Attack Checklist -
law < econ
1. Legal Theory - This is a case of a, b, c.
2. What happened or what are the choices for solving the issue (costs, benefits, utility)?
3. DEFINE​ key terms
4. Time and Location pt 1 - looking forward or looking back
a. backward - money spent (or not spent e.g. precaution) - dispute arises - defenses? - what remedy
b. forward - potential issue - what are the options - make contingent recommendations and efficient precaution
5. Is there a similar case(s) to compare each option to?
6.
7.
8.
9.
10.
a. What is the rule from the case?
b. Do we like the holding or the dissent? Why? ​...BECAUSE...BECAUSE...BECAUSE...
c. Can either opinion be characterized
i.
Pigovian 1. party who creates externality and must pay it (internalize)
2. assumes creator paying is less costly
3. government role correct market failure
4. Critique - not necessary in perfect neoclassical world
ii.
Coasean 1. externalities are reciprocal - can place liability since we don’t know who had the right
2. focus on transaction costs and distribution - ideally none- but gov should try to lower
3. the entitlement should go to party with high cost of avoidance or abatement
4. either way though, the parties will maximize value (spend or dont spend)
5. give property right to least cost avoider
6. Calabresi specified Coase with- tort law
a. ← analyzed as type of insurance
b.
iii.
Or Pareto / Kaldor Hicks analysis for a policy/law (never contract)?
1. compare options
a. pareto optimal if none are superior - can have more than one
b. pareto superior if leave one in no worse condition and one better off
c. Kaldor-Hicks (aka -potential pareto) i.
total wealth maximization
ii.
(winner could theoretically pay loser to offset loses)
Difference between remedies
a. check for all types of remedies available, listed or obvious first, double check other types
b. tie in Pigovian/Coase/pareto?
Legal issue and policy behind it
a. what is the source of the law/policy - constitution, common law, UCC
b. look for a strict liability question
How do the parties fare under the options?
a. torts language note - D = ​injurers​ and P = ​injurees
b. contracts note - lots of things are foreseeable - they should of put it in the contract
What do we want to know? - make up numbers for the hypo and analyze with formulas
Can we use a formula to analyze?
a. tort i.
present - looking back - B < PL - Learned Hand - tort
ii.
looking forward(or from the past)- ΔB < ΔPL - how much more should spend/spent- cost efficiency
iii.
11.
12.
13.
14.
primary
1. total cost accident = ((cost of accident prevention measures) + (expected accident
costs)+ (admin costs))
2. (Expected accident costs) = (probability of injury occurring) x (magnitude of injury
should it materialize)
3. (net value of an activity) = (Value derived from activity) − ((cost of accident
prevention measures) + (expected accident costs))
4. Δ(Value) − (Δ(cost of accident prevention measures) + Δ(expected accident costs))
b. contract i.
Plaintiff - Efficient Reliance
1. Will perform
a. present - looking back - reliance on performance expenditures - R < (P)(PV)
b. looking forward(or from the past)- how much you should spend - ΔR < Δ(P)(PV)
2. Will NOT perform
a. Δ(1-P)*(VNotP)
ii.
Defendant - Efficient Precaution - higher the damages → more $$ precautions - spend 9 to save 10
1. ΔPC < Δ(1-P)*D; marginal spend < marginal save
c. Can we discuss ​VALUE​ (define it too)?
i.
price doesnt reflect value
ii.
willing seller and willing buyer
iii.
valuations
1. seller - may value at max 5, sell for anythnig above that
2. buyer may value at 20, willing to pay anything less than that
3. 2 buyers - can only find max valuations through bidding
Does time or location (pt 2) matter in decisions?
a. where is the market - nyc vs memphis
b. judges fill gaps - they pretend to go back ex ante and imagine how they would of negotiation
Are there any available defenses?
a. he likes comparative negligence - liability
What’s the overall legal decision based on precedent - cite cases again
Is this the right economic choice - single analysis of everything
a. can be contingent on time, place, cost of prevention comparison, available defenses
Kaldor Hicks allow economists to judge which outcomes are best, or "efficient". Coase showed that, if
transactions costs are low enough, people will bargain until the efficient outcome is reached, regardless of how
property rights are assigned. If transactions cost are high, Pigou has another solution to make sure the efficient
outcome is reached: tax/subsidize those who create externalities at the amount those externalities harm/help
others.
Kaldor-Hicks efficiency​, often called cost-benefit efficiency or just "economic efficiency" is a yardstick by which
we measure outcomes. Like you said, by adding up the total benefits and costs among everybody, and whichever
outcome has the highest total benefit is considered "efficient" or "best". So, for example, let's say the
confectioner's loud taffy pulling machine produces $100 worth of taffy a week, but he could buy a quiet machine
for $50. The doctor loses $40 a week of business since patients don't like a loud office, but could buy soundproof
walls for $20. There are three outcomes: the machine runs as usual, the confectioner buys a quiet machine, or the
doctor puts in soundproof walls. The first outcome's cost and benefits sum to $60, the second's to $50, and the
third to $80, so the ​third outcome, the soundproof walls, are the Kaldor-Hicks efficient outcome.​ Notice that
the efficient outcome involves the doctor, who has to pay $20 to avoid the noise rather than $50, paying to avoid
the externality, making him the ​least cost avoider​.
Now, let's say that the confectioner gets to decide which machine he uses. What will happen? She'll keep using
the loud machine, and the doctor would rather pay $20 to put up the walls than lose $40 of business, so the
efficient outcome happens. What if, instead, the doctor owns the entire building, and can force the confectioner to
not make as much noise? Well, the confectioner would rather ​pay​ the doctor $20 to put up the walls than pay $50
for the new machine, and the doctor would accept, since he gets $20 ​and​ peace and quiet. This demonstrates what
people call the Coase Theorem, since, ​regardless of who is given the right to decide the noise level, the
efficient outcome is reached via bargaining.
However, what if it's costly for the two to bargain with each other? Maybe the two speak a different language, or
they can't rely on courts to enforce the contracts they make, or some other ​transactions cost​ prevents them from
reaching that efficient outcome, but if those costs are high enough, the Coase theorem no longer applies, and
we're not guaranteed the efficient outcome anymore. ​Pigou came up with an idea: what if we tax​ the
confectioner $40, the amount that she harms the doctor, if he uses the loud machine? Well, the confectioner
would rather pay the $40 tax than buy the $50 machine, so her machine keeps running and the doctor puts in the
soundproofing, which is, again, the efficient outcome.
The government would be the one doing the taxing, and you're absolutely right that there are costs to enforcing a
pigouvian tax. Again, the benefits of reduced negative externalities must be weighed against the
administrative/enforcement costs. Wearing ugly clothing and emitting CO2 both create negative externalities, but
Pigou would likely only support a tax on the later, since the benefits of reduced ugly clothing use are smaller than
the costs of administering the tax.
Ch. 1 Economic Concepts & Institutions
1) What Economists Study
a) Lionel Robbins defines economics as, “Economics is the science which studies human behavior as a
relationship between ends and scarce means which have alternative uses.”
2) Incentives Matter
3) Resource Scarcity:
a) The role of scarcity in creating economic ​value​ is the first premise of modern economic theory.
i) value​-a persons willingness to pay for something that he does NOT have with something he does
have
ALSO - a persons willingness to sell something they do have for something they do NOT have
b) Not all resources are economically or relatively scarce.
c) Economic or relative scarcity compares the available supply of some resource with the human demand
for it.
i) Air is an example of something that once was not scarce, but due to pollution is becoming
scarcer and markets are emerging for air.
4) Cost & Price:
a) A second premise of economic theory is that choice is costly because trade-offs are necessary.
b) This is refers to the idea of opportunity costs: what other opportunities are given up in taking the
action, spending the time, or making the choice.
i) An explicit cost is a cost that is represented by lost opportunity in actual cash payments.
ii) An implicit cost is a cost that occurs when one foregoes an alternative action but does not make an
actual payment.
c) Economic valuations are subjective and based on an individual’s preferences and budget constraints.
5) Economic Decisions Are Made at the Margins:
a) When people make decisions about consumption and production, they think at the margin; that is how
much benefit they will receive for one more unit of consumption versus the cost, they do not look at
their past or present decisions, but rather only to the next decision.
6) Allocating Entitlements to Resources:
a) Markets, governments, firms, and individuals own rights and entitlements but might not own the resource
itself.
i) You do not own the state park, but you have a right to use it.
7) Supply, Demand, & the Market:
a) Law of Demand
i) The third premise of economic theory is that the prices and quantities of scarce goods and services
in open markets will be determined by supply and demand.
ii) The law of demand posits that the amount of a good demanded (q) will increase if its price ($)
falls, and decrease if its price rises.
iii) Two standard assumptions of economic theory:
(1) Individuals look after their self-interest
(2) People rationally respond to price signals and other incentives in the marketplace to
maximize their social utility, wealth, or happiness.
iv) The demand curve also assumes that demand for an item is elastic.
(1) Demand is elastic when it responds strongly to relative price changes. If prices go up, the
quantity demanded will fall by a greater percentage than the price increase.
(2) Cigs are an example of a good with inelastic demand. If prices rise by ten percent, demand
may only fall by five percent.
(3) AIDs medication is an example of a good with complete inelastic demand because of the
consequence of not having the medicine. This is a function of strict need and no substitute
goods.
b) Law of Supply
i) The amount of a good supplied will rise when prices rise, and fall when prices fall.
ii) If the market price drops below the firm’s cost of supplying the good, they will not supply it.
(1) A firm’s supply curve is determined by its costs, and the quantity supplied is determined by both
cost and price.
iii) In the long run, the supply of goods will be relatively elastic.
iv) The market is where buyers and sellers meet. Markets have existed since medieval times. Markets
maximize gains for buyers and sellers by reducing the costs of transacting search as search costs
for finding each other.
c) The Market: Where Buyers and Sellers Meet
d) Market Equilibrium: Where Supply Meets Demand
i) The equilibrium or market-clearing price is the point at
which the quantity demanded and quantity supplied meet.
(1) At this point, there is no unsatisfied demand or extra
supply. The market is efficient and the society is
receiving the greatest benefit possible.
(2) In reality, this point is reached only briefly and the
equilibrium price is continuously changing as factors
change.
8) Efficiency
a) The goods that an economy should produce cannot be known until actual market transactions occur.
b) Productive, Allocative, & Adaptive Efficiency
i) Productive efficiency concerns the utilization of resources to achieve the highest possible level of
production of a desired mix of goods and services.
ii) Allocative efficiency relates to the distribution of goods and services in an economy to maximize
social welfare.
(1) This measure is the primary concern of law and econ scholars.
iii) Adaptive efficiency indicates the ability of, and cost to, social institutions and organizations to
absorb shocks and react to changing technological and environmental circumstances over time.
(1) This is arguably the most important measure for long-term success.
c) Measuring Allocative Efficiency: The Pareto and Kaldor-Hicks Criteria
i) Pareto:
(1) A given allocation of entitlements to resources is said to be Pareto optimal when any
possible reallocation would reduce the welfare of at least one person.
(2) Pareto criterion is oblivious to distributional issues. Economics is concerned with the size of
the economic pie, not with how the pie is sliced and distributed.
(3) Pareto is useful for economic modeling but not for assessing real-world transactions.
(4) This is due to the strict conditions imposed by the Pareto criterion:
(a) Voluntary market transactions (voluntary consent by all affected parties)
(i) In essence, Pareto requires a rule of unanimity for policymaking.
(b) Actual compensation of anyone who would otherwise be made worse off by some
reallocation
(5) Consequently, Pareto is only useful in judging the efficiency of contract-based
transactions with no negative externalities, which are very rare. Also, Pareto cannot asses
the value of nonmarket allocations.
(a) An example would be decisions by a court or legislature in allocating resources.
(6) Pareto does not even recognize the possibility that a change in entitlements can bring about net
social improvements in the absence of unanimous consent.
ii) Kaldor-Hicks:
(1) Economists Kaldor and Hicks each came up with a theory in 1939 that was to be more
practical then Pareto but it was only when the theories were combined that they proved to be
useful.
(2) Kaldor-Hicks maintains that an allocation or reallocation of entitlements to resources is efficiency
enhancing if:
(a) it makes at least one person better off, and that person could afford in theory to fully
compensate everyone made worse off by the allocation and still be left with a net
increase in their welfare (Kaldor efficiency; and
(b) those made worse off by the allocation or reallocation could not afford to bribe those who
gain into foregoing the allocation or reallocation without suffering an even greater loss in
welfare (Hicks efficiency)
(3) Kaldor-Hicks criterion is sometimes referred to as “potential Pareto” because a Kaldor-Hicks
efficient change would in theory be Pareto improving.
(4) Two critical distinctions separate the Kaldor-Hicks and Pareto criteria:
(a) Kaldor-Hicks doesn’t (1) assume that all changes in entitlements are voluntarily market
transactions
(5) Kaldor-Hicks criterion is practical because it assumes that net social welfare can be
enhanced by changes in entitlements, even if some individuals suffer losses as a result.
(6) However, this leads to its biggest weakness, because Kaldor-Hicks don’t require those who
benefit from some allocation or reallocation to compensate those who lose, it doesn’t provide
a market-determined price by which to evaluate the winners’ utility and losers’ disutility. This
uncertainty of valuation disqualifies Kaldor-Hicks in the minds of some.
iii) Cost-Benefit Analysis
(1) CBA is the embodiment of the Kaldor-Hicks efficiency criterion. CBA is used to assess
whether a certain social policy will, in net, enhance or degrade social welfare.
(2) CBA is only useful when the Pareto constraints of complete compensation and unanimous
consent are lifted.
