Law and Economics
Outline
Fall 2010
I. INTRODUCTION
I. ECONOMIC JUSTICE
A. Distribution of income or wealth
B. Utility - sense of well-being or happiness
C. Economic justice is different from “general sense of justice”
i. Incommensurate values - some sources of disutility can NOT be offset by anything that
falls w/in the realm of economics
a. Slavery Example 1. Imagine organizing society.
2. Is there any way for slavery to be an accepted part of slavery?
3. No!!! Thus, anti-slavery position is incommensurable w/ any other utility
that might be gained from a positive view of economics.
b. What a/b whether had to enslave someone or torture them? Here, slavery and
torture may be commensurable
c. Incommensurable - in a different sphere
ii. “Difference Principle” - Social and economic inequalities should be arranged so that they
are both…
a. To the greatest benefit to the least advantaged persons; AND
b. Attached to offices and positions open to all under conditions of equality of
opportunity
c. Veil of Ignorance
iii. Net Happiness - difference b/t utility and disutility
iv. Positional Externalities a. Negative psychic impact inequalities in wealth and income can have
b. Have great deal of influence over how we evaluate experiences
c. “The Jones’ have a bigger house than me v. my house isn’t that big, but its bigger
than everyone else’s in the neighborhood”
D. Interpersonal Comparisons of Utility
i. The little old lady is a prime example of this concept.
a. When you compare the utility that each resident gets out of their home, the utilities
are different.
b. W/ the little old lady, her utility is much higher than the average residence.
ii. In order to achieve distributive justice, it becomes very difficult b/c not all homeowners
have the same utility and some may have received much more utility than others. It is hard
to decide what justice is in these scenarios
E. Are all deserving of the same level of net utility?
i. Ex: if harming someone else gives a person pleasure, is he deserving of the same net
outcome as the person who gets pleasure from aiding others
ii. Idea of economic justice almost certainly means some level of redistribution
iii. Talent tax?
F. Summary
i. Is economic justice to be determined solely by one’s ability to produce goods or services
that have mkt value?
ii. Is economic justice achieved by accidents of birth that affect intellect and wealth?
iii. If not …
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a. Should the default position be equality of income w/ deviations based on factors
that are generally accepted as fair?
b. What factors that result in income inequalities should be regarded as fair?
c. Is economic justice consistent w/ permitting people to retain income they did not
earn?
II. BASIC TOOLS OF ECONOMIC ANALYSIS (8-30)
A. Demand i. Range of prices and the amounts individuals are willing and able to purchase of a good
at each price in a given market at a given time
a. Demand curves almost always slope downward, i.e. consumers willing and able to
purchase less as prices increases
1. Price on Y-axis.
2. Quantity on X-axis.
b. Change in Demand
1. Tastes / Preferences
2. Prices of Related Goods
3. Substitutes
4. Law
c. Change in demand v. change in quantity demanded
1. Complementary goods - those typically used together, i.e. tennis ball and
racket. If price of racket , demand for balls .
2. Substitute goods - jogging as substitute for tennis. Price of rackets ,
demand for jogging shoes .
3. What if people just start hating tennis? Demand curve will move 
ii. Does a change in law have an impact on demand or quantity demanded?
a. Or … does a change in law simply change price or make a good or service more or
less desirable in general?
b. Some may argue that laws cannot change our tastes and preferences
iii. When thinking a/b demand and its implications for questions dealing w/ justice or fairness,
demand can NOT be equated w/ desire or intensity of need
a. Why? B/c desire / need part of demand only if backed w/ ability / willingness to
pay
b. Ex: hungry, pizza loving student w/out money not factored into demand calculus
iv. George v. Alaska, 1997 a. Facts: Prisoners and non-prisoners may bring claim a/g state respecting their
imprisonment. Inmate says Alaska law requiring indigent inmates to pay for
litigation is UC-al, as non-inmate indigents do not need to pay.
b. Issue: Is there a relevant different b/t prisoner’s and non-prisoners to rebut Inmate’s
equal protection claim?
c. Analysis:
1. Court says there are too many recreational lawsuits. However, rich
prisoners can still bring lawsuits
2. Court looks at the economics of litigation - more litigation when price of
litigating is low. In prison the court says litigation is a recreational activity.
3. Opportunity costs higher for non-prisoners.
i) Prisoners don’t have near as much at stake. When change fee,
number of filings will react (very elastic).
4. Non- prisoners demand curves are inelastic, b/c cost of filing has almost no
impact.
5. Must measure disutility of denying non-frivolous claims w/ utility of filing
frivolous claims (36 min)
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6. Assumptions court makes (46 min)
i) Bullard: find assumption of rationality underlying the economic
model, and ATTACK that assumption
a) Use in K cases where diff. in sophistication of parties
b) Ex: minor’s are not rational
7. NO supply side to this analysis, as supply is infinite
d. Holding: No / Yes
e. Rule: Indigent prisoners do not have a legally protected right to sue the government
at no cost.
B. Supply
i. Schedule of prices and corresponding quantities that would be available for sale in a
given mkt at a given time
a. Usually upward sloping - as price , quantity supplied 
b. Surplus - more offered for sale than individuals are willing and able to purchase.
Tends to cause prices to 
c. Shortage - quantity supplied less than quantity demanded. Prices tend to .
d. Marginal cost - increase in total costs associated w/ the production of one
additional unit of output
ii. Changes in Supply
a. Increase Cost of Production
b. Taxes / Lower Utility
c. Reduced Demand and Supply
iii. Again, important to distinguish b/t shift in supply and change in qty supplied
a. Typically, shift in supply caused by increase or decrease in the cost of inputs
b. Ex: if price of labor , supply curve will shift left
C. Market Equilibrium (9/1) i. Where the supply and demand curves intersect
a. Tendency for mkt to gravitate toward the equilibrium price and qty
ii. US v. Richardson (2001)
a. Facts: Δ rec’d child porn and sentenced w/ sentence enhancers, i.e. using a
computer to receive the porn.
b. Two issues:
1. Four level enhancer - receiving porn w/ bondage or torture
2. Two level enhancer - use of the computer / internet
c. Possessing / creating v. receiving child porn. Should they receive same penalty?
d. If there are no substitutes, demand will be very inelastic, and un-responsive to
changes in supply from targeting suppliers through harsh penalties
e. What a/b the death penalty for the supplier? The demander?
1. Very inelastic demand curve f. Dispersion and social network idea - not all a/b making $, but also a/b sharing porn
1. Internet causes problems likely worthy of greater punishment
2. Drugs v. child porn - can copy and email an image, can’t w/ a joint
D. Elasticity
i. Sensitivity and responsiveness to changes in price
a. Elastic Goods - pizza
b. Inelasticity Goods - liver, heart surgery, etc.
ii. Elasticity of Demand Curve
a. Steepness of the demand curve 1. More steep, more inelastic
2. Less steep, more elastic
b. Elasticity of Demand = % Δ in Qty / % Δ in Price
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1. W/ demand, if % Δ in Q > % Δ in Π (ratio is > 1), demand is elastic. Qty
demanded changes more rapidly than price changes.
2. W/ demand, if % Δ in Q < % Δ in Π (ratio is < 1), demand is inelastic. Qty
demanded changes less rapidly than price.
3. Primary factor accounting for elasticity of demand is availability of
substitutes
i) More substitutes, more elastic
ii) Less substitutes, more inelastic
iii. Elasticity of Supply Curve
a. Calculated same way as elasticity of demand
b. Primary factor here is rate at which costs of production as output 
CH. II - BEHAVIORAL ASSUMPTIONS AND THE ECONOMIC ANALYSIS OF LAW
I. RATIONALITY (9/8)
A. Making decisions consistent w/ the law of transitivity
i. Law of Transitivity - an individual’s preferences follow a consistent ordering
a. Ex: If prefer A to B and B to C, then would not choose C over A
ii. Rational actor’s are fundamental to economic thinking
B. Preferences for Preferences
i. Individuals can have preferences for preferences they currently do not have.
a. Ex: Wishing that I had the willpower to resist a jelly donut or alcohol
b. Ex: In contracting, parties allocate based on revealed preferences
ii. Should we assume people w/ addictions or uncontrollable urges or preferences for different
sets of preferences are irrational?
a. If so, would be excluded from great deal of economic analysis.
