiring people to accept responsibility (internalize) for
the harm caused.
Of course, some of these concerns may be addressed through private agreements and
private enforcement agencies. It is likely, however, that this would be far less efficient
than having a legal system that applies to all equally.
,Chapter Two: Tools for the Economic Analysis of Law
1. In theory speeding declines as fines or other penalties increase. You can see this by
treating the fines as the price along the Y axis and speeding as the “good” demanded
along the X axis. The demand curve should be downward sloping. This theory is
actually put into practice in those instances in which fines are increased in some
neighborhoods or areas. For example, it is not uncommon to see signs that say
“speeding fines are doubled if workers are present.” This is an obvious application of
the theory of demand.
2. This is a difficult question at this stage. The idea is that the ability to pay to file a
lawsuit may be unrelated to the actual importance or value of the decision. For
example, a decision may have enormous positive externalities. Since they are not
captured by the litigating party, the motivation to file an action will be inefficiently
low.
3. This question is designed to reacquaint the student with the ideas of surpluses and
shortages. Obviously price ceilings can result in shortages and price floors may result
in surpluses. An emergency price control measure – a price ceiling – is designed to
curve temporary instances of market power. This gives rise to the question of how to
allocate relatively limited supplies. Of course, supplying needed items in emergencies
may be more expensive and the ceiling may discourage efficient resource allocation.
4. To the left of the equilibrium point, take any level of output and examine the
demand and supply curves. Focusing on the demand curve at that any given quantity,
the measure of willingness to pay exceeds the corresponding point on the supply
curve which shows the least the seller will take for that unit. If the buyer and seller
can agree on a price between those two extremes, they are both better off. At all the
quantities on the left, buyers are better off at any price less than their reservation
prices as indicated by the demand curve. Sellers are better off if they receive any price
higher than the minimum acceptable. To the right of the intersection all of this is
reversed.
5. The purpose of this question is to illustrate shifts in demand. So:
a. If baseball bats are substitutes for soccer balls then the lower prices will mean the
demand for soccer balls will decrease.
b. This represents a change in tastes and the demand curve will increase (shift to the
right).
c. Soccer clubs are complementary to soccer balls. An increase in price will mean a
decrease in the demand for soccer balls.
d. If kids are paid to play soccer, the demand for soccer balls will increase. The
demand curve for soccer balls will increase (shift to the right).
6. Here the emphasis is on the supply curve. If wages increase – a cost of production –
the supply of soccer balls will decrease (shift to the left). Government subsidization
means the costs the producer responds to will decrease and supply will increase (and
the supply curve will shift to the right).
7. Suppose the demand schedule is specified as:
Qd = 10 – P
, And the supply schedule is:
Qs = 2 + P
a. What is the equilibrium price in this market? What is the equilibrium quantity?
The equilibrium price is the price at which the quantity demanded (Qd) is equal to the
quantity supplied (Qs):
Qd = Qs
10 – P = 2 + P
2P = 8
P=4
Hence the equilibrium price is equal to $ 4
At the equilibrium price, the equilibrium quantity demanded is:
Qd = 10 – P = 10 – 4 = 6
The equilibrium quantity demanded is 6 units.
The equilibrium quantity supplied is also 6 units as can easily be checked:
Qs = 2 + P = 2 + 4 = 6
b. Maybe difficult: How big is consumer surplus, producer surplus and total surplus at
equilibrium
Price
10 Demand curve
Supply curve
b
a c
4
e 2 6 10 Quantity
-2
Law and Economics
Chapter One: Introduction
These are obviously introductory questions. The goal is to provide a preview
of what is to come and to increase the breadth of the students’ understanding of the
range of questions a study of law and economics addresses.
1. There exist two legal traditions in Western society: the Common Law tradition such
as in the US and the UK and the Civil Law tradition such as in France and other
countries that were once conquered and occupied by Napoleon Bonaparte. In the
Common Law tradition legal disputes are decided on the basis of precedent, and novel
disputes are the occasion for altering the law. In the Civil Law tradition disputes are
decided on the basis of the Civil Law Code book and changes in the law have to pass
through the legislature.
A) Can you say that one tradition is better than the other?
Both legal traditions must find the right balance between stability, uniformity and
flexibility. Stability over time and uniformity of law for all citizens leading to the
same conclusions for the same cases are obviously desired characteristics of a legal
system. Justice cannot be capricious. At the same time law must be flexible enough to
adjust to the specifics of a case and to adapt to changes in society over time. Both the
civil law and the common law systems achieve uniformity and stability by the use of
precedent. Flexibility is achieved by changing the law. In common law systems
changes are introduced by the judges. In civil law systems only the legislature can
change the legal code.