9) Market Failure: In theory, markets should always maximize productive and allocative efficiency, but in the
real world, this rarely happens and markets fail due to several reasons.
a) Neoclassical Assumptions Versus the Real World
i) Neoclassical economics starts with a world in which firms and consumers operate in perfectly
competitive markets and possess the following properties:
(1) Markets include many buyers and sellers, all with
complete information about product qualities, quantities,
and prices.
(2) No buyer or seller has sufficient market power to control
the price.
(3) Market participants respond rationally to changing
market conditions.
(4) Firms may enter and exit the market costlessly.
(5) All resources within the economy are owned and priced
within the market, and all prices are determined by supply and demand.
(6) All costs and benefits fall within the market, creating no externalities.
(7) Transactions within the market are costless.
ii) These assumptions do not reflect reality. The assumption of zero transaction costs never reflects
reality, and the others do so only rarely and incompletely.
b) I​mperfect competition​ causes the laws of supply and demand to not function properly.
i) I.e. a monopoly where a seller can charge a higher price than if the market was competitive.
c) Imperfect or asymmetric information leads to inequalities between sellers and buyers and gives
one side an advantage in bargaining that allows it to gain ​rents ​(prices exceeding the minimum
required to keep the seller from switching to some other investment opportunity).
d) externalities​, which are costs or benefits associated with the transaction that are not borne by those
participating in the deal but are externalized to others.
i) Pollution is an example of a negative externality.
ii) My beautiful grass is an example of a positive externality to the neighbors.
e) A ​public good​ is one the market will under produce because the benefits of producing it are so
costly to internalize that private investors would not be able to recover their investment costs.
i) Public goods have two properties (the typical example is a lighthouse):
(1) Joint supply ​(one person’s use doesn’t prevent or reduce another person’s use of the same good
or service)
(2) Nonexcludability ​(it is too costly to prevent someone from consuming the good or service
without paying for it)
f) Transaction costs​ are always positive in cost and often quite significant.
i) Buyers and sellers must find each other, contract, monitor the k, and often enforce the k.
g) Strategic Behavior​: Free riders and holdouts can greatly increase transaction costs especially when
agreement is required among a number of parties.
10) Responses to Market Failure: Firms & Governments (and their failures)
a) The firm is an alternative to the market for organizing economic activity based on contractual
relations between individuals who compromise the firm. However, firms fail too and they are costly
to
b) Government Intervention to Correct Market & Firm Failures
i) According to the welfare economics theory of Pigou, the purpose of government is to correct
market failures. However, governments fail too.
(1) I.e. minimum wage laws, airbag requirements, and highway speed limits have been justified
on the basis of market failure.
11) The Second-Best (Real Coasean) World
a) Coase says to rely on institutions and organization s that are least likely to fail or are likely to fail the
least, but mainly look to the institution that minimizes transaction costs.
b) Instead of maximizing social utility, wealth, or happiness, the goal has become to minimize costs.
Ch. 2. “An Introduction to the American Legal System”
1) Why Law?
a) scarcity - possession of “rare goods” - there is no market for car accidents or murder
i) malum per se - always bad
ii) malum prohibitum - bad because the law says it is - think prohibition
b) purpose - serve to organize individual behavior and structure social interactions
2) Legal Institutions: The Rules of the Game
a) Legal Rules
b) Rule of Law - how much does it rule? corruption or peaceful dispute resolutions
c) Criminal vs Civil
i) Criminal - Wrongs that society wants to punish
ii) Civil-Wrongs between people
d) Rights and Duties
i) Rights - natural or elaborated
(1) natural (a) life liberty, pursuit of happiness
(b) property-Locke
(2) positive - created by a sovereign
ii) Duties - if i have a right, people have a duty
e) Liability and Remedy - if liable what is the remedy - lots of options
3) Sources of Law
a) Constitution
b) Common Law and Courts - private causes of action look for stare decisis
c) Statutory - created by legislatures/governments
d) Admin Law - left to regulatory agencies for rule making of ambiguous statutes
e) Note on Local Custom- ranchers in Shasta County- alt. approaches that exist in the shadow of the law
Ch. 3 “Putting Law and Economics Together: Frameworks, History, and Perspectives”
1) What happens when policy makers ignore economic principles?
2)
3)
4)
5)
ii)
a) Credit Rate Ceilings
i) Government believes it is protecting consumers from unfair and discriminatory lending.
However, lenders have legitimate business reasons for charging differential interest rates for
credit, which have nothing to do with unlawful discriminatory practices. Due to the higher
default rate, the cost of lending in low-income areas is higher.
ii) When rate ceilings are put in place below the market rate of interest, reputable lenders will leave
the market and loan sharks will take over. In the end, the people the gov was trying to help are
only hurt more.
b) Rent Control
i) Chicago Board of Realtors, Inc. v. Chicago
(1) Posner’s concurrence says that even though the rent control ordinance was constitutional it was
bad policy because it will reduce the pool of quality housing by making the cost of renting
higher to landlords.
Judges need to know economics:
a) Baker v. Weedon
i) An elderly lady asked the court’s permission to sell the land she occupied as a life tenant.
ii) The court said no because of the economic detriment to the remaindermen. The court looked at
evidence that a highway was being built close to the property and that the land should be worth a
lot in the future.
iii) However, economic theory suggests that any reasonable expected increase in value should be
revealed in present market prices.
Limitations of the Economic Approach to Law
a) Economics alone cannot explain or determine law because the purview of law is broader than that of
economics. They both have the same goal -- maximize social welfare -- but disagreement arises with
the effort to define and measure social welfare.
b) Posner points out that if efficiency was the sole goal of law, some illegal activities would be legal
such as prostitution and cocaine trafficking. Efficiency is not the sole proxy for measuring social
welfare in the eyes of the law. The law also looks to moral concerns.
Legal rules condition economic transacting.
a) Keeble v. Hickeringill
i) The court established the rules of the duck-hunting game by outlawing the acts of the defendant in
trying to reduce the supply of ducks for the market when he was firing his gun to scare away
ducks from the plaintiff’s decoy pond.
ii) The court made a policy and economic decision by setting the rules for competition and trying to
maximize the gains from trade by increasing the number of ducks.
History of Law and Economics
a) Progressive Era Law and Economics
i) The first great movement began in the late 1800s with leader such as Oliver Wendell Holmes,
Karl Llewellyn, Thorsten Veblen, and Robert Hale.
Their movement lay dormant during and after WWII until it was resurrected in the late 1950s by
scholars at the University of Chicago.
(1) The Coasean Revolution
iii) Ronald Coase published articles entitled “The Nature of the Firm”, “The Federal
Communications Commission”, and “The Problem of Social Cost.”
iv) His assertions about gov failure constituted a direct rebuke to progressive era law and econ,
which presumed that gov intervention was always called for in the event of market failure.
b) Modern Law and Economics
i) This movement began with the founding of the ​Journal of Law and Economics ​at the University of
Chicago Law School in 1958.
ii) The leaders included Posner, Gary Becker, Coase, and Ronald Demsetz and they used economic
analysis to explain legal outcomes.
6) Perspectives on Law and Economics
a) The Chicago (or Posnerian) School: Neoclassical Law and Economics
i) This school analyzes and explains legal rules according to the basic microeconomic precepts of
neoclassical economic theory and treats individuals as rational preference-maximizers, who
respond to legal rules and decisions just as they do to market prices: to maximize their own net
benefits.
ii) The Chicago view is subject to the same criticisms that apply to neoclassical theory because their
views are based on a lot of the same presumptions of how individuals behave.
b) Public Choice
i) Public choice theory consists of two basic components: a theory of how political processes work
and a theory of how individuals cooperate to achieve political and economic ends.
ii) According to public choice theory, the preferences of politicians differ from ordinary market
participants because politicians seek to maximize their power, jurisdiction, and prospects for
reelection instead of their material well-being.
iii) The theory of collective action explains how small groups combine around a distinct issue and
assert greater influence over policies concerning that issue than do large diffused coalitions even
if the large group represents the majority sentiment.
(1) Associated with this theory is the concept of rent seeking, which describes the diversion
of resources from productive economic activities to efforts to obtain unearned benefits
in the political arena.
(a) I.e. a monopolist expending lots of $ to maintain their monopoly.
iv) Criticism of public choice theory includes its failure to account for the wealth of factors that
motivate human behavior beyond calculated self-interest.
(1) I.e. the theory can’t explain why people vote in elections even though their vote is completely
unlikely to decide the election.
v) Central to public choice theory is Kenneth Arrow’s impossibility theorem, according to which it is
impossible to discern social preferences through voting when voters have a multiplicity of choices.
(1) A critical implication of Arrow’s impossibility theorem is that the political process yields
results that have an indeterminate affect on social welfare because the choices do not
unambiguously reflect social preferences.
c) Institutional Law and Economics
i) This perspective is premised on a far broader understanding of the factors that motivate human
actions, including formal legal and political institutions and informal social norms, habits, and
customs.
ii) Where the Chicago and neoclassical perspectives believes a single efficient solution exists to
every legal problem irrespective of the preexisting assignment of legal entitlements, institutional
law and economics argues that an efficient solution under one set of entitlements and institutional
circumstances may not be an efficient solution under another.
iii) This perspective is criticized for discarding the neoclassical framework without providing a
more rigorous analytical framework in its place.
d) New Institutional Economics
i) This perspective builds on old institutionalist arguments about the embeddedness
of economic activity in social and legal institutions using Coase’s insight about the
critical role that transaction costs play in determining economic structures and
performance.
ii) Douglass North defines institutions as the “rules of the game,” consisting in both
the formal legal rules and the informal social norms that govern individual
behavior and structure social interactions including economic transacting.
Organizations, by contrast, are the structural mechanisms, such as courts, agencies,
firms, and clubs, which utilize, alter, and enforce institutions.
e) Behavioral Law and Economics
i) This perspective uses Herbert Simon’s observation that we all suffer from
cognitive limitations of varying degrees, which constrain our abilities to act
rationally, as economists historically have understood that term, as the starting
point for their study.
ii) Simon sought to replace the neoclassical conception of unbounded rationality
with a more realistic notion of bounded rationality.
(1) Instead of making on-the-fly calculations of costs and benefits, people
use “rules of thumb” shortcuts to make decisions.
(a) I.e. instead of calculating to the dollar which house you can afford, you use
the standard formula of one-quarter or one-third of current annual income.
iii) Recent behavioral research shows that humans suffer from framing effects,
which means that the way choices are presented may influence people’s
decisions.
(1) I.e. people are more likely to have a surgery when a doctor says you have a
90% success rate as compared to if the doctor said you have a 10% chance of
dying.
iv) Posner says that behavioral law and econ is not a theory in its own right because it
only pokes holes in other theories and does not offer anything in place.
Ch. 4 “The Problem of Social Cost” and Modern Law & Economics
1) The Nature of Social Cost Problems: Coase versus Pigou
a) Coase did not set out to revolutionize the study of law and economics, but rather to
critique the prevailing welfare economics view of externalities developed by Pigou.
Pigou believed the polluter should pay to internalize the externalities.
b) Coase points out that externalities are not created by just one party but rather two:
someone to produce it and someone else to bear it. In the case of pollution, it would be
the polluter and the downwind neighbor.
c) Externalities are bilateral in another sense. Not only do the polluter and the
downwind neighbor combine to produce the harm, one of them is bound to suffer
harm because of their conflicting preferences.
i) If the factory is entitled to pollute, the neighbor is harmed, but if the factory is
prevented from polluting, the factory is harmed.
ii) Coase argues that the goal should be to minimize the total harm because that way
the social product is maximized. But the situation provides no reason to presume,
as Pigou does, that it is always less costly for the polluter, rather than the
neighbor, to avoid or abate the harm.
iii) Coase would look to determine who the least cost avoider is --the party capable
of avoiding or abating the harm at the lowest cost.
iv) The total social cost or sum of private costs is also affected by the allocation of the
legal right or entitlement to either the polluter or the neighbor. If the factory holds
the entitlement, it will pollute and the neighbor will bear the costs and vice- versa.
d) Coase’s new view of externalities startled economists at first, they were slow to
come around to his view, and the lessons many have taken from Coase’s article
were not the ones Coase intended.
2) The Coase Theorem
a) In Coase’s article, “The Problem of Social Cost,” he begins by asking the reader to
envision a mythical world in which all the assumptions of neoclassical theory exist
(perfect competition, complete info, Pigou’s solution to externalities is not wrong but
unnecessary because all externality problems would be solved efficiently by the
market in a neoclassical world.
b) The assumption of zero transaction costs carries crucial implications for law,
because in this world, law would be irrelevant. Whatever the initial allocation of
entitlements or property rights, and whatever the legal rules for governing resource
use, parties will costlessly contract to the most efficient allocation of entitlements to
resources.
i) I.e. see the farmer and rancher problem on pages 90-95.
ii) Coase made this argument to make an important point: since we have institutions
such as the law and organizations such as the police and courts, then we don’t live
in a world of costless transacting.
iii) In a world of positive transaction costs, the allocation of entitlements clearly matters
for economic efficiency.
c) Coase’s ultimate point is that transacting is always costly in the real world and,
therefore, the law matters to maximize the social product by minimizing social
costs, but that is not the message everyone took from Coase.
i) George Stigler took the basic argument to be that if we can reduce transaction
costs nearly to zero in legal disputes we will always get efficient outcomes and
labeled this as the “Coase Theorem.”
ii) Coase was clear that the world of the Coase theorem was not worth
investigating because such a mythical world of costless transacting does not
exist. Many people have wrongfully criticized his theorem and said:
(1) Coase is too ideological in asserting that the market can solve all externality
problems.
(2) The Coase theorem is not verified empirically by events and transactions in the
real world.