C. Rationality and a Sense of Justice
i. Is it irrational to place a different price on beer depending on whether it is purchased at a
fancy resort hotel or run-down gas station?
a. Irrational - beer has same thirst-quenching effects regardless of where it is
purchased.
b. Decision inconsistent in terms of law of transitivity.
c. Frued’s pleasure principle - whatever you do arises out of your needs and wants,
thus action enhances your utility
ii. Ultimatum Game a. Rules:
1. A given a dollar.
2. A offers B b/t zero and $1.00
3. If B accepts A’s oofer, A and B keep their respective shares
4. If B rejects A’s offer, neither receives any pmt
b. Parties are willing to sacrifice an opportunity to be “better off” in a material sense
in order to avoid being treated in a way they perceive as unfair
c. Willing to pay for fairness by passing up a material gain
iii. Compensatory Justice a. Parties have views a/b how benefits from an exchange SHOULD be shared
b. These feelings are powerful enough to overcome at least minor set-backs in terms
of material well being
iv. People differ in what they expect or find acceptable in an exchange, and it is important that
two parties be compatible in the regard for a bargain to take place
D. Rationality and the Courts
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i. Courts rarely refer to the rationality concept. Closest law comes to rationality is found in
discussions of capacity, competency, and sanity.
ii. Moore’s Pyramid 35 min
a. Autonomy and rationality are to be understood by concepts of acting, and of acting
for reasons
b. Law, like morality, is built around commonsense psychology captured by the notion
of acting for reasons
1. The end must be an intelligible end to seek, and
2. The belief a/b the action a means to the fulfillment of that end must itself be
a rational belief
c. Structure of Pyramid
1. Intelligibility:
i) In order to rationalize an action, a reason-giving explanation must
utilize an end that is intelligible as something one could desire
ii) Law assumes that its persons not only act for reasons, but also that
the reasons are intelligible
2. Consistency:
i) Rationality here is logical consistency in the object’s of one’s
desires
ii) Take actions that don’t contradict the goal
iii) Relevant conflict here is one where desires necessarily conflict b/c
their propositional objects are contradictories of one another
iv) If law did not assume consistency in desires, crim and K law
doctrines relying on parties intentions would be “radically
indeterminate”
3. Transitivity:
i) Heart of “economic reality” to assume that the desires of a person
are transitively ordered
ii) Required by K law, b/c giving up something to get what you’d
rather have
4. Time:
i) Law assumes that a person has a character structure, and character
consists in part in the set of desires that people maintain over time
5. Correctness:
i) To act rationally, in this sense, is to act on…
a) A desire that is correct, or on
b) A moral belief that is true
ii) N Concept - R person must weigh competing values and get it right
iii) Lesser-of-Two-Evils Justification
iii. Godinez v. Moran, 1993 a. Facts: Guy shot and killed 4 b/f trying but failing to kill himself. Δ plead guilty and
waived right to counsel. Later, filed for PCR in state court, then habeas corpus. 9th
Cir. App. Ct. granted, stating “competency to waive C-al rights requires a higher
level of competency then required to stand trial.”
1. Stand Trial - “rational and factual understanding of the proceedings and is
capable of assisting his attorney”
2. Waive Counsel / Plead Guilty - “the capacity for ‘reasoned choice’ among
the available alternative”
b. Issue: whether competency standards for pleading guilty or waiving right to counsel
are higher than competency standard for standing trial.
c. Maj. Analysis: NO difference
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1. First, a criminal Δ may not be tried unless he is competent and may not
waive rights unless he does so competently and intelligently.
i) 9th Cir. Std - “the capacity to make a reasoned choice”
ii) DP does NOT require a higher std
2. Guilty / Not Guilty Plea are sets of “strategic choices”, which are no less
complicated than each other. Thus, no basis for demanding higher level of
competence for Δs who chose to plead guilty.
3. Person waiving counsel does not need to be more competent than one who
does not waive counsel. Measuring competence to waive right, not
competence to represent himself.
4. Waiver of C-al rights must be knowing and voluntary. Heightened std for
pleading guilty / waiving right to counsel, but not heightened stad of
competence (ability to understand).
d. Dissent:
1. Criminal prosecution of an incompetent Δ offends the DP Clause of 14th
Amd.
2. Disagree w/ majority over competency std to waive counsel and represent
one’s self.
3. Difference b/t “rational choice” and “rational understanding”
4. Suggests two different levels of rationality …
i) Passive understanding;
ii) Active choice-making
e. Pyramid Analysis: (9/13) (1 min) ***
f. Final Thought: Should courts rescue those who make seemingly irrational
decisions?
II. MAXIMIZING SELF INTEREST
A. Lexical Ordering & Incommensurates (9 min)
i. Incommensurability - weakness in economic model.
a. Ex: Overcharged for oil change, will cost more in gas to go complain. Say: “This is
not a/b money but the principle of the thing!”
1. Suggests that all needs / wants in life can be reduced to monetary terms
2. Economics depend on reducibility of all human needs / wants to common
denominator - usually money or utility
ii. Reducibility assumption - needs, values, or sources of satisfaction are interchangeable b/c
can be reduced to a common denominator of utility
a. However, assumption becomes questionable when people act on basis of principles
or sense of duty
b. Ex: no amt of $ will entice to drive recklessly through a playground
iii. Why? Some sources of utility are lexically or lexicographically ordered
a. Like words in dictionary, some values ranked so that they’re not interchangeable w/
values or sources of utility that exist at a different level
b. Similar to problem of incommensurables, i.e. values that cannot be compared b/c
there is no common denominator
c. Lexical ordering v. incommensurables
1. Lexical ordering - suggests definite hierarchy
2. Incommensurability - more general inability to compare, w/out necessarily
saying one value more important than another
d. Think a/b in terms of four ovals
1. Ex: Liberty higher than Efficiency. Can’t compare, b/c no unit of disutility
on liberty scale may be offset by any  in utility of efficiency
2. Rawls: Liberty interest always above wealth interest.
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3. What a/b reducing personal liberties to security. Incommensurable?
4. Organ Purchase: Physical Integrity / Parental Rights / Justice v. Money
5. Unconscionability Claim: certain K provisions not enforced, regardless of
utility in binding yourself to such terms
iv. Tennessee Valley Authority v. Hill, 1978 a. Facts: Sec. of Interior issued regulation saying operation of TVA dam will either
eradicate an endangered species or destroy their habitat. Act prohibits such.
b. Issue: Would TVA be in violation of the Act if it completed and operated the dam?
Requires the lexical ordering of different values.
c. Rule: Act requires federal agencies to insure actions authorized, funded or carried
out by them do not jeopardize continued existence of endangered species or result
in destruction / modification of their habitat
d. Analysis:
1. Lexical Ordering by Court:
i) Congressional intent - only use to interpret statute’s when text is
ambiguous
ii) Economic Loss 2. Congress intended endangered species to be afforded highest of priorities.
i) Cautious to eradicate species, as may hold answers to questions yet
learned to ask.
ii) Greatest threat is destruction of natural habitat.
3. However, TVA argues that dam was so close to completion that Act
doesn’t apply.
e. Holding: Yes.
f. Last Thoughts:
1. What if statute qualified w/ exception: “If already spent $X, statute does
NOT apply.”
