Handout for Econ 522, Spring 2009, Disc #1, 1/30
Introduction:
Your TA, Chao He. SWUFE-->Madison
Office Hours: 7231 Social Science, Wednesday 10:00am~noon, che2@wisc.edu
The lecture, discussion sections, the relationship of homeworks and exams, concepts.
1. Efficiency
Social Surplus: the sum of each member’s surplus
Surplus~ value, utility (may need to subtract cost), profit (if could be measured in monetary terms)
e.g. value of a car VS surplus of purchasing a car VS social surplus of a car deal
Daniel values: $3000; Chao values: $5000
2. Some Notes on the “Nash Equilibrium”
2.1 Instead of “circle”, we can also use arrows to represent the possibility of profitable deviations.
An “equilibrium” is an entry that is stable.
e.g. Prisoner’s Dilemma, Battle of the Sexes, Two Nash Equilibrium, SPR, Property Law Game
2.2 Only comparative values matter, i.e. if we add a same number to every entry, the “outcome”
will not be different from the original game.
3. Transaction Costs:
search cost, bargaining cost, enforcement cost
4. Coase Theorem and Normative Coase + Normative Hobbes.
3.0 Positive: law of demand,
Normative: government should pay for education, AD should show negative effects
3.1 Coase Theorem: assumption: no transaction cost + clearly defined property rights
conclusion: (1) voluntary negociation leads to efficiency
(2) initial allocation only matters for distr, not for efficiency
3.2 Normative Coase (not the same thing as Coase Theorem)
Structure the law so as to minimize the transaction cost (by clearly define property rights)
3.3 Normative Hobbes
Allocate property to whoever values it the most from the beginning.
3.4 Underlying assumptions of the two Normative Approaches.
When transaction cost are low and info cost high, structure the law to minimize trans cost.
e.g. rancher and farmer (Page 85)
e.g. laundry company (Page 100)