(3) Coase doesn’t consider the effects of initial wealth and how they might
alter the impacts of any distribution of entitlements.
iii) The third criticism is the only one of interest, but if the theorem was understood,
you would know this situation could not possibly exist because any distributional
effect would be accounted for in the price.
3) Transaction Costs and Law in the Real World
a) Coase also used real cases in his article to show that responsibility for costs is by
definition unclear because externality problems are intrinsically bilateral or
multilateral, joint or social cost questions, not unilateral problems with a clear
perpetrator, who causes the problem, and a victim, as Pigou described them.
b) Sturges v. Bridgman
i) A doctor and confectioner are neighbors and the doctor builds a consulting
room onto his house that abuts to the confectioner’s room where his mortars
are housed. The noise from the mortars is so noisy that it prevents the doctor
from using his consulting room.
ii) The doctor claims the noise to be an actionable nuisance, but the confectioner
says he has the right since he has been doing it for twenty years. The court rules
for the doctor and ultimately makes an economic decision by putting more
value on the doctor and his residential use than on the confectioner’s use of the
land.
iii) Coase points out that the problem was created by both the plaintiff and defendant
and not just one party and the fact the case is in court proves that the entitlement
of land use was not clearly defined and anything but costless to figure out.
c) Bryant v. Lefever
i) D and P are neighbors. D builds on to his house and now the P is unable to light a
fire in his fireplace without smoking blowing back into his home. The lower ct
finds for the P, but the appeals ct reverses and says that the P is liable for the
nuisance because he lights his fires.
ii) Coase points out that the judges oversimplify who is liable because both parties
are responsible for the problem. The lowest cost avoider is not immediately known
in this case and the ct does not attempt to find out whom it would be. We would
have to know how much the P values their fires and how the much D values their
tall house.
4) Four of the broader contributions of Coase’s essay:
a) In world of positive transaction costs, law matters.
i) I.e. In Sturges if the parties knew who held the legal entitlement, they would
not have had to go to court and incur significant transaction costs.
b) Law creates and alters economic incentives.
i) Economic concerns will affect how the law is (or should be) structured and how
entitlements are allocated.
ii) I.e. the court in ​Sturges c​ reated incentives for residential or professional space
development in the area but created a disincentive for commercial businesses
especially confectioners.
c) Policy decisions should be made on the basis of comparative institutional analyses.
i) Coase believes that scholars should utilize a comparative institutional
analysis, examining the costs and benefits of alternative allocations of
entitlements, and measuring the net social benefit of each alternative.
ii) The key is to allocate the entitlements in such a way as to create the least cost for
society as a whole.
d) Entitlements to property should be allocated to minimize joint or social costs.
i) The entitlement or property right should be allocated to the party with the higher
costs of avoidance or abatement.
ii) Coase’s normative solution raises two questions:
(1) What is the least-cost solution?
(2) Which party should bear that cost?
iii) Just because a party is the least cost-avoider doesn’t necessarily mean they
should bear the cost. It may be inequitable and the court decides on a more fair
remedy.
PROPERTY
Ch. 5 Property I: Acquisition
1) What is property?
a) Property is a sociolegal relationship between people respecting things. Property must
be relational because the very notion of property rights entails the idea of property
duties. Property is not just one right but a bundle of several rights, including the right
to possess, use, alienate, and exclude.
b) The concept of relativity of title means that several different persons may have
property interests, or entitlements, in a single object at the same time. This is not the
same as “co-ownership.”
i) I.e. a parking attendant is not a co-owner of your vehicle, but he is a bailee with an
interest in your car.
c) Paschal v. Hamilton
i) A bona fide purchaser buys a car from a car lot who received the car from a
person who fraudulently purchased it from the P and now the P wants their car
back from bona fide purchaser.
ii) The court relies on the UCC and rules for the D because the car was not stolen but
obtained by fraud.
iii) In this case, the P is arguably the lower-cost avoider because he is in a better
position to guard against the fraud that occurred. The P and not the D is the one
who had contact with the defrauder. On the flip side, the case appears to reward
crooks as long as they defraud owners rather engage in simple theft. The P still has
superior title to the car than the car lot and defrauder, so the P is not left without
any legal recourse.
2) Types of Property Regimes:
a) Res Privatae (private)
i) Private property is defined as property rights held by either a single private
individual or a small group of co-owners.
b) Res Publicae (public)
i) 42% of land in the U.S. is owned publicly and controlled by the federal, state, or
local governments.
ii) Some economists in the public choice tradition doubt the existence of “public
property” and believe that property owned by everyone is owned by no one (res
nullius) or de facto controlled by the interests of politicians and should be
privatized to maximize their economic value.
c) Res Communes (common)
i) Hybrid form combining both private and public property and is often mistakenly
conflated with nonproperty.
ii) Common property is simply private property owned by more than one
individual. Common property involves two groups: (1) the resource
users/decision makers, and (2) other, non-co-owners of the common property,
who have no access or use rights.
(1) I.e. fisheries (you have the fishermen who make rules regulating the waters and
exclude other people)
iii) Res Nullius (nonproperty or open access)
(1) Nonproperty/open-access is free for access and use by all. In reality, this
does not constitute a property regime at all, but denotes the absence of any
other property institution.
d) Mixed Property Regimes
i) An example would be commonfield agriculture in South America where land parcels are privately
owned for purposes of crop cultivation, but commonly owned for purposes of pasturage.
3) Economic functions of property:
a) Economic exchange
i) Buyers are far more likely to enter into transactions when they have confidence that sellers actually
own and can convey good title to the resources they are selling.
b) Resource conservation
i) Garrett Hardin, “The Tragedy of the Commons”
(1) Hardin demonstrates, by using an example of herdsman and a pasture, that scarce natural
resources, in the absence of property rights or government regulation, will tend to be overused
and degraded. Another purpose of property is to control access to and use of scarce resources.
(2) The dilemma posed by Hardin can be illustrated by a common game model known as the
Prisoner’s Dilemma. In this game, two captured thieves are taken to separate interrogation
rooms. Each is promised a light sentence in return for testimony against the other. The “best”
strategy for each prisoner individually is to testify against the other; but the “best” strategy
for the two of them collectively is to cooperate and not testify against one another.
(3) The same is true in Hardin’s story. If the herders agree to cooperate by restraining the size of
their herds in order to conserve the common pasture, they will be best off in the aggregate.
However, if one adds to a herd but another does not, the former gains at the latter’s expense.
Thus, individually rational strategies can lead to socially inefficient outcomes.
ii) Harold Demsetz, “Toward a Theory of Property Rights”
(1) A year before Hardin, Demsetz explains why the privatization solution to property rights is
likely to successfully conserve scarce natural resources. He argues that property both
internalizes externalities and reduces the costs of transacting.
(2) What Demsetz really adds to Hardin’s analysis is the argument that privatization of the
commons also reduces the costs of transacting. It does so by reducing the universe of people
who need to cooperate in order to conserve any particular scarce resource.
c) Capitalization and investment
i) Economists since Adam Smith have recognized land as an important source of production both for
the output of the land itself and for its use as collateral for other forms of production. Land is
economically valuable.
(1) I.e. a bank loaning you money and holding your home as collateral
(2) Prior to granting the loan, the bank will search the legal records for competing ownership
claims and they will require the buyer to purchase title insurance to protect against future
claims.
ii) Hernando de Soto refers to the legal system of property as a “staircase” and that property rights
allow economic resources to be more quickly and easily moved to their highest and best (most
profitable) uses, which in turn allows for higher levels of economic growth.
4) Intellectual property law
a) Beyond real property, the government also creates incentives for investment in socially useful
innovations.
b) The Constitution’s Intellectual Property Clause (Art. I, §8, cl. 8) promotes the useful arts and sciences.
Government is empowered to grant exclusive rights to investors and authors in their respective
inventions and works for limited times. This allows the entrepreneur time to reap the economic fruits of
their labor.
c) However, the government is in essence creating a monopoly for that good created by the
author/inventor and causes a tension between two important economic values: (1) the desirability of
exclusive property rights in socially useful ideas to create incentives for innovation, and (2) the benefits
of competition in the marketplace.
i) Maybe the founders had this in mind when they placed limits on the time that a person has exclusive
rights.
ii) patent 20 years - trademark is 70 years
d) Cheny Brothers v. Doris Silk Co
i) The P manufactures silk and each season releases new patterns for sale. The D copied one of the
designs and sold it cheaper than the P. The P asks for protection of their design only during the first
season that it goes on sale. The P is unable to register the silk for a trademark because the Copyright
Act doesn’t protect such items.
ii) Judge Learned Hand wrote the decision and found for the D. Congress has chosen which kinds of
innovation deserve the protection that property rights afford. New pharmaceuticals and songs are
protected but not silks.
(1) I.e. cologne/perfume is another example of something not protected
5) Sources of property
a) Bottom-up theories of property: prepolitical or natural property rights
i) According to John Locke, property rights arise naturally from human labor regardless of state
authorization, recognition, and enforcement. Locke’s example: while walking in the forest you stop
and pick up an acorn, you now have property rights in that acorn.
(1) The big question for Locke is how much labor gets you how much property.
ii) Friedrich von Hayek’s theory of “spontaneous organization” says that social institutions,
including property rights, contracts, and markets arise spontaneously in the absence of
government intrusions. Individuals, in a state of liberty, naturally derive cooperative institutions
to enhance their well-being.
b) Top-down: political definition and allocation of property
i) Others argue that property rights started when kings began to protect their lands in order to collect
taxes and that without some government created regime of property rights, there would not be any.
ii) However, no consensus exists about where property rights come from.
6) Allocating property rights
a) Allocation organizations are all entities that define and allocate property rights.
i) Courts, legislatures, administrative agencies, contracts, and social norms are all examples.
b) Allocation institutions are “rules of the game” that help the allocation organizations above make
their decisions. Examples are “first possession” and “just deserts.”
i) “First possession” refers to the default presumption that the person in possession of an item has a
lawful claim to that item. The presumption is not rebuttable by someone with no right of
possession, but it may be rebutted by someone with a superior claim of ownership.
(1) This does not always result in the most efficient allocation of property rights. Joint or
social costs should be minimized by giving the property right to the least cost avoider.
ii) “Just deserts” refers to the allocation of property rights to accomplish certain, supposedly just, end
regardless of priority and often regardless of efficiency.
(1) An example is the giving of federal lands to veterans who fought in the Revolutionary War.
iii) Utility/wealth maximization
(1) Sometimes property rights are given for purely utilitarian or wealth-maximizing reasons. An
example is the land the government granted to the railroads and canal builders.
Ch. 6 Property II: Protection
1) Determining liability
a) The legal system offers two primary theories for determining liability for interference with property
rights: strict liability and negligence/reasonableness. Strict liability means that the defendant is liable
for any harm caused to the plaintiff’s property, regardless of fault or the magnitude of the harm.
Reasonableness means that the defendant is only liable for “unreasonable” harm.
i) Whether harm is unreasonable may be determined by a cost-benefit test, which weighs the harm
to the P against the benefits created by the D’s activity.
b) Strict liability: trespass and nuisance distinguished (prior to the understanding that all invasions are
physical)
i) A trespass is defined as the direct, physical invasion of another’s land.
ii) A common law nuisance is defined as a nontrespassory invasion of land, one that is either indirect or
iii) Another distinction between trespass and nuisance is that they protect different rights of property.
Trespass protects the legitimate landowner’s right to exclude. Nuisance protects the landowner’s
property right in “use and enjoyment” of the land.
c) Modern nuisance law
i) Today, trespass remains a strict liability crime, but nuisance is now judged on a fault-based,
reasonableness standard. According to the Restatement of Torts a defendant is liable for nuisance
if the harm to the P exceeds the benefits created by the D’s activity or if the harm to the P is
either serious or severe.
ii) Carpenter v. Double R Cattle Company, Inc
(1) The Ps are homeowners who believe that the expansion of a nearby cattle feedlot creates a
nuisance due to its odors, air and water pollution, noise and pests in the area.
(2) Even if the social utility of an actor’s conduct outweighs the harm caused by such conduct, his
actions may still constitute a nuisance for which he is liable in damages.
(3) The court vacated the lower court’s decision for the D and orders a new trial. The court looks to
the Restatement of Torts and its set of criteria for determining whether a nuisance exists. The
court says that even though the D’s activity may be beneficial, if it creates serious harm to the
P, then the D can still be held liable.
(4) The court cites Coase’s article, but Coase says that the court is wrong for focusing on the
seriousness of the harm, but should focus on which party is the best cost avoider.
2) The remedy decision
a) Once a court has determined that the D is liable, the court must fashion a remedy: compensatory damages
or injunctive relief.
b) Types of remedies: Guido Calabresi and A. Douglas Melamed, “Property Rules, Liability Rules,
and Inalienability: One View of the Cathedral”
i) The article considers three types of entitlements: entitlements protected by property rules,
liability rules, and inalienability entitlements.
ii) An entitlement is protected by a property rule to the extent that someone who wishes to remove the
entitlement from its holder must buy it from him in a voluntary transaction in which the value of
the entitlement is agreed upon by the seller.
(1) Property rules involve a collective decision as to who is to be given an initial entitlement but
not as to the value of the entitlement.