2. Courts doesn’t want to make these kinds of decisions.
3. Hypo: must kill-off one endangered species to save another. Legal?
i) Will have to compare utility.
ii) Or … save ½ of each. Allocative efficiency.
iii) What if must kill off humans? Weasel way out of question w/ C
DP or EP claim.
v. Proposed Tobacco Rules: Dept. of Health & Human Serv. Admin. (45 min)
a. Facts: Propose new regulation of tobacco products to reduces children’s easy access
and appealing advertising. Proposed rule would establish 18 year-old minimum
age. FDA found compliance w/ regulations would help achieve “Healthy People
2000” goals, and that 1-in-3 children who smoke will die of smoking-related
disease.
b. Analysis:
1. Some economic loss to big tobacco that would not be justified by saving
certain number of human lives.
2. Should the gov’t act paternalistically here?
3. Posner believes each human life worth $50K and est. value of human
civilization at $600 trillion.
III. CONCEPTS OF EFFICIENCY & THEIR LIMITATIONS (9/15)
A. Productive Efficiency
i. Typically, “efficiency” term associated w/ notion of accomplishing a level of output at the
lowest possible cost.
ii. This is productive efficiency.
B. Allocative Efficiency
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i. Typically, describe an industry which is producing the “right” amount of a good or service
ii. Supply and Demand Curve
a. Demand curve - indicates value consumers attribute to a product. As move  curve,
value of additional units of output  as price people willing to pay .
b. Supply curve - reveals costs of producing additional units of output. “Social cost”
of input is value placed on use of input in production of other goods.
c. Thus,  output until demand and supply intersect.
iii. Entire analysis, as dependent on supply and demand, is based on preferences and the
strength of those preferences as expressed in the marketplace.
a. Cannot justify producing goods and services that people can not afford
b. However, what happens when markets are imperfectly competitive?
1. Private action
2. Gov’t action
C. Hypo’s
i. Grove satisfaction per person - if allow completely unregulated access, could destroy value
so that no one can enjoy the benefit
a. Tent rule - only allow certain amount of square feet and circumference around
b. Rules help minimize effects of tragedy of the commons
ii. Oil and gas law - mineral rights - suck all oil out as quickly as possible. However, if act on
basis of demand and supply, will have delayed until reach market equilibrium.
iii. Examples show different view of property rights.
IV. EXTERNALITIES, FREE-RIDING, AND GAME THEORY
A. Tragedy of the Commons
i. Problem that illustrates negative externalities and the need for property rights
a. Negative externality (aka “social cost”) - action of a product on consumers that
imposes a negative side effect on a third party
ii. Problem: pasture open to all, expected that each herdsman will try to keep as many cattle as
possible on the commons. One day, long-desired goal of social stability becomes a reality.
a. As rational beings, each herdsman seeks to maximize their gain by asking “what is
the utility to me of adding one more animal to my herd?”
1. Positive component - f(x) of increment of one animal
2. Negative “” - f(x) of additional overgrazing created by one more animal
3. Each rational herdsman makes same decision: increase they’re herd, which
causes the tragedy, i.e. commons are destroyed
b. Each man locked into system that compels him to  herd w/out limit in limited
world.
1. Benefit of adding animal = profit from additional animal
2. Cost = general cost of overgrazing spread throughout community
c. How would assignment of property rights solve problem? Costs of adding an
animal would be fully internalized by landowners.
d. Also illustrates advantages of cooperative behavior.
1. Everyone ultimately made worse off in pursuit of own self-interest
2. If reached agreement, would all likely benefit in long run
3. Could serve as substitute for public assignment of property rights
B. Prisoner’s Dilemma - (13 min)
i. If try to actualize your preference w/ self-maximization method, have worse result.
However, if try to “help the other guy”, have best possible result.
ii. Most common tool used in L & E to demonstrate importance of cooperation
a. Two prisoners, unable to confer w/ one another, must decide whether to take the
prosecutor's offer:
1. Confess, inculpate the other, and serve a year in jail; or
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2. Keep silent and serve five years
b. Often, self interest drives a confession.
c. If could make binding bargain w/ each other, they would keep silent and both
would go free.
1. But they can't communicate, and each fears that the other will talk. So both
confess.
2. Problem would be solved if had enforcement mechanism
iii. Not always experienced by prisoners
iv. Page v. US, 1989a. Issue: Confess or not to confess? Can defense of ineffective counsel be raised at
all, and if so in which court?
b. Analysis
1. Page didn’t make strong showing that his counsel was ineffective
2. The district court found the trial court attorney was not deficient
3. T/f appellate court said Page didn’t prove his appeals attorney was deficient
C. Theory of Revealed Preferences (p. 111)
i. Fundamental Assumption: People do reveal their underlying preferences through their
actual choices.
ii. Connectedness of Preferences - requires that b/t any two alternatives, X and Y, person
either prefers X to Y, Y to X, or is indifferent.
a. Buridan’s ass - animal couldn’t chose b/t two haystacks and subsequently died.
1. Is the problem indifference? NO, b/c if that were the case, lost value of
choosing one over the other would have been zero.
2. Unconnected preference b. What if person has connected preference relation, takes his decisions deliberately
after considering all alternative, and is not swayed by advertisements?
iii. Prisoner’s Dilemma a. Through a collective K, groups can do better than what they will do under
individualistic action.
b. How does this relate to revealed preferences?
c. What happens when a K-ual solution is not possible?
D. Negative Externalities (9/20)
i. Result when the activity of an individual or business imposes cost on someone else
a. Ex: polluting factory, cig smoking, driving recklessly, or producing defective
products
b. Creates weakness in supply and demand curve …
1. Supply curve doesn’t incorporate all costs of production.
2. If did, equilibrium point would change (see PP), thus displaying the
allocatively efficient result.
c. Question: what rights does a person have, i.e. right to clean air and water?
d. Issue: over production
ii. Allocative efficiency - achieved when price and output are determined by intersection of
demand and supply (marginal cost)
E. Positive Externalities
i. Occur when activities of individual or firm result in benefits to others, value of which the
producer is unable to internalize or enjoy
a. Ex: building of Wal-mart at end of Jackson Ave. Positive externalities created by 
land value of merchants nearby. However, Wal-mart doesn’t necessarily capture
benefit.
b. Ex: mowing lawn, planting flower beds, etc. Creates added values for others not
paying for that value (free-rider problem).
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ii.
iii.
iv.
v.
vi.
c. Often, rules in place to fix these problems. Establish minimum std to which each
person must adhere. See gov’t intervene here frequently.
d. Issue: under production
Chicken Game - other’s hesitate to act in benefiting others, b/c believe others will act
before them
Free-Riding - person who holds out the longest receives the benefits of the efforts of
another w/out having to pay for them
a. Helps explain existence of copyright, trademark, and patent law
Bullard’s Concepts
a. Exclusivity - only one able to own thing being created
b. Non-rivalrous - consumption of good doesn’t reduce availability to anyone else
1. Ex: create idea. Anyone w/ possession of idea can benefit.
2. Ex: clean air
Public Goods a. Good or service subject to free-riding, provided by the gov’t and financed by tax
revenues
b. Gov’t gets involved, b/c goods otherwise would not be produced in sufficient
quantities
c. Ex: roads, navigable waterways, clean air, the Internet, etc.
G.S. Rasmussen & Assoc. v. Kalitta Flying Service, 1992 a. Facts: R spends 100K testing modifications to aircraft. FAA says don’t have to
reintroduce aircraft as modified, but will recognize as “incremental version” (i.e.
Version 2.1). R also leases aircraft; thus, some value is internalized. R wants
everyone to go through same process.
b. Issue: is this a complete barrier to anyone else wanting to modify aircraft? NO.
c. Analysis:
1. What will be the social cost of not awarding property right to R?
i) Others will not want to research modifications.
ii) If don’t protect prop rights, however, will have efficiency
2. Must have public enforcement mechanism, as private rules do NOT work
i) Here, that mechanism is the court
ii) No statute on point here, so maybe better that Judge, who has
specific facts, make a CL rule
3. Should the FAA resolve this issue, as they created the license, and have
rules related to the transfer of the license?
i) FAA in business of air safety.
ii) What happens if they cross the line to law making?