B) Can you identify differences in societal costs or benefits comparing these two
traditions?
It is hard to identify differences in stability and uniformity in both systems and hence
that there would be differential costs and benefits in this respect. Arguments about
differences in costs and benefits could focus on whether flexibility introduced by
judges is faster, less complicated and less political than when flexibility has to come
about through changes in law approved by parliament.
C) Are these two traditions really that much different?
It is sometimes argued that the main difference between the common and civil law
system is that the latter is codified (in legal text voted upon by the legislature) and the
former is not. But codification is also common practice in common law systems. The
main difference that in the common law system the judges are law making. In the civil
law system the legislature is the only law maker.
2. A professor could spend a full session on this question. Virtually any day to day
activity could be selected and then the questions asked: What role does the legal
system play? Is this superior to no system or a private system?
,If your campus is like most, parking is a problem. The legal system plays a role in
allocating spaces. Even more broadly, what role does the legal system play in
contracts? For example, ask a student what happens if a mechanic agrees to repair a
car but does not. Also, what happens someone collides with an automobile?
As some point, the students may (hopefully) note that the law plays a role in defining
rights, protecting rights, and requiring people to accept responsibility (internalize) for
the harm caused.
Of course, some of these concerns may be addressed through private agreements and
private enforcement agencies. It is likely, however, that this would be far less efficient
than having a legal system that applies to all equally.
,Chapter Two: Tools for the Economic Analysis of Law
1. In theory speeding declines as fines or other penalties increase. You can see this by
treating the fines as the price along the Y axis and speeding as the “good” demanded
along the X axis. The demand curve should be downward sloping. This theory is
actually put into practice in those instances in which fines are increased in some
neighborhoods or areas. For example, it is not uncommon to see signs that say
“speeding fines are doubled if workers are present.” This is an obvious application of
the theory of demand.
2. This is a difficult question at this stage. The idea is that the ability to pay to file a
lawsuit may be unrelated to the actual importance or value of the decision. For
example, a decision may have enormous positive externalities. Since they are not
captured by the litigating party, the motivation to file an action will be inefficiently
low.
3. This question is designed to reacquaint the student with the ideas of surpluses and
shortages. Obviously price ceilings can result in shortages and price floors may result
in surpluses. An emergency price control measure – a price ceiling – is designed to
curve temporary instances of market power. This gives rise to the question of how to
allocate relatively limited supplies. Of course, supplying needed items in emergencies
may be more expensive and the ceiling may discourage efficient resource allocation.
4. To the left of the equilibrium point, take any level of output and examine the
demand and supply curves. Focusing on the demand curve at that any given quantity,
the measure of willingness to pay exceeds the corresponding point on the supply
curve which shows the least the seller will take for that unit. If the buyer and seller
can agree on a price between those two extremes, they are both better off. At all the
quantities on the left, buyers are better off at any price less than their reservation
prices as indicated by the demand curve. Sellers are better off if they receive any price
higher than the minimum acceptable. To the right of the intersection all of this is
reversed.
5. The purpose of this question is to illustrate shifts in demand. So:
a. If baseball bats are substitutes for soccer balls then the lower prices will mean the
demand for soccer balls will decrease.
b. This represents a change in tastes and the demand curve will increase (shift to the
right).
c. Soccer clubs are complementary to soccer balls. An increase in price will mean a
decrease in the demand for soccer balls.
d. If kids are paid to play soccer, the demand for soccer balls will increase. The
demand curve for soccer balls will increase (shift to the right).
6. Here the emphasis is on the supply curve. If wages increase – a cost of production –
the supply of soccer balls will decrease (shift to the left). Government subsidization
means the costs the producer responds to will decrease and supply will increase (and
the supply curve will shift to the right).
7. Suppose the demand schedule is specified as:
Qd = 10 – P
, And the supply schedule is:
Qs = 2 + P
a. What is the equilibrium price in this market? What is the equilibrium quantity?
The equilibrium price is the price at which the quantity demanded (Qd) is equal to the
quantity supplied (Qs):
Qd = Qs
10 – P = 2 + P
2P = 8
P=4
Hence the equilibrium price is equal to $ 4
At the equilibrium price, the equilibrium quantity demanded is:
Qd = 10 – P = 10 – 4 = 6
The equilibrium quantity demanded is 6 units.
The equilibrium quantity supplied is also 6 units as can easily be checked:
Qs = 2 + P = 2 + 4 = 6
b. Maybe difficult: How big is consumer surplus, producer surplus and total surplus at
equilibrium
Price
10 Demand curve
Supply curve
b
a c
4
e 2 6 10 Quantity
-2