(2) court determines the value (price) - this is good when the cost to determine is great - helps
overcome strategic behavior like holdouts and freeloaders
iii) An entitlement is protected by a liability rule when someone can destroy the initial entitlement if
he is willing to pay an objectively determined value for it.
iv) An entitlement is inalienable to the extent that its transfer is not permitted between a willing buyer
and a willing seller.
v) Paternalism is belief that we know better than the perosn who posses a right - sale of cigarettes to
minors
vi) Calabresi and Melamed’s liability rules and property rules come into play only after legal
liability is established. A D who is liable will be subject to either a property rule (injunctive
relief) or a liability rule (money damages).
c) Property Rules: Injunctive Relief
i) Whalen v. Union Bag and Paper Co
(1) The P owns a farm on a creek down river from the D who operates a pulp mill. The mill
discharges lots of pollution into the creek and has dirtied the water. The D’s employ 400 + and
have made an investment in excess of $1 million.
(2) The P claims that the dirty water has caused them harm to the tune of $100 and asks for an
injunction. The court agrees with the P and issues the injunction.
ii) Court used to automatically issue injunctions to enjoin nuisances, but this proved to be
economically inefficient and now courts have moved towards awarding money damages.
d) Liability Rules: Money Damages
i) Boomer v. Atlantic Cement Co
(1) The D operates a large cement plant and the P’s are neighbors who are claiming that the plant
causes smoke, dirt, and vibration that has injured their property.
(2) The court gives the D the choice of paying permanent damages to the Ps or an injunction.
(a) The main reason courts award permanent damages rather than actual damages is to
reduce the social costs of potentially recurring litigation between the parties.
(3) The dissent argues that the court is licensing a continuing wrong as long as the cement plant is
willing to pay. Also, once the D pays the damages, they have no incentive to quit or reduce
polluting
(a) However, the company still does have some incentive to slow their polluting, because
other Ps could sue and the government could still pass laws that would require the plant
to reduce their pollution output.
e) Hybrid Property/ Liability Rules
i) Spur Industries v. Del E. Webb Development Co
(1) The P owns land in which he is developing into a residential area. The D owns a cattle feedlot
nearby and has for many generations. The D argues that he has been there and that the P came
to the area knowing that the feedlot was there. (“Coming to the nuisance”)
(2) The court finds the feedlot liable and to be a public and private nuisance and permanently
enjoins the operation of the feedlot. The court says that the P is not blameless but the owners
of the homes in his subdivision are and that they are entitled to relief.
(3) The court also rules that the P is responsible for compensating the D for his reasonable costs of
closing or relocating.
(4) The court’s ruling creates substantial uncertainty for those who already own feedlots and for
those who might enter that business and this uncertainty increases the cost of doing business.
f) Inalienability Rules
i) Andrus v. Allard
(1) The P is challenging the Eagle Protection Act and the Migratory Bird Treaty, which prevents
the P from selling bird parts that he legally owns.
(2) The court upheld the federal regulations and deprived the owners of the right to sell eagle
feathers. Since the P could still possess and own the feathers, the court also found that there
was no “taking.”
(3) Property rights are not absolute!
Ch. 7 Property III: Limits
1) Private Law Limitations
a) Nuisance law as a limitation on property
i) The same institutions that protect property rights also serve to limit them.
ii) Rylands v. Fletcher
(1) The P owns land that he mines and the D is the owner of a mill in the neighborhood. The D had
a reservoir constructed on his land by an engineer and contractor. However, there were old
mine shafts beneath the land where the reservoir was built which connected the mines of the P.
When the pond began to fill, the water burst through the mines and flooded the P’s mines.
(2) The court rules for the P and says that when someone brings something on to their land that
could do damage if it escapes, must keep the item at the owners peril and if he doesn’t, he is
prima facie responsible for the damage that is caused.
(a) The D could escape liability if he could show that the P was responsible for the harm or that
the escape was the consequence of an act of God.
(3) The court made it clear that a landowner’s property rights are accompanied by a property duty
not to interfere with other’s use and enjoyment of their own land.
iii) Ampitheaters, Inc. v. Portland Meadows
(1) The D bought land and built a racetrack with lights for night racing. The P is next door and has
a drive-in theater. Once the Ps complained to the D about the light coming from the racetrack,
the D made the effort of installing hoods on their lights and other precautions to help shield the
light from the theater. However, these changes still did not prevent the light from detrimentally
affecting the theater.
(2) The court finds for the D and says that light alone is not a nuisance and that it is not the D’s
fault that the P put his abnormally light sensitive theater so close to a racetrack. ​The court did
not take a Coasean approach to see who the best cost avoider was.
b) Private land-use planning: covenants
i) Covenants restrict the uses to which the owner can put the land. They often increase the value
of property, but, over time, they can become inefficient and removed under the doctrine of
changed conditions.
ii) Rick v. West
(1) The P bought land from a developer who had subdivided the land and included a covenant that
restricted each lot to single-family dwellings. The D was an owner of a lot that had the
covenant.
(2) The P tried to sell the land to a hospital, but the D refused to release the P from the covenant.
The P sues arguing that the covenant is no longer enforceable under the doctrine of changed
conditions.
(3) The court finds for the D. The D bought the land and has relied on the covenant and
there are no changed conditions. The court in essence protected the D’s property rights
with a property rule (injunction).
2) Public Law Limitations on Private Property
a) Governments hold two inherent powers for regulating uses of private property: the police power
and the eminent domain power. These powers are inherent of government in that they are
enforceable even if not specifically enumerated in constitutions.
i) Police power regulation (two types)
(1) Public nuisance
(a) A nuisance is a public nuisance if it affects the public at large. Private individuals can bring
a public nuisance action if they can show “special damages” or damages above and beyond
those suffered by the public at large. Most public nuisance actions are brought by the
government and are usually for activities such as prostitution or pollution.
(b) From an economic stance, the purpose of public nuisance law is to internalize
externalities that private actors impose on the public.
(c) Injunctive relief is typically the remedy in public nuisance actions due to the widespread
harm.
(2) Zoning
(a) Zoning is a process by which a local government determines how land in different areas of
town is used.
Zoning regulation is justified as a police power measure, designed to prevent public
nuisances that might arise if incompatible land uses were allowed in the same area.
(b) Village of Euclid v. Ambler Realty Co
(i) The main issue in the case was the provision of the zoning ordinance that excluded
apartments, business houses, retail shops, etc from residential districts.
(ii) The court upholds the comprehensive zoning plan but it does not go as far as to say
that zoning is good policy.
(iii)From an economic view, it depends on the efficiency or inefficiency of zoning
regulations. Robert Ellickson argues that it is efficient in large urban areas, but
not as efficient in smaller areas where covenants and nuisance law may be more
efficient.
ii) Eminent domain literally means highest ownership, the implication being that all private
landownership is subject to the state’s assertion of superior title. The government can take title
away from private landowners with or without their consent.
(1) Eminent domain is subject to two conditions contained in the Constitution: (1) the gov must
take the land for “public use”; and (2) the gov must provide “just compensation.”
(2) Kelo v. City of New London​ - SC
(a) Holding - Stevens - A state’s use of eminent domain to condemn property from private
individuals and redistribute it to other private individuals constitutes a “public use” under the
Fifth Amendment if it is rationally related to a conceivable public purpose.
(b) Took houses so Pfizer could build a plant
(c) Concurrence - Kennedy - cautions over use and violations of Equal Protection Clause
(d) Dissent - Thomas and O’Connor - abandoning long held property rights - implores majority to
reconsider meaning of “Public Use Clause” - allows for governemtn to transfer resources
from those with less to the already rich and powerful
3) Constitutional Limitations on Public Regulation of Private Property: Regulatory Takings Law
a) Governments will usually have a choice between using their police power or eminent domain and this
raises intriguing issues of policy choice. When the government purports to regulate property under the
police power, but the effect of the regulation is more in the nature of an eminent domain taking, the
courts will require the government to compensate, as if it were exercising its power of eminent domain.
b) Pennsylvania Coal Co. v. Mahon
i) The P sued to prevent the D from mining under the P’s property. The P bought the property
from the D and gave up their right to any damage caused by the mining below the ground, but
now the P argues that the deed is invalid due to the Kohler Act. The Act prohibits the mining of
coal in such a way to cause subsidence damage to someone else’s property.
ii) The D argues that the Act is not a proper use of the police power and amounts to a taking.
iii) The court holds that the Act is not a valid use of the police power and does amount to a
taking. The regulatory takings doctrine was established by the court. The court creates the
“diminution-in-value” test to determine whether there is a taking.
c) Lucas v. South Carolina Coastal Council
i) The P bought two residential lots near the ocean for $975,000. The South Carolina legislature
then enacted the Beachfront Management Act, which prevented the P from building any permanent
structures on his two parcels. The P argues the law amounts to a taking of his property and that he is
entitled to just compensation.
ii) The court finds that the law has deprived the P for using his land for anything economically
beneficial or productive and rules for the P and holds that he is entitled to compensation.
d)
Justifications for regulatory takings law in the law and economics literature:
i) Public choice
(1) Justice Holmes (Mahon case) and Scalia (Lucas case) each presented what amount to “public
choice” explanations for extending the 5th Amendment’s just compensation requirement to
regulatory takings.
(2) After ​Lucas,​ the state can avoid compensating for regulations that deprive the landowner of
virtually all-economic value only if the activities being regulated amount to common law private
nuisances. In addition, the gov need not compensate for non-nuisance-related police power
regulations that do not “go too far” -- that is, if the regulation reduces property values substantially
but not, say by 90 percent or more.
ii) Efficiency, productivity, and demoralization costs
(1) Frank Michelman, “Property, Utility, and Fairness: Comments on the Ethical Foundations of ‘Just
Compensation’ Law”
(a) Michelman uses three quantities to determine when someone should be compensated.
(i) Efficiency gains are the excess of benefits produced by a measure over losses inflicted by it,
where benefits are measured by the total number of dollars, which prospective gainers
would be willing to pay to secure adoption, and losses are measured by the total number of
dollars which prospective losers would insist on as the price of agreeing to adoption.
(ii) Demoralization costs are defined as the total of (1) the dollar value necessary to offset
disutilities which accrue to losers and their sympathizers specifically from the realization
that no compensation is offered, and (2) the present capitalized dollar value of lost future
production caused by demoralization of uncompensated losers, their sympathizers, and
other observers disturbed by the thought that they themselves may be subject to similar
treatment on some other occasion.
(iii)Settlements costs are measured by the dollar value of the time, effort, and resources that
would be required in order to reach compensation settlements adequate to avoid
demoralization costs.
(b) He concludes that compensation should be paid whenever demoralization costs exceed settlement
costs.
iii) Legal process theory and the economics of just compensation
(1) William Fischel concludes that just compensation still exists due to political reasons and the want
to spread out concentrated burdens. He would like judges to more closely scrutinize local
governments and bureaucratic regulations for compensable takings, but give more latitude to state
and federal governments, where “outsiders” are fewer and political processes more pluralistic.
iv) Comparative institutional analysis of regulatory takings law
(1) Neil Komesar looked at the regulatory takings issue from a Coasean, comparative institutional
perspective, and said that even though the regulatory process is highly flawed, it might be the best
of bad alternatives due to the problems in the market and judicial system. As Coase has said, the
goal should be to choose the institutional structure of property rights that fails least.
CONTRACTS
CHAPTER 8: CONTRACTS I FORMATION AND ENFORCEMENT
1) The Nature of a contract
a) A contract is a legally enforceable promise.
b) The reason why a contract’s economic importance is so great is that it permits voluntary economic
exchange where parties perform at different times.
2) Not all promises are contracts
a) Hamer v. Sidway
i) Nephew gives up drinking, smoking, and swearing etc. until he was 21 for 5,000
ii) Court found that nephew changed behavior in return for the promise of money. This amounted to
valuable consideration in exchange for promise.
iii) Contract enforced
b) Ricketts v. Scothorn
i) Court ruled in favor of a woman who had given up her job after her grandfather promised her a sum
of money sufficient for her needs. Sued grandfathers estate because of reliance on his promise
ii) equitable estoppel prevents revocation of unenforcable gratiutious promise if promise is foreseeable
and reasonable relied on promise to her detriment
iii) policy - courts want to enforce promises to protect their societal value
c) Mills v. Wyman
i) Guy cares for dying son of defendant
ii) Defendant promise to pay him out of gratitude.
iii) He is morally obligated to do so, but the promise was made without consideration
3) Enforcement
a) If contracts were not enforceable, no one would undertake any form of exchange that involved
temporal differences in performance; no one would agree to pay for something that was not already
made; no one would make anything on a promise alone.
b) In the United States the Constitution of the United States of America commits the government to enforce
contracts.
i) If this were not the case, parties who were harmed due to breach might take matters into their
own hands and lead to violence (social cost)
4) Should contracts always be enforced?
a) Impossibility: voids a contract. (theater burns down, opera singer cannot perform)
b) Although contracts are intended to promote mutually beneficial exchange for private ends, the failure
to nforce any contract simply because it did not meet one party’s expectations would jeopardize the
institution of contracting itself.
i) So, even when a particular contract does not improve one party’s wealth or utility, the
consequence of nonenforcement would be potentially ruinous f social welfare as a whole.
5) Contract failure
a) Sometimes failed contracts should not be enforced for reasons of both economic efficiency and equity
b) In essence, all contracts fail for the same reason: they are inevitably incomplete and imperfect
c) If contracting parties could foresee, and provide for, every possible contingency that might arise during
a contract’s lifetime, the contracts would never fail. But to specify all contingencies is beyond the
realm of possibility. (It would require every possible interaction the parties might face while the
contract was in force
d) Information costs and transaction costs would be infinite in order to create a perfect contract.
6) Two economic views of contract failure and the role of courts
a) Neoclassical model of perfect contracts: - ​take over mind of parties when the contract was made and
figure out how they would of bargained for it and then enforce it
i) A perfect contract under this model would have the following properties
(1) Individual rationality: ​Economic agents have stable preferences and seek for themselves
the best feasible outcome
(2) Full information: ​Contract terms cover and assign responsibility for all contingencies.
