ECO320 – Final UPDATED ACTUAL Exam
Questions and CORRECT Answers
forms of economic analysis of law - CORRECT ANSWER markets without private goods
(intellectual property)
markets with bad (crime)
markets without prices (marriage, domestic contracts)
where do laws come from - CORRECT ANSWER custom
judicial precedent
statutory legislation
executive decision-making
central problem of economic analysis of law - CORRECT ANSWER optimality; lawmakers
want to maximize social surplus
what policies should matter to making a law and applying it? - CORRECT ANSWER income
and endowment effects
why should redistribution not be important under economics of law? - CORRECT
ANSWER imprecise targeting
unpredictable consequences
high transaction costs
distortions in incentives
productive vs allocation efficiency - CORRECT ANSWER 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 - CORRECT ANSWER 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 - CORRECT ANSWER goods move to those who value them most
through bargaining; theory of coase; always increases utiltiy
involuntary transactions - CORRECT ANSWER 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 - CORRECT ANSWER 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 - CORRECT ANSWER when someone is endowed with the right to sue, they
treat this as an increase in wealth
bargaining theory - CORRECT ANSWER 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 - CORRECT ANSWER The value created by moving a resource to a
more valuable use
threat value - CORRECT ANSWER payoff that is generated by not participating in a bargain
, three steps of bargaining theory - CORRECT ANSWER establish threat values, determine
cooperative surplus, and agree on terms for distributing surplus
coase theorem - CORRECT ANSWER 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 - CORRECT ANSWER when transaction costs are high
enough to prevent bargaining, the efficient use of resources will depend on how property rights
are assigned
transaction costs - CORRECT ANSWER costs of an exchange;
1. search costs
2. bargaining costs
3. enforcement costs
variant version of the theorem of coase - CORRECT ANSWER 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 - CORRECT ANSWER efficient outcome is the
same regardless of how property rights are assigned; identically efficient outcomes; simple
version of variant version of coase
normative coase theorem - CORRECT ANSWER structure law so as to remove impediments
to private bargaining; clear, simple rights make threat values clear to both parties ex. define
simple and clear property rights
normative hobbes theorem - CORRECT ANSWER structure law so as to minimize the harm
caused by failures in private bargaining; when private negotiation fails the law should allocate
property rights to the party who values them most
Questions and CORRECT Answers
forms of economic analysis of law - CORRECT ANSWER markets without private goods
(intellectual property)
markets with bad (crime)
markets without prices (marriage, domestic contracts)
where do laws come from - CORRECT ANSWER custom
judicial precedent
statutory legislation
executive decision-making
central problem of economic analysis of law - CORRECT ANSWER optimality; lawmakers
want to maximize social surplus
what policies should matter to making a law and applying it? - CORRECT ANSWER income
and endowment effects
why should redistribution not be important under economics of law? - CORRECT
ANSWER imprecise targeting
unpredictable consequences
high transaction costs
distortions in incentives
productive vs allocation efficiency - CORRECT ANSWER 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 - CORRECT ANSWER 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 - CORRECT ANSWER goods move to those who value them most
through bargaining; theory of coase; always increases utiltiy
involuntary transactions - CORRECT ANSWER 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 - CORRECT ANSWER 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 - CORRECT ANSWER when someone is endowed with the right to sue, they
treat this as an increase in wealth
bargaining theory - CORRECT ANSWER 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 - CORRECT ANSWER The value created by moving a resource to a
more valuable use
threat value - CORRECT ANSWER payoff that is generated by not participating in a bargain
, three steps of bargaining theory - CORRECT ANSWER establish threat values, determine
cooperative surplus, and agree on terms for distributing surplus
coase theorem - CORRECT ANSWER 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 - CORRECT ANSWER when transaction costs are high
enough to prevent bargaining, the efficient use of resources will depend on how property rights
are assigned
transaction costs - CORRECT ANSWER costs of an exchange;
1. search costs
2. bargaining costs
3. enforcement costs
variant version of the theorem of coase - CORRECT ANSWER 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 - CORRECT ANSWER efficient outcome is the
same regardless of how property rights are assigned; identically efficient outcomes; simple
version of variant version of coase
normative coase theorem - CORRECT ANSWER structure law so as to remove impediments
to private bargaining; clear, simple rights make threat values clear to both parties ex. define
simple and clear property rights
normative hobbes theorem - CORRECT ANSWER structure law so as to minimize the harm
caused by failures in private bargaining; when private negotiation fails the law should allocate
property rights to the party who values them most
