Handout for Econ 522, Fall 2009, Disc #2, 9/18
0. Several Types of Costs
Information Cost,
Boundary/Monitoring Cost
Transaction Cost: Search, Bargaining (see below), Enforcement
-Asymmetric (adverse selection),
-Private information (threat points),
-Uncertainty,
-Large numbers
e.g. Lemon Mkt, seller’s valuation x is from [0, 10], buyer’s valuation is 1.5x. Is there going to be trade?
How about when buyer’s valuation is 3x? (this will not be covered in the exam)
1. Gains and Cost of Internalization/ Property Law
1.1 Water in Hawaii VS the only well in cairo VS a well in the Sahara Desert, do we want to
privatize these resources?
1.2 Stolen Bikes and Stolen Cars, why more bikes are stolen than cars and why do we only
register cars
2．Normative Coase VS Normative Hobbes
Normative Coase: Structure the law so as to remove the impediments to private agreement. “By
lubricating bargaining, the law enables the private parties to exchange legal rights, thus relieving lawmakers of the
difficult task of allocating legal rights efficiently.” –Information Cost by the courts.
Normative Hobbes: Structure the law so as to minimize the harm caused by failures in private
argreements. “When the parties fail to reach a private agreement where one is, in fact, possible, they lose the surplus from
exchange. To minimize the resulting harm, the law should allocate property rights to the party who values them the most.”
Consider the above two examples in 1.1 and 1.2, which approach
3. Damage (Liability r) VS Injunctive (Property r) & Inalienability
3.1 when transaction costs are high, damages are more efficient
3.2 when transaction costs are low, injuntion are more efficient
Injunction: court order clarifying a right and specifically barring any future violation
2.3 Example: The damage is $100. The farmer can build a fence at $50.
Rancher’s Cost $90 Rancher’s Cost $120
rules\payoffs
T.C. High T.C. Low T.C. High T.C. Low Threat Point (Gains from Trade)
Rancher's Right
Damage Rule
Injunction
In the above chart, you need to fill in each player’s payoff and predict who will build the fence or
no fence will be built. You need to be able to do this calculation.