All parties fully understand the terms and the assignments.
(3) No externalities: ​no on aside from the contracting parties is affected.
(4) Competitive markets: ​A monopoly or cartelized market could give one party disproportionate
bargaining power because the other party would have no choice with home to contract
(5) Strict enforcement: ​Even though a perfect contract is self-enforcing, it must exclude the
potential of a third party acting to help one side extract opportunistic gain.
(6) Zero transaction c​osts: This condition is necessary if the contract is to be written so that all
contingencies are covered.
ii) The perfect contract exists only in the mythical world of the Coase theorem.
b) Rexite Casting Co. v. Midwest Mower Corp
i) Plaintiff agreed to supply lawn mower castings to defendant for a certain price
ii) After signing, plaintiff demanded increase above the contract price due to increase in metal prices
that raised production costs
(1) It withheld promised shipments until the mower company would sign a new contract. It
signed and breached as soon as it could make alternative arrangements
iii) similiar to ​Nanakuli​ case - shell oil - price spike in hawaii during the 70’s
c) Wood v. Lucy, Lady Duff-Gordon
i) Plaintiff had exclusive contract to market Lady Duff-Gordon’s name for fashion products
ii) He did not fulfill his side of the bargain by making a sufficient effort to win business for her.
d) From the neoclassical perspective, the role of the court is fairly straightforward: Faced with
contract failure, the courts should endeavor to correct the imperfect and turn an imperfect contract
into a perfect contract
e) The model of the ideal contract should be used as the basis for revising imperfect contracts ​ex post.​ If a
contingency is not specified in the contract and consequently leads to contract failure, the court should
rewrite it to account for that contingency.
7) New Institutional Model of inevitably imperfect contracts
a) This model shows the gap between the neoclassical mode and real contracts is unbridgeable by the best
efforts of judges, so that the perfect contract cannot legitimately serve as a model for contract
interpretation and enforcement. Instead, this model approach focuses on the inherent limits of
contracting relations. - ​least cost avoider - assign loss to them
i) The elements of new institutional model include the following:
(1) (1) ​Bounded Rationality: ​People are, as neoclassical theory postulates, rational actors who seek
to do the best that they can for themselves; but their abilities to calculate the outcomes of any
given action is necessarily limited. They rely on mental models that leave may leave them less
well of then they might have been under a completely calculated decision
(2) (2) ​Incomplete and asymmetric information: ​No one has complete information, nor can they
acquire it at any finite cost. One party usually has better information than another. This
imbalance allows for strategic and/or opportunistic behavior.
(3) (3) ​Inevitable and ex ante uncertain external effects: ​contracts often have economic impacts that
extend beyond the contracting parties
(4) (4) ​Imperfect competition: ​No market is perfectly competitive and many markets and industries
are characterized by highly imperfect competition. Monopoly power can be exercised with
respect to many contracts simply because of limited availability of low-cost substitutes
(5) (5) ​Costly and potentially unreliable third-party enforcement: ​Even in the U.S., it can be costly
to initiate a claim for breach of contract and to carry the claim through the court system. Social
and political factors may work against enforcement.
(6) (6) ​Positive and sometimes high transaction costs: ​writing, performing, and enforcing
contracts is costly. Court cases add to social costs.
ii) These limitations apply to contracting parties, judges, and jurors (who are also boundedly rational).
(1) Judges often lack specialized knowledge that the contracting parties have about their own
interests. They cannot know the subjective valuations of contract performance versus
nonperformance.
b) Florida East Coast Railway Co. v. Beaver Street Fisheries, Inc.
i) Defendant was to provide food to a resort
ii) Plaintiff who was charged with delivery failed to ship food safely.
iii) Railroad (plaintiff) was liable for damage to cargo, but who was responsible for the costs of
emergency shipment of replacement.
iv) Who could insure food delivery at the lowest cost?
(1) Under the perfect contract model, a judge would assign a cost to the lowest cost avoider on the
grounds that had parties known in advance the contingency that disrupted the contract, they
would have assigned costs in exactly that fashion.
(2) Under neoclassical: making that assignment the court achieves the same goal ex post that
voluntary exchange would have accomplished ex ante, given more complete information
(3) Under the new institutional mode, the court can seek only to minimize social costs in order to
improve efficiency. The court cannot claim that its ruling is what the parties themselves
would have agreed to at contracting time.
(a) It would claim that its decision unambiguously improves social welfare.
c) Judicial decisions do not meet two o the strict conditions for Pareto efficiency: voluntary consent of
all affected parties and on party left worse off.
8) Reasons for contract breach
a) Reasons for contract failure can be grouped into two general categories:
i) 1) formation defenses
ii) 2) performance excuses
9) Formation defenses
a) (1) Duress:
i) A contract is not legally binding if one party signs it under duress.
ii) Post v. Jones (1856)
(1) whaling ship that was sinking full of whale oil
(2) rescuers were not going ot save the ship unless captain promised to sell oil at discounted price
(3) captain agreed, but revoked promise once on land - claimed duress defense
(4) defense allowed, but maybe not best outcome - person in duress has specific knowledge to the
circumstances and knows whats at stake
(5) reasonable payment to rescuers should be allowed
b) (2) Mistake:
i) The general rules is that if both parties to an agreement are mistaken as to the facts of the
exchange, then the mistake is mutual and the contract not be performed
(1) A contract is based on mutual expectations of economic benefits: if both parties were mistaken
about the substance of their agreement, they can hardly be said to have entered into a viable
exchange agreement.
ii) A unilateral mistake where one person has inside knowledge that the other cannot obtain,
which leads purely to a redistribution of wealth, is not enforceable.
iii) Sherwood v. Walker (1887)
(1) Contract for sale of cow
(2) Banker bought her at $80: She would have been worth at least $750 if she could breed. Turns
out she could breed. Court found that it was mutual mistake and voided the contract (probably
because the banker wouldn’t know anything about a cow).
iv) Harris v. Tyson (1855)
(1) Action to void contract because guy sold land right to dig for chrome without knowledge of
the land’s value due to chrome deposits
(2) Court says ignorance of vendor is not itself fraud on the part of the purchaser.
(3) Every man must bear the loss of a bad bargain legally and honestly made. If not, he could not
enjoy in safety the fruits of a good one.
c) (3) Incompetence/Incapacity
i) Someone who is incapable of understanding the terms of a bargain cannot be held legally responsible
for upholding it.
(1) Cidis v. White (1972)
(a) Contact lens case where girl voids contract because of infant status
d) (4) Fraud
i) Misrepresentation or fraud is grounds for breach of contract and liability (as a tort) for resulting
harm. It clearly defects any economic purpose when one person is deliberately missed into an
agreement that is not in his interest.
ii) If contracts to defraud were enforceable in court, it would create perverse incentives for
parties to enter into such contracts.
(1) Miltenberg & Samton Inc. v. Mallory
(a) mislabeled herring as California mackerel to sell to Egyptian buyer
e) (5) Unconscionablilty
i) A promisor is legally competent and the contract is not fraudulent, but het terms are difficult to
understand or written in such a way as to confuse the promisor about the nature and implications
of the promise.
ii) A contract is unconscionable, and therefore unenforceable, if its terms are determined by the court
to be too onerous or ambiguous
iii) Williams v. Walker-Thomas Furniture Company
(1) Add-on clause making it so you never pay off anything you buy as long as you keep buying
stuff; then the repo man busts down your door and takes everything.
(2) Unconscionablilty has been recognized to include an absence of meaningful choice on the part
of one of the parties together with contract terms which are unreasonably favorable to the other
party.
(3) When one party of little bargaining power/choice signs an unreasonable contract with little or
no knowledge of its terms, there is no meaningful consent and enforcement should be withheld.
(4) Court’s decision not to enforce the contract due to unconscionablilty:
(a) Confusion from fine print
(b) Inequality of bargaining power.
10) Performance excuses
a) 1) Impossibility: someone dies, place burns down, beer becomes illegal
i) *Economic impossibility is NOT an allowable defense.
ii) Opera Company of Boston v. Wolftrap
(1) Impossibility - occurrence of event , the non-occurrence of the basic assumption of the contract
(2) Occurrence = unexpected destruction or deterioration
(3) Frustration of performance must be substantial and made performance impractical
(4) Power outage caused show cancelation, issue was public safety,
(5) Reverse and Remand for further findings on foreseeability of lost power and not having adequate
back up
(6) Dissent-easy to add disclaimer for not being responsible for power outage
b) 2) Frustration of purpose
i) Was this decision efficient? Depends on whether the court actually imposed the burden on the least
cost avoider.
CHAPTER 9: CONTRACTS II REMEDIES
1) Two general types of remedies are available in case of contract breach
a) 1) specific performance
i) Court requires parties to perform the contract as written
b) 2) legal remedies
i) Money
2) Specific Performance
a) Argument in favor of specific performance being more efficient than money damages:
i) Parties know what the contract is worth to them; they will not sign if the valuations do not
match their goals or expectations
(1) Litigation may be reduced if parties know that in the absence of some formation problem or
accepted excuse that courts will order performance instead of altering the bargain
(2) Specific performance default rule reduces information costs for the court.
(3) Specific performance can save on insurance costs for the parties
(a) Too much uncertainty in possible settlement
(4) Specific performance also seems more fair
b) Oklahoma Natural Gas Corporation v. Municipal Gas Co. (1930)
i) Gas corporation brought suit against city for specific performance of a contract
(1) Nothing was improper about the contracts terms or formation.
(2) City breached by disconnecting gas line in violation of contract
(a) Didn’t give sufficient notice.
(3) The court awarded specific performance! (but did not prevent the parties from bargaining
around its remedy to a more efficient outcome)
c) Specific performance is not always the least costly remedy
i) It can also lead to inefficient overreliance on contracts by promises
3) Money damages
a) Specific performance is considered an extraordinary remedy to be applied only when the
plaintiff cannot be fully compensated through the legal remedy of damages
b) Money damages are the default remedy.
4) Efficient breach
a) Social welfare is unambiguously improved where A is better off not performing and B is fully
compensated because the total cost is lower with the breach that with performance (given the
assumption of no externalities).
b) 2 flaws of efficient breach
i) 1) breaching party may be prevented from knowing whether breach would be efficient and
reviewing court might have the same uncertainty
ii) 2) argument in favor of efficient breach presumes that the contract prices accurately reflect
the buyers’ respective valuations
c) Also, transaction costs might not be lower!
d) The risk of litigation following a contract breach is substantial and provides reason to question whether
the gains from breach exceed the cost.
e) Neri v. Retail Marine Corporation (1972)
i) Boat contract with deposit of $4,250
ii) Boat was delivered prior to cancellation of contract.
iii) Defendant declined to refund down payment
iv) Boat was later sold for same price plaintiffs had contracted to pay
v) Court found that seller is entitled to its lost profit + expenses
f) Peevyhouse v. Garland Coal & Mining Company (1962)
i) Plaintiffs own farm with coal deposits and lease it for 5 years to strip mining operation
ii) Defendant agreed to perform certain restorative and remedial work at the end of the lease period
(1) $29,000 to move all dirt back
(2) Plaintiffs sue for $25,000
(3) Jury awarded plaintiffs $5,000
iii) Plaintiffs contend on appeal that true cost of performance 29k should be paid
iv) Defendants argue that measures of damage should be limited to total difference in market value of
property before and after work
v) Diminution of value was $300.
vi) Court threw out $5,000 verdict and awarded $300.
(1) Judges probably thought they were making an economic improvement
(2) Although this judgment may seem reasonable, it shows poor understanding of basic economic
principles
(a) There is no such thing as objective value in economics (even market valuations are subject
to change according to who is buying what when.
(b) The larger more important point is that economic value is inevitably subjective (it is what
purchaser is willing to pay and seller is willing to except.
(c) Peevyhouses valued land at 29k, the coal company valued minerals at at least 29k. Both
signed the contract.
(d) From an economic standpoint, specific performance or damages equal to the value of
performance would have been the only efficient remedies.
(e) If contracting parties expect the courts to substitute their own valuations for those of the
parties, no none will agree to a contract unless that person’s valuation is strictly at market
price and the market is fully defined
vii) Groves v. John Wunder Co. (1939)
(1) Damages for willful breach of a construction contract, even where there has been substantial
performance are awarded as the cost of completing the failed performance.
(2) D remove sand and gravel, promised to grade when done
(3) D deliberately breached - 60k specific performance v. 12k Diminution in Value
(4) breach was in willful, in bad faith, and deliberate
(5) law aims to give promisee what was promised - awarded the 60k
(6) they took the money and never fixed the land
(7) courts differ on whether breach vs. willful breach can impact recovery when SP and
DIV are disportionate - some will give SP even if disportionate, some will still only give
DIV
5) Efficient reliance
a) Efficiency in reliance would be achieved when the marginal cost of reliance equals the expected marginal
benefit.