4. What if FAA played no role at all in property rights?
i) Safety problems could arise;
ii) FAA could “punt” to the courts, as they did here
5. Conflict of Laws - which law should apply? Should there be a uniform
law, or should states apply their own?
d. 5th Amend. Taking’s Clause
1. “Nor shall private property be taken for public use, w/out just
compensation”
2. Does question turn on what business R is in?
V. CHOICES AND PREFERENCES
A. Revealed Preferences, Revisited (9/22)
i. Allocative tool based on what people believe to be best interest
ii. Prisoner’s dilemma - acting in best self-interest may not be best result
iii. What is a K?
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a. Promise b/t two or more w/ obligations running both ways
b. Does substance of K reveal preferences of parties?
1. Somewhat, as a compromise
2. Do K’s create net social utility? Have revealed preference for Y over X, so
now have more utility if able to trade Y for X.
c. Why, then, do we litigate K’s to get out?
1. Changed Circumstances - Preferences change, or value may 
2. Incompleteness - often, terms are unclear.
3. Sometimes, performance becomes impossible. Should they have allocated
risks better, though?
d. Who should bear risk of Ks?
1. Lowest cost insurer - person who already has vested interest in theatre
surviving who really knows the risk (i.e. owner)
2. “” provider - performers would want  in price, whereas theater owner
would want  in price.
3. Always must make decisions on which risks not worth allocating.
iv. Conclusion
a. Why we have Ks,
b. Why we enforce them,
c. Why sometimes people are worse off after,
d. Why people sometimes get out of them
B. Dual Preferences and Legitimacy 45 min
i. Examples:
a. Sharing of the dollar example
b. Big house in shitty neighborhood v. small house in nice neighborhood
ii. Equity Theory
a. Individuals tend to feel that outcomes are just when:
1. [outcomes of person A / inputs of person A] = [outcomes of person B /
inputs of person B]
2. In other words, distribution equitable when ratios of outputs to inputs
perceived as being equal
b. If see someone w/ nicer stuff, etc. then you, does that handicap your bargaining
position w/ respect to them?
iii. Relative Deprivation Theory
a. Idea that you evaluate fairness of your utilities based on your own code
b. Differs in equity theory in its emphasis on social comparison. Characterized by
general comparison of one’s well-being w/ position of others.
c. Deprivation more likely to occur when:
1. One lacks an outcome;
2. Compares herself to someone who has that outcome;
3. Feels entitled to that outcome;
4. Feels the outcomes was feasible; AND
5. Does not blame herself for not achieving the desired outcome
d. Two categories:
1. Egotistic deprivation - compare plight w/ that of similar person, w/
emphasis on individual’s own well being
2. Fraternal deprivation - focus on plight of group of which individual is
member, as compared to better situated group
iv. Ryan v. Wiener, 1992 - inalienability rule
a. Facts: Ryan only had 9th grade education and fell behind on mortgage. Real-estate
broker Wiener stopped by his house to “help him out”, but instead made him enter
into sale of land K (adhesion K). This was in effect a lease, and he was charged
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rent. Ryan refused to pay rent once he realized he had exceeded what he owed
Wiener.
b. Holding:
1. K unconscionable and should be rescinded
2. Use following factors:
i) The transaction
ii) Substance
iii) Process
iv) Ryan’s mistake relates to the substance
v) Ryan was not culpable
VI. CONCEPTS OF EFFICIENCY: PRODUCTIVE, ALLOCATIVE, PARETO & KALDOR-HICKS
EFFICIENCY
A. Productive Efficiency, Revisited
i. Accomplishing outcome at lowest possible cost
ii. Outcome often a specific level of output
B. Allocative Efficiency, Revisited 9/27
i. Depends on how we value things
ii. Hypo: poor family w/ 5 children; one child has disease that may be cured w/ 100K drug.
Wealthy bachelor willing to pay 120K for drug to get high.
a. Under value maximizing approach (productive efficiency), drug would go to
person willing to pay highest price.
b. Under utility max approach, look at happiness of family v. qualities of high felt by
bachelor
c. How can allocative efficiency be achieved?
1. Price drug according to its use
2. Give subsidy to poor family, etc.
iii. Clearly, advantages to using dollars to measure utility
iv. What about morality?
a. Should a group or individuals life be sacrificed to further other’s utility?
b. Kant’s Principle
C. Pareto Principles
i. Often, an  in utility is a movement toward more efficient allocation of resources
a. K curve - describes number of prices that would make parties better off
b. Pareto superior - at least one party to transaction better off and no one is worse off
c. Pareto optimal - original distribution where resources distributed so that they
cannot be reallocated w/out at least one party feeling worse off
ii. Hypo: car sale, p. 36 and PPT
a. Is this a wealth maximizing state? Yes, if transaction occurs, society’s wealth will
be maximized.
b. Created a Pareto superior reallocation, b/c wealth maximizing, i.e. only one
person better off, no other person worse off***
1. Still, transaction is worth it to both parties
2. How much wealth is created?
i) If sold at 8K, seller gained one penny, buyer gained 1K.
ii) Truthfully, as long as w/in 8 to 9 K range, world better off by 1K
c. Pareto Optimal?
1. Pre-transaction, is there no possible pareto superior move? No, b/c can
make pareto superior allocation.
2. Once deal is done, h/w, have pareto optimal transaction. If buyer bought
for 8,250, and want to restructure sale for 8,500, buyer now worse off.
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3. Chart no longer applies once transaction occurs, thus, need set of rules for
when K doesn’t cover specific risk and someone must bear loss.
iii. Why is this approach attractive from a moral standpoint?
a. Economics simply not equipped to evaluate relative gains and losses for involuntary
distributions, i.e. interpersonal comparison of utility (comparing one person’s loss
w/ another’s gain)
b. Standard involves an absolute respect for the autonomy of individuals, i.e.
individuals must consent to what happens to them
1. Kant’s Categorical Imperative - people should not be used as a means to
further the ends of others
iv. What is difference b/t individual transactions and gov’t decisions?
a. Ex: car sale v. pollution
b. Almost no gov’t policy can be effectuated here, b/c will affect so many people that
someone will be worse off
c. Kaldor Hicks attempts to solve this problem
D. Kaldor Hicks Efficiency
i. Model for involuntary utilitarian allocations
a. If start w/ idea of wealth max, look at gov’t action and measure total  and  in
utilities.
b. If created utility > destroyed utility, have efficient outcome, GO FOR IT!
c. Check Bar Chart in PPT
ii. Disadvantage: who assigns value on utility?
iii. NOT a takings, which is moving another step toward compensating losers once it is decided
that there is a net increase in wealth
a. Gov’t may get in wrong
b. Could assign wrong value
E. Specialty Tires v. CIT Group, 2000 i. Facts: Specialty sued CIT for breach of K after 11 tire presses weren’t delivered. CIT then
filed 3rd party complaint a/g Condere b/c refused to remove presses. Specialty moved for
SJ. CIT moved for SJ based on impossibility or impracticability. Court granted CIT’s
motion. CIT owned presses that were in a bankrupt Condere company. They tried to sell,
but found no one other than Specialty tires. They had a deal, CIT went to replevin presses
but then Condere made bond payment to replevin court and court removed it from
expedited list. So now CIT couldn’t get the presses to Specialty and now Specialty needed
to bid for the presses.
ii. Pareto Optimality:
a. “Excuse for impracticability would be pareto-optimal move.” WRONG. Test is
whether it was pareto superior, i.e. no one was worse off.
b. Court decides Specialty was not worse off. However, this is inconsistent w/ K
principles.
c. From what position do we measure whether they are worse off?
1. When is “cover” not a required remedy? If good is unique, i.e. can’t get
anywhere else.
2. Court says measure from where would have been w/out K, at time they
sign K. But … this is WRONG.