6) Efficient Precaution
a) D - only spend money on precaution if reduces expectation of liability in event of a breach
b) marginal benefit - slope down because at some point, money spent on precaution will not reduce liability
in event of breach
c) marginal cost - each increment of precaution will cost more
d) Q* is the “right” amount to spend on precaution, where you are maximizing precaution per dollar spent
limiting liability in the event of a breach
e) Formula - see attack sheet
7) Alternative approaches to calculating damages
a) Contract law provides various types of legal remedies in addition to equitable remedy of specific
performance
i) 1) expectation damages
ii) 2) reliance damages
iii) 3) restitution
iv) 4) liquidated damages
8) Expectation damages
a) These are likely to be the most efficient remedy for a given breach
b) Court awards what the promise would have expected to receive if the contract had been carried out
c) A promisor will insure against breach precisely up to that point where the last dollar spent on
precaution will exactly equal a dollar’s reduction in expected liability from breach
d) Expectation damages may lead to inefficient overreliance on the part of the promise who knows
that the court will order compensation that meets the promisee’s expectations, even if those
expectations are unwarranted.
i) Thus, the remedy that is most clearly designed to induce efficient precaution on the part of one
party can lead the other to act inefficiently (moral hazard).
e) The remedy of expectation damages also entails information costs that could prevent an efficient
outcome.
f) Redgrave v Boston Symphony Orchestra
i) BSO breached becuaes Vaness Redgrave sympothetic to PLO
ii) not allowed to perform
iii) court awarded her the fee as if she would have performed
g) Hadley v. Baxendale (1854​)
i) Mill was stopped by breakage of crank shaft
ii) Due to neglect on part of shipping company, the shaft’s delivery was delayed
iii) Court found that loss of profits cannot reasonably be considered such a consequence of breach of
contract as could have been fairly and reasonably contemplated by both the parties when they made
the contract.
(1) (they were never communicated)
iv) Rule: Expectations must be reasonably in the contemplation of both parties; otherwise, they cannot
serve as the basis for recovery. The basis for the remedy of expectation damages becomes
reasonably foreseeable expectations damages
9) Reliance damages
a) Reliance damages compensate promisees fro how much they actually spent in relying on the promise of
performance.
b) The purpose of reliance damages is essentially to compensate promises and put them in the same
position as if the contract had never been written.
c) Security Stove & Mfg. Co. v. American Railway Express Co. (1932)
i) Plaintiff mad furnace gas burner, wanted to ship it to expo
ii) Shipping company misplaced important component.
iii) Plaintiff wanted all money spent on trip plus
iv) Court found damages or loss suffered by plaintiff grew out of breach of contract for benefit of the
contract
v) Expectation damages were not sought because they would have been speculative (thus not
foreseeable by the defendant)
10) Restitution
a) Where neither expectation nor reliance damages seem appropriate and specific performance is not
possible, there is always restitution
b) Deitsch v. Music Company (1983)
i) Music group fails to appear at wedding after receiving 65 dollar deposit
ii) $65 dollars returned would be restitution
iii) Band was to be paid $295
iv) Plaintiff asks for the entire amount of the wedding reception, $2, 643.59
v) Court says the damages award must be the natural and probable consequence of the breach of
contract or those damages which were within the contemplation of the parties at the time of making
the contract.
vi) “Plaintiffs are entitled to compensation for their distress, inconvenience, and diminution in value of
the reception” at
$750 + security deposit.
11) Liquidated damages/penalty clauses
a) With liquidated damages, contracting parties write into their contract the nature and extent of damages in
the event of breach.
b) Both parties voluntarily agree assess damages in the event of breach
c) These provisions do not avoid litigation
i) (1) they are generally disallowed if they are deemed punitive
ii) (2) they must be a reasonable estimate at the time of contracting
iii) (3) they should approximate expectation damages
d) If the stipulated damages are punitive they will be likely to exceed the benefits a promisee would get
from performance of the contract by the promisor (creating perverse incentives for the promisee to
induce breach by the promisor leading to reduced economic activity).
e) Penalty for non-performance might also lead the promisor to undertake wasteful performance because
it would be less costly than to breach under the penalty clause.
f) Also, if used as a penalty clause, it might be unconscionable if there are great inequalities in bargaining
strength.
TORTS
CHAPTER 10: TORTS I NEGLIGENCE
1) Civil wrongs
a) Torts are wrongs committed against individuals or groups
b) They are addressed in the civil justice system through private litigation
c) They are distinguished form crimes, which are wrongs committed against society, and prosecuted by
the state in a distinct criminal court system.
2) The common law of torts
a) Tort doctrine evolved over the centuries within the common law. (It is judge-made)
b) The common law elements of a tort included
i) (1) Breach of a
ii) (2) Noncontractual duty owed to the plaintiff
iii) (3) Which causes, both legally and in fact
iv) (4) Harm to the plaintiff
3) Breach of duty
a) Not all duties arise through voluntary contracting
b) Some duties exist simply by virtue of coexisting with others in a community.
c) Who decides what duties are owed?
i) Courts decide what extra contractual duties are owed to others in society
ii) Legislatures are increasingly doing so through statutory impositions of duties
d) The chief duty, the one upon which all specific, noncontractual legal obligations are based, is the ​duty
to act reasonably under​ ​the circumstances
i) Courts act whether the defendant acted as a reasonable person would have acted.
ii) The existence of a duty depends on the court’s finding that reasonable people, or the
community as a whole, would legitimately expect an individual to behave in a certain way by
doing x or not x in a given set of circumstances.
iii) Violation of the reasonable person standard constitutes a breach of the duty, potentially exposing
the violator to liability for resulting harm
4) Causation
a) In tort law, plaintiffs must establish that the defendant’s breach ​caused ​harm.
b) Causation is rarely as straightforward and simple a matter as we might suppose: it requires proof of:
i) 1) causation in fact
(1) But-for cause: harm to the plaintiff would not have occurred but for the defendant’s conduct
ii) 2) proximate cause
(1) Legal cause (the cause recognized by law) of the harm
(a) Was the action so remote in time or space that it would be unfair and possibly inefficient to
hold that defendant responsible to the plaintiff.
c) Palsgraf v. Long Island Railway Co.
i) Court ruled that railroad was not liable when Mrs. Palsgraf was struck and injured by heavy weight
scales that fell on the railway platform.
5)
6)
7)
8)
9)
ii) The scales fell because of shock from an explosion that occurred at the end of the platform where
railroad employees accidently dislodged a box of fireworks from a man’s hands.
iii) Court concluded that the railway employee’s actions were too remote to constitute legal cause of the
plaintiff’s injuries.
(1) But for the employees actions, the explosion would not have occurred
(2) Their actions, however, were not the proximate cause of her injuries.
Harm
a) No tort liability occurs in the absence of harm
b) Financial losses, personal injuries, and harm to property always count
c) Harm to the psyche, increased risk of disease, and fear also count
Types of torts
a) Fault based
i) Defendant’s liability turns on whether the court finds that eth defendant is at fault
(1) These include intentional torts and negligence law.
b) Non-Fault based
i) Torts for which the defendants are liable regardless of their level of fault or blameworthiness
(1) These include strict liability offenses
Intentional torts
a) A tort where the defendant intends to act in such a way as to interfere with the rights belonging to the
plaintiff
i) No real harm must be intended—practical jokes would count
b) If found guilty of committing an intentional tort, the tortfeasor is liable for any and all resulting harm
c) From an economic view, strict liability for intentional torts is generally efficient
i) When one person does something intentionally that causes harm to another, the tortfeasor is
overwhelmingly likely to be the least cost avoider.
Unintentional torts: Negligence nad Strict Liability
a) Negligence
i) The predominant legal doctrine governing liability for accidents is the law of negligence.
ii) Under negligence, the defendant is legally liable for the plaintiff’s harm only if the plaintiff
establishes that the defendant, who allegedly caused the accident, failed to act reasonably, or failed to
take reasonable precautions to prevent the accident
(1) Society’s courts do not expect individuals to avoid accidents at all costs; we are only expected to
act reasonably under the circumstances.
(2) If we act reasonably, we will not be at fault for the accident and therefore not liable for negligence
b) Strict Liability
i) liable even without fault-governs allocation of resources in specific kinds of cases
ii) Products liability
iii) Statutes
An economic approach to torts: why accidents happen
a) From a Coasean economic view, torts represent an inability or failure to contract.
b) torts can efficient and inefficient - kratske - “no such thing as an efficient tort”
c) Injury, Injured, Injurer​ - more nuetral
d) Torts would not occur in the world of the Coase theorem because complete information would lead all
would-be tortfeasors and victims to contract costlessly over the risks—defined as the expected harm
multiplied by the probability of that harm occurring—associated with the world-be tortfeasor’s
conduct
e) Even if tort disputes could arise, they would by definition be immediately and costlessly resolved
without the need for any third party involvement
f) Vincent v. Lake Erie Transportation Co.
i) A party who damages the property of another while acting out of private necessity must compensate
the property owner for the resulting damage.
ii) boat was moored during stor​m and damaged dock for $500
iii) even though mooring was prudent, still liable for damages
iv) this is failed contract under necessity doctrine
g) In the real world of positive transaction costs, torts occur for various reasons:
i) 1) People do not have complete information about the risks created by their conduct
ii) 2) Even when the risks are known, people sometimes do not calculate them correctly because of
bounded rationality
iii) 3) They fail to act on the basis of accurate risk calculations because the risks created by their
conduct are externalized to some third party.
h) Tort law does not seek to eliminate risk
i) Any effort to eliminate all risks from the world would be both inefficient and futile; it could not be
achieved at any finite cost.
j) The proper goal of tort law, from an economic point of view, is to create incentives for individuals to
keep risks to reasonable or efficient levels.
10) Why society compensates accident victims
a) Law - make a person whole
b) Econ- indifference curves
c) An injury caused by an accident results in a loss of utility, but the injured party can gain a higher
level of utility through compensation
Legal and Economic Functions of Tort Law
1) Corrective Justice
a) Most legal scholars view the purpose of tort recovery to be corrective justice
b) If the defendant acted unreasonably and consequently harmed the plaintiff, justice dictates that the
defendant should make the plaintiff whole
c) The defendant should bear all the costs associated with unreasonable behavior.
d) Corrective justice is attained by internalizing externalities
2) Deterrence through internalization of externalities
a) Cost internalization corrects the injustice of torts, sends price signals to tortfeasors and creates
incentive effects that should minimize the occurrence of inefficient torts
b) By forcing tortfeasors to bear the costs associated with their torts, they will, if they are rational,
continue to commit torts only when the benefit to them of engaging in the conduct outweighs the cots,
including compensating victims.
c) Coase: legal disputes constitute joint cost problems
d) The problems arise not from the action of one party, but from the combined and conflicting actions of
both parties.
e) To maximize efficiency the law must create appropriate incentives for both the tortfeasors and tort
victims to take effective precautions to avoid harm
3) Punishment
a) Criminal law punishes, tort law compensates
b) In most tort cases, courts seek to remedy plaintiffs’ injuries and to deter defendants from creating
additional harm through unreasonable conduct
i) Actual damage awards serve both of these, but are not punitive
c) Additional punitive damages are designed to punish the tortfeasor.
d) The word punitive implies punishment.
i) But its primary purpose is to create additional deterrent effects where an actual damages remedy is
insufficient to induce efficient level of deterrence.
e) Sometimes juries award punitive damages not simply to deter, but to punish.
i) Usually excessive punitive damage awards are thrown out by higher courts because they violate the
due process clause of the Constitution of the United States of America.
4) Maximizing Social Welfare by Minimizing the Total Costs of Torts
a) Three sets of costs involved in any tort or potential tort situation are
i) 1) costs of taking precautions to avoid the tort;
ii) 2) the costs associated with the tort, if it occurs; and
iii) 3) the administrative costs associated with resolving tort disputes.
b) The chief goal of tort law is to minimize the sum of these three sets of costs.
c) Lawyers and the court system are both parts of the transaction costs economy.
5) Kratzki views
a) take any 2 or more of the rationals to their extreme and eventually they will collide - when they do,
one prevails over the other and that becomes the purpose of tort law
b) no such thing as efficent tort
c) torts economic view - single analysis - purpose is to maximize value and minimize costs of accidents
LAW AND ECONOMICS OF NEGLIGENCE
1) Simple Negligence: creating incentives for reasonable behavior
a) A defendant is liable for negligence, an unintentional tort, if that person acted unreasonably in causing
harm by breaching some noncontractual duty owed to the plaintiff. By holding defendants liable when
their unreasonable conduct causes harm, the courts create incentives for defendants to take precautions
against futures accidents
2) Defining what is reasonable: learned hand style
a) An owner’s duty to provide against resulting injuries is a function of 3 variables:
i) 1) The probability that she will break away
ii) 2) the gravity of the resulting injury, if she does;
iii) 3) the burden of adequate precautions
b) Formula:
i) Probability = P
ii) Gravity of Injury = L
iii) Burden =B
iv) Formula: Liability depends on whether B is less than L multiplied by P
(1) B < (P x L)
c) It is not easy to apply this formula because of transaction costs
i) Information about accident and accident-avoidance costs is itself costly and often lacking in court
d) It is simply not possible for the trier of fact accurately to determine the burden of precaution, if both
the probability and the magnitude of harm are significantly uncertain.
e) Winn Dixie Stores, Inc. v. Benton (1991)
i) Appellees was injured in a slip and fall in appellant’s market (court held for plaintiff)
ii) Milk puddle, plaintiff had burden to prove that milk was on floor long enough to provide notice to
store
iii) Court found that the issue was for the jury to resolve even where the evidence may be
susceptible of more than one reasonable inference.
iv) Defendant was liable because the jury found it to be at fault for the injuries plaintiff sustained
because it had not mopped up the milk quickly enough.
3) Incentive effects of negligence liability for tort defendants
a) Economic incentives now exist for grocery stores to be more careful in the future
b) We would expect that Winn Dixie would take precautions up to that point where the costs of any
further precaution would exceed the expected benefits.
i) Those expected benefits would equal reductions in the expected liability stemming from a future
accident
c) It will act in such a way as to minimize the sum of its own accident and accident avoidance costs
d) However, a simple negligence rule does not necessarily ensure an efficient outcome
i) We must consider the plaintiff’s conduct
ii) And the administrative costs of implementing and enforcing the legal rule in the court system.
4) Influencing Plaintiffs’ incentives: Defenses to negligence
a) Negligence law accounts for the costs generated by the conduct of plaintiffs
5) Contributory negligence
a) Reasonable people should realize that there will be a certain amount of negligence in the world. As a
consequence, they have a duty to take precautions against the negligence of others. (This duty is the
basis for the contributory negligence defense which focuses on the reasonableness of the plaintiff’s
own conduct).
i) In states that recognize this defense, the defendant can avoid liability entirely by showing that the
plaintiff did not act reasonably under the circumstances.
b) Butterfield v. Forrester
i) Plaintiff was injured when he rode a horse into an obstruction in the road at twilight
ii) Had he been riding slowly and with care (in daylight) he would have seen the obstruction prior to
collision.
c)
d)
e)
f)
g)
iii) Court found that because he was negligent in riding without reasonably and ordinary care,
the defendant (and his negligence in leaving the obstruction) was absolved under
contributory negligence).
If plaintiffs know that they cannot recover for injuries they suffer as a result of defendants’ negligent
conduct, unless they act reasonably themselves, they will take reasonable precautions.
Contributory negligence rule reduces the incentives of defendant to take reasonable precautions,
at least in cases where plaintiffs are likely to be at least slightly negligent.
i) When defendants who are least cost avoiders are insulated from liability by the rule of contributory
negligence, the likely result is inefficient underprecaution by potential defendants and inefficient
overprecaution by potential plaintiffs.
ii) The contributory negligence defense is widely perceived to be unfair to worthy/slightly negligent
plaintiffs.
To ameliorate the perceived unfairness to plaintiffs, courts experimented with various legal devices for
avoiding contributory negligence defense
Levi v. Southwest Louisiana Electric Membership Cooperative
i) Plaintiff, oil field worker was electrocuted on mast of truck that touched power lines
ii) Court held ordinary reasonably person is required to realize certain amount of negligence in the
world.
Other courts adopted a rule known as Last Clear Chance
i) Under this rule, defendant remains liable despite the plaintiff’s contributory negligence, if the
defendant had the last clear chance to avoid the accident by the exercise of ordinary care.
(1) The burden is shifted back and forth between the defendant and the plaintiff in serial fashion:
if the defendant was negligent, he bears all the costs, unless plaintiff was at all contributorily
negligent, in which case, he bears al the cost, unless the defendant had the last clear chance to
avoid the accident through the exercise of reasonable care
(2) QB - The contributory negligence of a plaintiff will not defeat his negligence claim if
the defendant had the last opportunity to avoid the consequence of the plaintiff’s
negligence.
h) The defense of contributory negligence sanctions the least economically efficient solution because it
provides no incentive for the defendant to spend the lesser avoidance cost cognizant that, if the
plaintiff contributed even a little bit, the defendant will incur no liability at all.
i) Leroy Fibre Co. v. Chicago, Milwaukee & St. Paul Railway Co.​
i) A property owner is not liable for contributory negligence when he properly uses his property but
nevertheless suffers damage from the negligence of another party authorized to use the land.
ii) A property owner has no duty to use his or her property to avoid harm caused by another’s
wrongdoing.
iii) Flax stacks near the train tracks - spark hits the mark and burned like the Bismark - the court
commands that you cant demand how I use my land as long as it ain't banned
6) Comparative negligence
a) The rule of comparative negligence examines the reasonableness of the plaintiff’s conduct, but
not in isolation from the defendant’s conduct.
i) Rather, it compares the parties’ respective reasonableness or negligence
ii) Most importantly, ht outcome under comparative negligence is not necessarily a winner take all game
(1) Legal responsibility and economic costs can be shared
b) Scott v. Alpha Beta Company (1980)
i) Plaintiff slipped in grocery store again; jury found defendant 60% plaintiff 40%
ii) $200,000 total verdict; $120,000 recovery baed on percent liability
iii) Plaintiff wearing slippers walked in rain, stepped off rubber mat, injured knee (already had knee
injury)
iv) Court found that jury might reasonably conclude that plaintiff failed to exercise due care for her own
safety
v) Outcome is different than Winn Dixie case because court applied comparative negligence
c) Under the assumption of rational behavior, the defendant can be expected to invest in precaution up
to that point where the cost of the next unit of precaution (marginal cost) exceeds the consequent
reduction in expected liability (marginal benefit).
d) Expected liability in this case would be equal to the discounted value of future harm multiplied by
the probability that the store would be held liable the next time a customer slips on the floor.
e) Thus, the rule of comparative negligence creates incentives for both parties to take precautions.
f) Information asymmetries;
i) Plaintiffs will not be in a position to know
(1) 1) how much precaution the defendant has taken
(2) 2) the expected value of the defendant’s precautions in terms of reducing the
probability/magnitude of harm
(3) 3) whether a court, in litigation, would consider defendant’s precautions reasonable under the
circumstances
7) The role of insurance in negligence law
a) Insurance can lead to an increase in accidents because of 2 problems:
i) Moral Hazard
(1) Auto insurance leads drivers to be less careful than they otherwise would be
ii) Adverse selection
(1) Who is risky? Who isn’t? Risk takers drive up the costs for everyone
b) Mechanisms for dealing with moral hazard and adverse selection
i) Risk profiles: e.g. Young drivers have less experience/sports car guys are bad news
ii) Tailor premiums based on past experiences
iii) Deductible: e.g. driver must pay towards repair
c) Insurance has replaced the tort system as the primary mechanism of compensation for automobile
accidents in states that adopted a no-fault system
CHAPTER 11: TORTS II STRICT LIABILITY
1) An alternative to negligence
a) For certain kinds of torts, courts reject the fault-based analysis of negligence law in favor of the rule
of strict liability, which holds defendants liable for the harm their actions cause plaintiffs no matter
how many precautions the defendants took
b) Most common types of strict liability torts:
i) Trespass
ii) Abnormally dangerous or ultra hazardous activities
iii) Public nuisances
iv) Products liability (harm resulting from defectively designed manufactured goods
th ​
c) Strict liability dates back to the 14​ century
d) Rylands v. Fletcher
i) Plaintiff sought to recover damages for harm to his mining operations when a reservoir defendants
were constructing on their land flooded the plaintiff’s mine shafts
ii) Court ruled in plaintiff’s favor (not due to negligence)
iii) The true rule of law is that the person who, for his own purposes, b​rings on his land and collects
and keeps there anything likely to do mischief if it escapes must keep it at his peril; and if he does
not do so, is prima facie answerable for all the damage which is the natural consequence of its
escape.
iv) natural accumulates on land - not liable for its escape
(1) Concurrence:​ if a person brings, or accumulates, on his land anything which, if it should escape,
may cause damage to his neighbor, he does so at his own peril. If it does escape, and cause
damage, he is responsible, however careful he may have been.
e) Guille v. Swan (1822)
i) Defendant landed a hot air balloon in the plaintiff’s vegetable garden
ii) Plaintiff sued defendant for the harm to the vegetable garden caused by his balloon and crowd that
assembled to see him land it.
iii) Court found:
(1) Intent with which an act is done, is by no means the test of the liability of a party to an action of
trespass
(2) The ballooner should have foreseen the circumstances that would draw a crowd
(3) He put himself in a situation to invite help and called for help, and so he is liable for all injury
sustained.
(4) Posner:
(a) The risk (probability) of harm was great;
(b) the harm that would ensue if the risk materialized could be great
(c) such accidents could not prevented by the exercise of due care (technology in ballooning
was insufficiently developed)
(d) The activity was not a matter of common usage and was not presumed highly valuable
(e) activity was inappropriate in the place it took place
(f) value does not offset unavoidable risk (converse of (d) - recreational ballooning does add
value to the community)
2) Why Strict liability?
a) The existence of strict liability reflects a judicial perception that in some circumstances—involving
extraordinary risk whose existence calls for such special responsibility—torts defendants should be
held liable even though they are not negligent or otherwise at fault for the plaintiff’s harm.
i) Liability is based simply on the fact that defendants engaged in conduct that cause harm to plaintiff
ii) Plaintiff still must prove that defendant acted in such a way as to cause—both in fact and
approximately—their harm. (Once these are proven, liability is assured regardless of efforts to
avoid harm).
b) Positive reasons for preferring strict liability in some cases:
i) defendants are, in most cases involving ‘extraordinary risk’ the least cost avoiders or insurers of the
plaintiffs’ harm;
ii) defendants are better able to spread the costs associated with the risks created by their conduct.; and
iii) defendants are better able than plaintiffs to afford the losses
c) Normative argument for strict liability
i) Defendants should internalize the costs associated with their conduct
d) Defednants as least-cost avoiders - ​Ogle v. Caterpiller Tractor, Co. (1986)
i) Supreme Court of Wyoming adopts strict liability for defective products
(1) When defective article enters stream of commerce and an innocent person is hurt, it is better that
the loss fall on the manufacturer, distributor, or seller than the victim. (They are in best position
to insure against the loss or spread the loss among all the consumers of the product).
(a) Cheapest cost avoider criterion for strict liability:
(i) The cheapest cost avoider is the person who could avoid the accident at the lowest cost.
(ii) Manufacturer is best situated to afford such protection
(2) In strict liability cases where the plaintiff is the least cost avoider, it is inefficient to impose
strict liability on the defendant—but defendants may be best cost avoiders often enough that
imposing liability on defendants as a matter of course is efficient across the run of cases.
3) Cost-Spreading effects of strict liability
a) Cost spreading is among the fundamental reasons underlying the imposition of strict liability
b) By imposing strict liability on the defendant, the court spreads the cost of injury from the plaintiff to
the consuming public, which will pay a higher price for the product to reflect the increased expense of
insurance to the manufacturer resulting from its greater exposure to strict liability.
c) Shepard v. Superior Court of Alameda County (1977)
i) defective lock
ii) Purpose of strict liability upon the manufacturer is twofold:
(1) (1) loss-distribution or risk-spreading
(a) (Holds manufacturer liable because he is in the best position to distribute loss by insurance
or increased product price)
(2) (2) injury reduction by enhanced safety
(a) (Holds the manufacturer liable because he is in the best position to discover and correct
the dangerous aspects of his products before any injury occurs).
iii) Downside of cost spreading: Economic realities—lost profits to all
(1) Losses: Decreased activity results in losses to several categories
(a) consumer will feel the loss because the manufacturer’s ability to produce a better safer
product will diminish
(b) reduced industrial activity will affect labor
(c) Reduced economic activity will affect the entire society through lower tax revenues, lower
wages and lower profits
d) Deep Pockets -Some courts hold defendants strict liability because defendants, as a class have are
better able to handle the costs than a plaintiff. Marginal Utility of Money - value of a dollar between
people who have a lot or a little money - transferring deep pockets to non-deep pockets increases
utility
e) Internalization of Externalities - Strict liability is also supported by theories of welfare economics,
according to which costs must be internalized to producers in order to insure allocative efficiency.
f) Doe v. Miles Laboratories (1987)
i) Jane Doe sought emergency treatment for vaginal bleeding 1 week after giving birth
ii) During treatment 500 units of coagulation blood factor concentrate
(1) Plaintiff was infected with AIDS
iii) Court held that strict products liability applies to blood and blood products
(1) there is no reason why victims of defective blood should bear the costs where victims of other
defective products do not
(2) strict liability would provide the incentive to promote all possible accident prevention (it is
rational business decision to keep costs down)
(3) producers are in a better position to spread the costs than are individual consumers
(4) it makes for more efficient allocation of social resources when the price of transfusion reflects its
true costs.
iv) Strict liability promotes a rational marketplace. Society cannot make rational decisions
concerning the allocation of resources unless the price reflects the true costs
v) Judge is Peguvian because allocative efficiency in holding the manufacturer liable
(1) Coase would agree if manufacturers usually liable - lower transaction costs
4) Defenses to Strict Liability
a) Pigou and other welfare economists were wrong to think that allocative efficiency is always
maximized by internalizing externalities to the producer
i) In cases where the victim is the least cost avoider, imposing liability on the defendant would not
maximize allocative efficiency
ii) Coase would probably recognize that if tort defendants were overwhelmingly likely to be least cost
avoiders, then a rule of strict liability might make sense as a mechanism for minimizing transaction
costs.
b) The law of strict liability provides defendants with several affirmative defenses to excuse or reduce their
liability
i) These defenses create incentives for plaintiffs to be careful
5) Comparative Negligence
a) Most states allow manufacturers to avoid strict liability for defective products, if they can prove
that the plaintiff was comparatively negligent in using the product
b) Daly v. General Motors
i) Auto maker was not strictly liable for a design defect that cause front door to open during an
accident despite fact that plaintiff’s husband died when thrown vehicle
(1) California Supreme Court found that decedent was comparatively negligent because he failed
to lock the door and wear a seat belt (either of which would have prevented him from being
thrown from the car).
(2) California uses pure strict liability (vs. comparative)
ii) Court: We impose strict liability against manufacturer to relieve the consumer form problems
of proof inherent in pursuing negligence remedies (consumers are powerless to protect
themselves).
(1) With comparative negligence consumers will still be relieved of this burden.
(2) Plaintiff’s recovery will be reduced only to the extent that his own lack of reasonable care
contributed to the injury.
(3) Plaintiffs still benefit from the 2 chief virtues of strict liability:
(a) (1) a reduction in their burden of proof and relief from costs that they are powerless to prevent
c) Difference between strict liability and comparative negligence
i) Under strict liability, reasonableness of defendant’s conduct does not absolve him of liability for
the plaintiff’s harm. Under comparative negligence, the defendant’s reasonableness relieves him
of all liability, so that in cases where both parties act reasonably, the plaintiff is left to bear the
harm.
6) Assumption of Risk and misuse
a) It is a general rule in products liability cases that plaintiffs cannot recover damages when they have:
i) Used a product that was patently defective, so that they had notice of the danger
ii) Unreasonably misused a product in a way that was unintended and unforeseeable by the
manufacturer.