3. Initial position is very important to inquiry.
d. Court applied narrowly
VII.
PROBLEMS IN DETERMINING PREFERENCES 9/29
A. Wealth and Endowment Effects
i. Individuals seem to value item or right more when they possess it than when its possessed
by someone else
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a. Why?
1. Ownership means they actually are wealthier, and t/f are capable of paying
more for items than if they did not own them (people who own things are
wealthier than those who don’t)
2. Bullard: maybe this is how people get wealthier
b. Wealth Effect - Value of Right to Unobstructed View (PPT)
c. Endowment Effect - Value of Lottery Ticket
1. People show preference to thing have as opposed to thing they don’t have
2. Value depends greatly on whether you start w/ ticket or start w/ money
i) A owns ticket, values at > $3.00
ii) A owns $3.00, values > than ticket
iii) Maybe, preferences change at a certain price
ii. Does theory of revealed preferences still hold?
a. Yes - b/c people still revealing preferences
b. Problem - should courts / legislatures allocate things to those who value them the
most?
B. Framing Problems
i. People may respond differently to the same question depending on how its framed
a. Different outcomes where choices perceived differently
b. Jury instructions - framing substantially affects how jury answers question
presented
ii. PPT Example:
a. Certainty v. Uncertainty
b. Use of “save” v. “die” will change people’s choices. However, should be
indifferent when dealing w/ numerical qty.
C. Dual Preferences and the Question of Legitimacy
i. People seem to have generalized preferences that are inconsistent w/ specific choices
a. Ex: alcoholic may prefer not to be alcoholic but still drink a lot
b. Creates gap b/t expressions and actual preferences
ii. Gaps b/t choices and preferences may also be seen w/ lexical ordering and
incommensurables
a. Ex: don’t think rappers should talk so dirty, but also believe in free speech rights
iii. What about where people make decisions based on their mental state?
iv. Faber v. Sweet Style Manufacturing, 1963 a. Facts: Manic-depressive entered into a K.
b. Court said he could not make an informed decision and that K should be rescinded,
as would not have been entered into w/out the mental disease
c. Was illness enough to get out of K?
1. Std test: lack of understanding. Being manic doesn’t have much to do w/
this.
2. Alt. test: compulsion to enter into a K - internal force he cannot combat
i) Creates battle of experts, more people trying to get out of Ks
ii) Opposing party may show
a) Had no knowledge of mental illness (will be easier to prove
than lack of understanding)
b) K terms are fair (similar to unconscionability)
c) Detrimental reliance
d. More like Moran and Ryan, where we try to understand model of rationality we
want to apply b/f willing to apply revealed preferences (end of class)
1. External Factors - may be considered by parties to evaluate risks
2. Internal “” - not as susceptible
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III. COASE THEOREM AND RELATED MATTERS
I. COASE THEOREM BASICS 10/4
A. Introduction
i. Rule: assuming no transaction costs, initial assignment of a right will not affect its final
allocation
a. When transactions can conveniently be made, ultimate assignment of a right will be
determined by relative values parties associate w/ right, not by court’s decision
ii. Clearly defined system of property rights, often provided by the court, may be essential to
the buying / selling process
iii. Ronald Coase’s “The Problem of Social Cost”
a. Article most frequently cited by legal scholars
B. Wealth and Endowment Effects
i. Wealth effect - initial assignment may itself affect the value attributed to the right
a. May also affect parties ability to express themselves in the mkt, which is how
valuation is determined
b. Offer-asking problem - what one is willing to offer to buy something is different
from the amt asked for when one sells it
ii. Endowment effect - individuals valuation tends to turn on whether he or she already
possesses property or a right
a. Want to retain thing have, b/c already have it
C. Fontainebleau Hotel v. 45 25 Inc., 1959 - Property Rule
i. Facts: An addition to the Font Hotel would shade the Eden Roc Hotel’s pool area. Trial
court granted injunction to halt construction.
ii. Analysis:
a. Coase Theorem - what will happen?
1. F ($100) / E ($150)
i) F wins - E buys right
ii) E wins - E keeps right
2. F ($150) / E ($100)
i) F wins - F keeps right
ii) E wins - F buys right
3. What are the chances the court will get it right / wrong?
i) Problems arise where parties in bed w/ legislature, courts, etc.
ii) Must determine what transaction costs are
b. Doctrine of ancient light
1. If enjoyed direct sun light for 20 yrs, enjoyed right to light under English
CL
2. Worried a/b overruling precedent, as may amt to judicial legislation
c. Transaction Costs
1. F ($100) / E ($150); $75 transaction costs placed on adjudicated loser
i) F wins - right stays w/ F, b/c 101 + 75 = 176, which is > than E’s
max of $150. $100 to F; $0 to E.
ii) E wins - E keeps right. $150 to E; $0 to F
2. F ($150) / E ($100); 75 transaction costs placed on adjudicated loser
i) F keeps right. $150 to F; $0 to E.
ii) E keeps right. $100 to E; $0 to F.
d. Wealth and Endowment Effect
1. Replace transaction costs w/ endowment effect, deal gets done
e. Property v. Liability Rules
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II. TRANSACTION COSTS 10/11
A. Faculty Parking Lot Hypo
i. Are you willing to pay ticket?
ii. Should number of violations jack up fine?
iii. Boomer dissent: “… you may continue to do harm to your neighbors so longs as you pay a
fee for it.”
a. Historical example: in old days, want to kill someone, just pay them twelve sheep
after
B. Boomer v. Atlantic Cement Company, 1970
i. Facts: Cement plant causing pollution nuisance for local property owners. T.C. and A.C.
upheld temporary damages, but denied injunction b/c of large disparity in economic
consequences b/t an injunction and paying damages.
ii. S.C.: plant should face injunction if do not pay families recovery amount (185K total for
all)
a. Better than forcing relocation, b/c no obvious actuality that technology will 
b. But … making it mandatory to pay damages unless plant shuts down doesn’t
disturb current plant operations
iii. In-class Analysis: assignment of right will not affect allocation
a. B (185K): A (4.5 mil)
1. B wins - A buys right to pollute
2. A wins - A keeps right, pollutes for free
b. Dissent argues this is wrong approach. Not deciding who will win, but is this the
proper remedy for B (homeowner)? Two possibilities:
1. Injunction
i) Halt production until homeowner satisfied w/ payment
ii) Functional equivalent of specific performance
iii) Equitable remedy
2. Liability rule
i) Continue pollution, but pay damages
ii) Legal remedy
c. Why might negotiation fail if homeowner wins the case? 28 min
1. Transaction costs
2. Endowment effect
3. Separation of ownership and mgmt
4. Hold outs
i) More $
ii) Idiosyncratic effect (want to garden)
5. Wealth effects
i) Is neighborhood poor or rich?
ii) Is company rich or start up?
6. When gap in values assigned to right is very large, causes more problems
w/ getting it right (incommensurable values)
d. B (185K): A (4.5 mil) 42 min
1. Injunction - A negotiates right to pollute
2. Monetary Damages - A buys right to pollute at set price (i.e. by court)
e. Public Policy Issues
1. Public interest a/g pollution.
2. What remedy?
i) Inalienability Rule: Can NOT pollute, no matter how much willing
to pay.
ii) Homeowner may sue, but don’t get to sell right to pollute.
f. Hold Out Problem
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1. Total Settlement Maximum
i) 10 holdouts - 4.5 mil
ii) 5 holdouts - 4 mil
iii) 1 holdout - 3.6 mil
2. Settlement Maximum / Holdout
i) 10 holdouts - 450K
ii) 5 holdouts - 800K
iii) 1 holdout - 3.6 mil
g. Summary 1 hr, 9 min
iv. Coase Theorem Book Notes
a. If court followed NY law, Π’s would have been granted injunction, and Δs could
have bought from Πs right to continue polluting
b. Given that losses from injunction to Δ far exceed loss to Πs if pollution continues,
Δ likely would have bought the right.
c. Using Coase Theorem may minimize externalities.
C. Weingarten v. Northgate Mall, 1981 10/13 - Property Rule
i. Facts: Mall and grocery store had lease agreement. Mall wanted to expand, grocery store
could also, but only 50% of amt wanted too. K had specific performance provision. When
Mall started building where grocery store wanted to build, grocery store moved for
injunction.
a. T.C. said no injunction, b/c of costs (mall had finished $ 4 million addition)
b. A.C. reversed
ii. S.C.: no injunction b/c of large disparity b/t costs of destroying building compared w/ costs
of paying damages or allowing expansion elsewhere
iii. Class Analysis: Injunction (Specific Performance) v. Monetary Damages
a. Injunction std: LH of irreparable harm
b. Ultimately, court finds Mall can’t sell right.
c. Coase would respond that Mall can pay for right. Should be able to bargain for
giving up the right.
1. Silly to think will cause destruction of mall by awarding the injunction
d. What arguments that court understood Coase Theorem?
1. Too much wealth transfer. When disparity b/t values is smaller, injunction
more appropriate.
2. This is different from Fontainebleau, b/c we have a K breach. Here, even
the party assigning a lower value should have a say in the decision, b/c the
right has already been assigned and bargained for via K.
e. Court here has created an inalienable right.
1. How do you make K right inalienable? Spend a lot of $ so court won’t
assign right to other party!
2. But … isn’t there a duty to mitigate damages? Mall should flip argument,
say trying to mitigate by not stalling and moving forward w/ construction?
3. Can make trial longer by extra motions, depositions, interrogatories, etc.
f. Liquidated damages clause - world thinks damages are X, you think they’re 2X.
Use to “slap bigger number” on valuation of right.
1. Can’t be punitive, just must be reasonable
III. SHOULD COURTS MIMIC THE MARKET?
A. Introduction
i. Should the Coase Theorem be a guide for judicial decision making
ii. Would such an allocation be consistent w/ wealth maximization?
iii. These possibilities involve doing what the mkt would have done
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iv. Unless the assigned right is inalienable, a judicial assignment, in the context of low
transaction costs, is one that permits the mkt to work
a. Leads to wealth maximization, regardless of how assignment is made
b. So, what should a court do when transaction costs are high?
v. Transaction costs: general view of efficiency theories is that CL Rule is more efficient
doctrine w/ respect to property v. liability rules
B. Monge v. Beebe Rubber Co., 1974 1 hr, 3 min
i. Facts: Π worked at a manufacturing plant, claiming breach of employment K w/ tones of
sexual discrimination. Jury ruled in her favor for $2,500. Δ appealed.
ii. Issue: Whether evidence sufficient to support jury finding
a. Court held yes, although damages are off
iii. A.C.:
a. Affirms judgment if damages reduced to 1,083, b/c no findings that she can recover
more than lost wages in breach of K dispute
b. Cites “Termination by employer motivated by BF or malice constitutes a breach of
K”
c. Overtones of sexual discrimination/abuse and the jury sided w/ the Π
iv. At-Will v. For Cause Employment
a. Employees
1. Want For Cause, b/c of job security
2. Protection from employer mistake or malice
b. Employers
1. Easier to fire someone w/ a reason. Just don’t want to be challenged where
grounds are good, but not provable for-cause grounds.
2. Places limits on frivolous employee suits, as employees will likely lose
these
c. At will employees will have a higher income than for cause
1. There are costs for employers for a “for cause” system, i.e. monitoring and
enforcement of agent-principal relationship
d. For Cause - at CL, right belonged to employer. However, who owns property right
w/ respect to unjust terminations?
v. In Class Analysis: 10/18
a. Hypos
1. Employee blows whistle b/f nuclear plant explodes. Why assign right to
sue to employer?
i) Public policy exception (see also w/ “for cause” employment)
ii) Likely an inalienable right. Ex: can’t sell organs.
2. Employee fired sleeps all day at work? Who owns right? Employer.
b. For cause is the default rule
c. Property v. Liab Rule
1. To have a property right, (i.e., an entitlement protected by a property rule),
then, is to have a right that is in some way shielded from wealthmaximizing social functions (Rights trump utility)
i) May sell the right
2. Liab rule - may sue for damages
d. At-Will - employer owns the right
C. Individual Employees Bargaining Situations
i. Often not the weak v. powerful, but a difference in the relative informational standing
amongst parties
ii. How does an employee value the right?
a. May agree to receive lower wages to curb chance of being fired
b. May value right more highly at end of relationship, i.e. when a/b to be fired
18
c. What a/b employee’s ability to evaluate unknowns?
iii. Unknown Factors
a. Underestimated Risk
1. Does an employee underestimate risk b/c of lack of info or go in thinking
everything is golden?
2. Optimism is normal, as the last thing want to think a/b when start new job
is getting canned
3. Bullard: “Should think a/b the divorce, NOT the marriage”
b. Information inadequacy may be harder to deal w/, though
1. Economic conditions
2. Culture of firm
3. Information asymmetry: one party cannot obtain information as easily
c. Likely, employer will be in better position of knowledge in these respects
D. How Does this Affect Right Valuation?
i. Information Deficiency (PPT)
ii. Why does firm w/ high turnover want At-Will? High cost of purchasing the right.
iii. Cost benefit analysis help determine whether lawyers will settle or litigate employment
disputes.
a. Remember, Rule 11 sanctions may also come into play
iv. Expected value of unjust termination lawsuit 52 min!!!
a. Cost of being terminated
b. Good examples in class
c. Must compare expected value of both parties
d. If Π’s lawyer, look for claims that will be high cost for Δ to defend!!!
v. Major Issue: Whether dynamics of litigation put employer’s in position, where if don’t
have at will, will always be defending a/g frivolous lawsuits
E. Negotiation by Employee Union
i. How does this change the game?
a. Solves information asymmetries
1. Union more likely to have better information
2. Gets better return on investment b/c repeatedly negotiate
3. Must legitimize union dues
b. Is Coase’s theory more likely to be correct?
1. Union employees have much greater bargaining power: “take my terms, or
no one will work for you.”
2. Bullard: odds of getting it right likely greater
ii. Inefficiencies of Politics
a. Unions constantly negotiate rights which members may negotiate out of
b. If had known and predictable rule, would be more efficient
c. What if had uniformity throughout nation?
1. Higher cost imposed w/out
d. But … federal rule would kill “laboratory of democracy” whereby states compete to
create the best legal model for such employment decisions
F. Applying Incidence Analysis to the At-Will Rule
i. Possible effect of guaranteed job security is  in demand for labor
a. When business forced to incur expenses associated w/ use of labor, amt willing to
pay for each qty of labor will remain the same (thus wages )
b. Passes some of costs of improved working conditions to workers by  opportunities
and wages
c. Part of costs may also be passed on to consumers
d. Division of these costs largely determined by relative elasticity’s of demand and
supply
19
1. Largest portion absorbed by people least able to respond
ii. Likely,  job security will  supply of labor
a. Result will depend on where equilibrium ends up
b. Still, have same affect on wages as a  in demand
G. Limitations of Valuation and Problem of Unequal Bargaining Power
i. Value determined by willingness and ability to pay, and person unable to pay is not
distinguished from the wealthy person who is unwilling to pay
ii. Maybe, employers simply have a much greater deal of bargaining power
a. Again, may have holdout problems
b. Must contend w/ interpersonal comparisons of utility
iii. Additionally, one buyer / seller may have more choices than the other
iv. Wealth and endowment effects
H. Ploof v. Putnam, 1908 1 hr, 7 min - Inalienability Rule
i. Facts: Family was on Lake Champlain and storm kicked up. They moored onto dock on
someone else’s property. Servant of the property owner unmoored boat and boat sank
injuring family. Family sued owner of property.
ii. Rule: One may engage in what would ordinarily be a trespass when there is an emergency
and the risk of harm to life and property is high. Or, more precisely, one may not prevent
the use of his or her property by another who is in a life-threatening state (liability rule).
a. Party who is in danger of losing life and limb will, in most instances, value the right
of using another’s property more than that party would value excluding them
iii. Analysis:
a. Court looks at trespass by necessity, which applies when trying to preserve life and
prevent substantial damage to property
b. This right is inalienable!
iv. Valuation and bargaining power
a. Take situation into account and the person’s bargaining power.
b. How do you value something when you don’t have it versus when you do?