(1) (Consumer assumes the risks inherent in his improper utilization and should not be heard to
complain about the condition of the object.)
b) Assumption of risk is a total defense to strict liability
i) Whereas, comparative negligence merely offsets the plaintiff’s recovery in proportion to the
plaintiff’s fault.
7) The historical context of the debate between strict liability and negligence
a) In the 14th century, liability for all torts was strict (with defenses of force majeure and
contributory negligence of the plaintiff).
i) Fault was not the crux.
b) The 19th century saw a shift towards fault based instead of strict liability.
i) Public choice theory might explain why:
(1) Industrialists were likely to be defendants, so they could use political connections to
influence legislation/judges. (They were more likely to be defendants and would prefer
negligence).
ii) Shift from strict liability to negligence favors tort defendants
(1) Instead of being liable for harm regardless of fault, tort defendants were held liable only for
harm deemed by the courts to be unreasonable.
c) Enterprise liability/absolute liability: this is strict liability without the traditional defenses, including
consumer misuse and contributory negligence
d) It is liability regardless of both defendant’s fault and plaintiff’s fault.
i) If the defendant engages in some activity that causes harm to the plaintiff the defendant is liable
period.
8) The comparative ethics of negligence and strict liability
a) If torts are wrongs committed by a wrongdoer against an innocent victim, a strong intuitive sense of
justice demands that defendant bear the cost
b) If torts are joint-cost Coasean conflicts over entitlements, then the ethical argument favoring strict
liability is weak and negligence seems more ethical because it holds tort defendants liable only in
those cases where they are blameworthy.
9) Comparative institutional analysis
a) Negligence rules tend to affect how much precaution parties take, but not how much they undertake the
activity that causes the harm. The potential for negligence liability leads automobile drivers to drive
more carefully, but does not lead them to drive less frequently.
b) Strict liability affects both precautions and activity levels.
i) Defendants subject to a rule of strict liability can be expected to undertake an efficient level of
precaution
(1) Up to that point where the cost of the next unit of precaution would exceed the expected
savings from reduced​ ​liability.
(2) And, they will automatically adjust their activity level in all cases where the extent of activity
affects the probability of harm to some potential plaintiff.
10) Costs of administering the torts system
a) Tort system is costly to administer
b) Administrative costs include the costs of physical plant construction and court maintenance as well
as costs of attorneys, judges, clerks, stenographers, and other court personnel.
11) Choosing the legal rule
a) Empirical evidence supports the claim that strict liability leads to a greater number of legal claims:
products liability suits exploded in the 2nd half of the 20th century after the switch from negligence to
strict liability for accidents involving defective products.
b) Because more legal claims are made under strict liability, then increase in litigation might lead to higher
costs.
c) However, the relative certainty of defendants’ liability under strict liability might actually reduce
the rate of litigation by encouraging prelitigation settlements.
d) As a general rule, disputes involving fewer legal issues require less litigation .
i) Strict liability admits fewer issues for litigation than negligence.
(1) Strict liability raises just 3 questions:
(a) Did the defendant cause the plaintiff’s harm
(b) Did the plaintiff act reasonably?
(c) What is the extent of the harm?
(2) Negligence requires these three and:
(a) (4) Was the defendant at fault?
ii) Defendants subject to strict liability should be more likely to settle out of court (significantly
reducing administrative costs)(less evidence to produce in order to determine fault).
iii) So, even if the number of legal claims is higher under strict liability, the average
administrative costs of resolving negligence claims may well be higher.
12) The costs of estimating damages:
a) The court must also accurately assess the damages to plaintiff
b) Over and under estimation is endemic - more important is by how much
13) The Costs of Evaluating Ex Ante Precautions and Pot
a) Must accurately assess the respective costs and benefits of feasible precautions (B) that plaintiff and
defendant ​might​ have taken to minimize PL
b) This estimation will substantially determine the incentive effects created for the parties by the court’s
ruling.
c) Whichever rule the court chooses for allocating liability, the decision is virtually certain to give the
parties inappropriate incentives to attain the efficient level of precaution
d) Even Learned Hand said applying HIS formula is a bitch. As a result economists remain skeptical
of courts ability to determine first-best, least-cost solutions to accident and other trot disputes.
CHAPTER 13: CRIME AND PUNISHMENT
1) Crime and criminal law
a) A crime is simply a tort (a wrong) committed against both the individual victim (if there is one) ​and the
larger society.
b) Why do we have a separate body of law in addition to tort law?
i) Some acts are considered so wrongful or socially inefficient that the law prohibits tem with few or
no exceptions. Such acts should not be committed, even if the perpetrator is willing to pay
compensation.
(1) Example: if murder were simply a tort, society would be willing to tolerate murders as long
as perpetrators were willing to compensate victims’ families.
(a) Murder is not allowed regardless of compensation.
ii) One purpose of the criminal law is to generate additional deterrent effects ​(through threat of
imprisonment/capital punishment) where tort damages are likely to be insufficient.
(1) Also, the perpetrator of the crime is likely to be judgment proof anyway.
(a) Those who cannot pay will not be deterred.
iii) Another purpose of criminal law is to punish.
(1) Rapists are imprisoned, not because their acts are economically inefficient
(2) Punishments for rape are not designed with the purpose of setting a price on rape
2) Criminal Procedure
a) Difference between torts and criminal law concerns remedies
b) Convicted criminals are subject to more serious penalties
i) They may be liable for monetary payments in the form of judgments and fines.
ii) They may also forfeit their liberty/lives
c) U.S. constitution imposes special requirements due to the higher stakes of crim defendants.
i) (1) No one can be criminally convicted for an act that was not legally designated a crime before they
committed the act.
ii) (2) Criminal prosecutions are initiated not by those who may have been harmed but by government
prosecutors on behalf of the public
iii) (3) Alleged perpetrators are tried in specialized criminal courts in accordance with constitutional
protections (designed to prevent abuses of state power and minimize the prospects for mistakes that
would result in the wrongful conviction of innocent people including:
(1) (1) Criminal defendants are entitled to legal representation, if necessary at state expense
(2) (2)They have right to trial by jury and their guilt must be proven beyond a reasonable doubt.
(3) (3) Prosecution may only present evidence obtained through legally warranted searches or
seizures; and criminal defendants cannot be required to testify against themselves
3) Society criminalizes certain wrongful acts, but not others
a) Not every wrongful or harmful act is a crime.
i) Boxers can fight each other
b) Some acts are crimes even if no none is actually harmed by them
i) Attempted murder/conspiracy
c) So, it is not the mere fact that harm is done that signifies a crime
i) It is the type of act, degree of wrongfulness of conduct, or bad intent of person causing the harm
that leads society to criminalize certain behavior
ii) Basically, criminalization is, ultimately a matter of public choice.
4) Criminal acts, criminal intent
a) Some acts are deemed criminal by their very nature
i) Taking another person’s property without permission
b) Other cases, it is the extent of the wrongfulness that distinguishes a crim from a tort
i) Simple negligence is not a crime, gross negligence is sometimes criminalized
(1) Gross negligence becomes a substitute for criminal intent
(a) (This is also true for strict liability crimes like statutory rape)
c) For most crimes intent is a critical element
i) It can be either general (intent to perform proscribed act) or specific (intent that performance of
the proscribed act will lead to a certain outcome).
d) Crimes are sometimes best explained by public choice theory
i) (Selling margarine was made a crime due to political power of dairy farmers)
5) Crimes as well as torts
a) The fact that a crime has been decriminalized does not mean that it has been removed from the civil
liability system of tort law.
i) O.J. was subject to both criminal prosecution and civil liability after he “allegedly” murdered Nicole
and Ron.
(1) Even though he was found not guilty in a criminal trial, a separate civil proceeding held
him liable in tort for wrongful death.
6) Firms commit crimes too
a) Not all crimes are committed by individuals.
b) Corporations may be subject to criminal prosecution.
i) But, a corporation cannot be imprisoned
(1) As a result, criminally convicted firms are usually only subject to fines.
(2) Corporate officers may be imprisoned
7) Crime and its economic consequences in the United States
a) 2000 - 800,000 full time officers
b) 1999 - ​cost $146 billion in crime avoidance
c) In the year 2000, 25.9 million crimes were reported in the United States (down 25% from 1979 crime
rate).
d) Crimes impose significant costs on American society
i) Gross economic costs of all reported crimes in 2000 amounted to ​$13.4 billion in direct losses​.
8) Why people commit crimes
a) Individuals commit crimes for many reasons: poverty, ideology, ignorance, malice, indifference,
uncontrollable passion.
b) Criminal activity can be explained in terms of marginal costs and benefits.
i) Crime rates vary with economic conditions
(1) Rising when the economy deteriorates and declining as economic conditions improve.
(a) This theory is not entirely supported by empirical evidence.
(2) Other explanations for changes in crime
(a) Public spending on crime prevention
(b) Public spending on law enforcement
(c) Perception that the expected benefits of criminal conduct exceed the expected costs
9) Data on law enforcement, arrests, convictions, and punishments
a) A primary purpose of the criminal justice system is to limit the social costs of crime
10) Selecting the Levels of Crime prevention and law enforcement
a) It is certainly the case that the optimal level of crime in society is NOT zero.
b) The optimal level is that at which the next dollar spent on prevention or enforcement would yield less
than one dollar’s worth of reduced crime.
i) The gross costs of crime prevention is around 160 billion or 1.6% of the U.S. gross domestic product.
c) The economic Goal is to minimize the sum of the costs of crime, crime prevention, and criminal law
enforcement. If it costs more for society either to prevent a crime or to enforce the law, then it would be
more efficient to allow the crime. For that reason, the optimal level of crime is extremely unlikely to be
anything close to zero.
11) The economics of Criminal Punishment
a) The end of the criminal justice system is to punish those convicted of crimes in order to deter
them, and others, from committing the crimes in the future.
i) This goal assumes some connection between ​punishment ​and ​deterrence​.
b) The empirical evidence does not offer a clear cut answer to which has a greater deterrent effect on
criminal behavior: (1) increasing the likelihood of punishment or (2) increasing the severity of
punishment.
c) Criminal behavior is damn complex.
i) Lead in the blood can be the strongest predictor of arrests from kids 7-22 years old.
(1) Thus, biological and environmental factors can compromise the rationality assumption of
traditional economic theory and create uncertainty about whether any given change in the
rate or severity of punishment would have a particular effect on the rate of crime.
d) Even in cases where the rationality assumption holds, increasing the severity of punishment might not
increase deterrence of crime if the marginal increase in severity is insufficient to alter criminals’
opportunity cost calculations.
12) War on Drugs:
Illegal drug use in America
a) Two reasons explain the high profit margins in the illicit drug trade
i) pnDrug prices are high because:
(1) drug trade is illegal, and therefore a high risk occupation, which will not be undertaken
unless rewards are sufficiently large
(2) much of the drug trade is a cartel operated by organized crime groups
ii) The demand curve, for hardcore drug users at least is inelastic (when prices rise, the percentage
increase in price is significantly greater than the percentage decrease in the quantity demanded.
13) Why certain drugs (but not others) are illegal
a) Drug use is criminalized because drugs are perceived as dangers for users and society
b) Legal distinctions between various drugs may best be explained by politics and the theory of public
choice.
14) Does the history of prohibition suggest that the war on drugs is futile?
a) Making alcohol illegal did NOT stem demand. It significantly increased the cost of alcohol production
and consumption.
b) One of the biggest reasons for the failure of Prohibition was the relative inelasticity of demand for
alcohol.
15) The death penalty
a) If increasing the severity of punishment increases the law’s deterrent effect on criminal behavior, by
raising the cost, does maximizing the severity of punishment by imposing death create maximum
deterrence?
i) Back in the day, Marquis of Beccaria argued that life imprisonment is more costly than death to
any rational person and therefore possesses a greater deterrent effect.
16) The death penalty in American history.
a) For the most part, the death penalty was the ultimate punishment throughout most of the U.S. well into
the 20th century.
b) In the 1950s sentiments changed and more Americans opposed the death penalty than supported it.
c) In 1972, the Supreme Court overturned all existing death penalty statutes.
i) It held that all existing death penalty laws violated the constitution
ii) It did not hold that death penalty per se constituted cruel and unusual punishment
iii) The majority found that the existing statutes violated the cruel and unusual punishments clause
because they were arbitrary or discriminatory in design or application; but they held open the
possibility that states might enact and apply death penalty statutes that were nonarbitrary and
nondiscriminatory.
d) Four years later, it upheld new death penalty laws that included procedural safeguards
e) Public attitudes began to shift in favor of the death penalty.
17) Does the death penalty increase marginal deterrence?
a) Not every state reinstated the death penalty, allowing us to compare the rates of capital crimes to
measure the deterrent effect of the death penalty
b) The extent to which the death penalty actually deters homicides and other violent crimes remains an
unsettled question.
18) Gun control
a) From an economic point of view, the chief issue in gun control debates is whether laws limiting
handguns and other weapons actually reduce the cost of crime in society.
19) Does gun control lead to less or more crimes?
a) After WWII the homicide rate increased as did the availability of guns
b) State and local governments reacted by increasing the severity and certainty of punishments for
criminals who used guns in committing crimes.
i) 1997 study found that allowing citizens to carry concealed firearms deterred violent crime without
increasing accidental deaths
ii) Lott’s s​ tudy led to the conclusion that instead of restricting legal availability of guns, state and local
governments should make it easier for potential crime victims to carry them.
iii) Another study found the complete opposite
iv) Debates over statistical methodologies, data, analyses, interpretations, and conclusions are likely to
continue.