1. Do you have ability to buy it?
2. If not, how do you value it?
IV. DETERMINING WHO VALUES SOMETHING MORE 10/20
A. Introduction
i. Mimicking the mkt means assigning a right to a party who would eventually acquire that
right if transaction costs are low
ii. Many times, rather than a one-on-one determination of value, courts must examine a more
general dispute relating to a broader assignment of rights
a. Thus, determining which rule should be adopted
b. Usually a rule and counter-rule
iii. Sometimes, must determine which party would pay more to make the other party liable
a. Traffic light example p. 182
iv. Calabresi and Malemed fallback position
a. Court should assign right to party from whom it could be transferred less
expensively
b. May be instances where transaction costs are asymmetrical
c. LH of mkt correction higher if path of exchange is less costly of the two
B. Class Readings
i. Altruism as related to enforcement of charitable Ks
a. If all good deeds motivated by self interest, than stupid to talk of altruism
b. If allow economic theory to explain everything, economics ceases to explain
anything, b/c no differentiating basis for further social policy
c. Kin Selection
20
1. People do nice things for their children.
2. Thus, your genes likely to be far more replicated through your family
d. Reciprocal altruism
1. Evolution favors those who sacrifice self interest for others, w/ thought in
mind that favor will be returned.
2. Ex: who will win be the new world super power in the 21st century?
i) Brazil, U.S., China, India?
ii) Nation’s success depends on ability to look forward
ii. Populist Pareto View
a. Facts: professor, hair dressers, and student’s schedules benefited from campus
shooting
b. Professor classified as pareto superior move b/c both better or off, or at least he’s
better off
c. Bullard:
1. Obviously parteo superiority doesn’t go to ability to make large, multi party
groups better off
2. Rather, Kaldor Hicks should be used here.
C. Stonestreet v. Southern Oil, 1946
i. Facts: Π and Δ agreed on lease agreement of Π’s land for Δ’s service station. Agreement
contained stipulation where Δ could purchase land w/in 10 years on lease for 5K. If didn’t
purchase land, reverted back to Π. Also included was Δ’s access to Π’s water supply, but
once that ran out, Δ had to find own water supply.
a. Then, Π and Δ split cost of drilling new well.
b. Issue arose when Δ offered to buy and Π brought up an oral agreement, which said
if Δ bought land Δ would give ½ cost of well back to Π.
c. When Δ exercised right to buy land, didn’t return the $329 for the well.
ii. Rule: A mere promise, w/out more, lacks a consideration and is unenforceable
iii. Analysis:
a. Court said promise would have been a gift w/out consideration and not enforceable
b. Here, his statement was one of mere gratuity. Π promised nothing and gave
nothing in return for the Δ’s promise.
iv. Note:
a. Under R. 90, gratuitous promises to charities are enforced even w/out reliance.
D. Weintraub v. Krobatsch, 1974
i. Facts: Δs were buying Πs house, but find out its infested w/ cockroaches. Hadn’t notices
b/f, as whenever looked at house all lights were on, but cockroaches are nocturnal.
a. T.C. found for Π and ordered the 4K paid out of escrow
b. A.C. affirmed
ii. Analysis:
a. S.C. looked to other jurisdictions to see where law was going.
1. Basically, stated if there is material defect or any problem w/ the structure,
seller is under a duty to notify buyer of the problem
2. Based on fundamental fairness arguments
iii. Rule: Silence may be fraudulent, and relief may be granted to one party where the other
suppresses facts which he under the circumstances, is bound in conscience and duty to
disclose to the other party, and in respect to which he cannot, innocently, be silent
iv. Coase Theorem Defects 49:30 min
a. Hypo: chandelier missing from house
1. Revealed preferences: what we want to enforce in Ks.
2. Where defect hidden, if price paying reflects actual preferences, shouldn’t
affect analysis. Either way, buyer should not be able to rescind or sue.
21
b. What if buyer sees chandelier, few weeks later stolen. Seller had no idea. Who
should pay?
1. Seller: should have carried insurance until date X. More efficient for seller
to carry insurance since in better position to cover risk. Has dominion.
2. Where defect non-obvious?
V. PROTECTING ENTITLEMENTS 10/25 - Important Class!
A. Introduction
i. Most would argue that the Coase Theorem is far more likely to work when the ownership of
various rights or entitlements is clear.
ii. However, how are these entitlements to be protected?
iii. Here, already assigned right. Now, must decide which rule to apply
iv. Analysis Framework
a. Think a/b various models, questions to be applied to each case.
b. Knowing who owns right, which type of rule should be applied?
c. Analysis:
1. What is the right?
2. Who owns that right?
3. What rule are we going to apply?
4. What remedy will result?
B. Calabresi and Melamed: Property Rules, Liability Rules and Inalienability
i. Entitlements can be protected by:
a. Property Rules
1. Some rights can be sold, but can’t be taken w/out owner’s consent
i) See where property owner wants property back, not just damages
ii) Look at owner’s subjective value of the property
2. Party must have permission from affected party b/f taking or using other
party’s entitlement
3. Ex:
i) Continuing pollution
b. Liability Rules
1. Used when person is permitted to invade rights of another and then
compensate them (objective value)
2. Examples:
i) Accident where person at fault required to compensate victim for
personal or property damage
ii) Parking lot: can pay ticket and still park there. But, if get booted,
becomes quasi-liability / property rule.
iii) Boat docking during storm: rule allows boat docking in certain
circumstances. Boat owner’s has property right. Remedy doesn’t
really fit specific category.
iv) At-Will employment: don’t want to apply property rule, b/c would
simply put person back on job. T/f, apply liability rule.
3. Civil v. Criminal Liability
i) Civil - all about liability rules
ii) Criminal - all a/b property rules. Reflects onerous penalties if take
something subject to property rule. Also, can’t enjoin criminals!!!
c. Rule of Inalienability
1. Entitlement cannot be sold or otherwise exchanged (can’t waive right)
2. Won’t apply in the K scenario. However, will apply in CL!
3. Ploof Example
22
i) What if boat owner told dock owners planned to sail during
emergency. We are all waiving Ploof right.
ii) Inalienable? Yes. Boat owners would still win.
4. Nuclear Power Plant Whistleblower: can’t negotiate away right to blow
whistle on plant a/b to explode.
i) If right didn’t exist via PP, wouldn’t make sense.
ii) Looking for PP, i.e. sale of body parts, agreements to beaten up,
sale of birth child
ii. Fontainebleau Example 22 min
a. Fontainebleau won. Case a/b who owns property right. Developed economic
analysis for how to make decision. However, once right assigned, what do we do?
b. Hypo: Edinrock owns light from outset. Now, lawsuit is like Mall case. Now,
issue is whether subject to liab, prop, or inalienability rule.
1. Under Calabrese, liability rule will be likely be applied.
i) Would otherwise be inefficient.
ii) Argue where large gap in valuation, resolution w/out liability will
be difficulty
2. Counter Coasian argument
i) Could apply property rule, loser may buy the right.
ii) Not any waste, b/c Edinrock simply gets paid what it values
sunlight at.
c. CL v. K
1. Whole point of K is to create or gain a property right
2. Exam question: Was person rationalizing a revealed preference, thus
assigning an actual value, so that courts may give it effect?
i) K: property rule
ii) CL: liability rules
iii. When should these be applied?
a. When transaction costs are likely to be high, makes sense to apply liability rule
1. Eminent domain example: if society can remove from mkt the valuation of
each tract of land, decide the value collectively, and impose it, holdout
problem gone
2. If society can value collectively each individuals citizen’s desire to have
par and charge “benefits” tax based upon it, freeloader problem gone
b. W/ accidents, could not apply property rule
1. Pre-accident negotiations would be prohibitively expensive
2. Would preclude many activities worth having
c. Most common reason for using liability over property rule to protect an entitlement
is where mkt valuation of the entitlement is deemed inefficient, i.e. either
unavailable or too expensive compared to a collective valuation
d. Also, may facilitate distributive goals
iv. Inalienability rules often further same goals
a. Greater degree of societal intervention
b. Often the ideal choice where a transaction would create significant externalities
(costs to 3rd parties)
C. Mieske v. Bartell Drug Co., 1979 - 1 hr, 1 min - Liability Rule
i. Facts: Family took reels of family videos to store to get them spliced and put together for
easy viewing. Store lost reels; family sued for damages. Lower courts both ruled for
family ($7500).
ii. Issue: measure of damages
iii. Analysis:
a. Court recognized three different types of property…
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1. Personal property that is destroyed and has a replaceable mkt value
2. Personal property that has no mkt value but can be replaced w/ like values
of replacement, i.e. cost of replacement or reproduction
3. Personal property that has no mkt value and cannot be replaced or
reproduced, so owner valuation is measure of damages
i) Can’t recover sentimental value, i.e. “indulging in feeling to an
unwarranted extent”
ii) Determined by value to owner, i.e. intrinsic value of property
b. Court used (3) to determine liability and damages against drug store
c. Jury’s determination was deemed the objective result of the loss of film
iv. Class Analysis:
a. Liability rule extremely problematic b/c idiosyncratic value
b. What a/b disclaimer?
1. Mall case had specific performance clause - property rule
2. Disclaimer here is flip side of specific performance, i.e. “we have agreed to
liability rule”
3. As economic matter, why enforce / don’t enforce disclaimers?
i) Who knows better how to insure the harm? Should they bear the
risk? See infra, lowest cost avoider question.
ii) Maybe … inalienability matters.
D. Sedmark v. Charlie’s Chevrolet, 1981 - 1 hr, 14 min - Property Rule
i. Facts: Dealer and Π entered into oral K for sale of Chevy Corvette Pace Car for
considerably less than others were bidding on. Dealer allegedly breached K when told Π
would have to bid rather than buy outright. Π sought specific performance.
ii. Issue: Was specific performance proper remedy if Π’s did not show legal remedies were
inadequate?
iii. Rule: may grant specific performance where goods are unique or in other proper
circumstances, i.e. goods can’t be obtained elsewhere w/out considerable delay, expense, or
inconvenience
iv. Analysis:
a. Car’s mileage, condition, ownership and appearance would make it difficult if not
impossible to obtain its replication w/out considerable expense, delay and
inconvenience
v. Conclusion:
a. Court granted specific performance
b. Specific performance probably was the more efficient outcome
vi. In Class Analysis:
a. Assuming had money, why didn’t he buy car, then recover damages for difference,
if wanted so bad?
1. What is LH we prevail?
2. Guessing whether property or liability rule will be applied.
i) Mitch: If really want car, just buy it. Don’t take risk of which rule
will be applied.
E. Right Valuation, Revisted
i. Similar to Bartell inquiry
ii. Note: on exam, if have similar facts to Bartell, Sears, or Baby M, likely not deciding who
right should go to, but how to value the right
iii. Make sure know what your being asked. Remainder will be being creative, looking at
different approaches might take.
F. Rush v. Sears, 1983 10/27 - listen to beginning of class!
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i. Facts: Tent caught on fire, injured girl and killed another. Filed products liability suit based
on failure to use flame retardant fabric. Jury awarded 300K to the dead child’s estate, and 4
million to surviving child
ii. Analysis:
a. Court affirmed deceased child’s award, but reduced survivor’s to 1.5 mil b/c was
excessive
b. If didn’t want to accept 1.5 mil, could have re-trial
c. Is this an inalienable property right?
1. Donna owns her skin. Social context - irrationality of people that may
waive the right (also, what a/b minors?). Under this approach, likely
inalienable.
2. Also a function of very extensive regulation, shouldn’t be confined to “no
one” or “everyone.” Rather, could limit inalienability to incompetents,
minors, etc. Concerned w/ relative sophistication of the party’s
d. Analogy to Bartell
1. Both cases involve hard to value injury.
2. Hypo:
i) If sell right for 10 dollars when buy tent, reveal preferences.
ii) She is thinking a/b b/f, whereas court must determine ex post
iii. Damages
a. Should not be excessive, disproportionate to community standards, shock the
conscious, improper motive, etc. (p. 207).
1. These terms are more objective than Bartell. Suggest scientific way to
calculate damages
2. Want to determine value of property to OWNER. Here, leaning to more
objective than subjective injury.
b. Compare w/ Bartell 27 min
1. In Bartell, had “psychic loss.” No physical loss, no pain, its “all in your
head”
2. Weakness of liability rule
i) Normative view: should find most accurate determination of
subjective damages (i.e. pain to Bobby Joe)
ii) Problem: how can you even do this???
c. Freedom of choice: value in being able to engage in risky behavior.
d. Sometimes, stare decisis provides a comfortable reference point
G. In the Matter of Baby M, 1988 56 min - Inalienability Rule (spill on surrogacy)
i. Facts: Surrogacy contract. Promised to end maternity / paternity rights under Parentage
Act. Surrogate mother was to be paid 10K.
ii. Analysis:
a. Court invalidates K as a/g public policy and NJ statute
b. Public Policy
1. K bears no relationship to settled law that child’s best interest shall
determine custody
2. Children should remain w/ and be brought up by natural parents
3. No counseling or warning to mother; no evaluation
4. Under K, irrevocably committed b/f understand strength of mother/child
bond
i) Court says NOT voluntary
5. “Sale of a child, or at very least, sale of mother’s right to her child”
c. Inalienability - protecting a right by making transactions illegal or void
iii. Contractual analysis
a. What tools used here?
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1. Revealed preferences
b. What weaknesses?
1. Large disparity in income
i) More I get for womb, more likely to fall under exception (i.e. can’t
sell)
ii) Ryan - Unconscionability - less he gets, more likely to get to use
unconscionability
iii) *Get in trouble for receiving too little and too much in K cases
2. Dual preferences - not so much that surrogate prefers $ to her womb or the
child
3. Problem w/ entering K b/f actually bear the child
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CH. 5 - THE ECONOMICS OF TORT LAW
I. INTRODUCTION 11/1
A. Torts
i. Simply imposing involuntary externalities on others
ii. How different from K scenario?
a. Here, parties engaged in transaction, but not voluntary.
b. Haven’t had opportunity to negotiate
c. Thus, thinking of social K - exists among citizens working w/in same social rubric.
iii. What K-ual assumptions are reflected, i.e. they’re revealed (actual) preferences?
a. Not so different from Ks. Often, can predict ex ante what party’s preferences
would have been.
iv. Minimize costs of harms resulting from intentional / unintentional acts
a. Costs of harms - broad enough to include costs of harms themselves as well as
costs of avoiding harm and administration of those actions
b. Insure that costs of harmful effects are internalized by the responsible party
c. Note: focusing here on unintentional torts
v. Often, party who could avoid the harm at the lowest cost is held liable
a. Party committing intentional act in best position to avoid the wrong; make decision
a/b whether benefits of activity outweigh its costs
b. Should be liable and pay for those actions and consequences
vi. Allocative Efficiency: Requires parties internalize the full cost of activities
vii. Issue: To what extent are economic goals achieved?
B. N
i. Have accidents not worth having.
ii. Look at horizontally rather than vertically.
II. THE COSTS OF ACCIDENTS AND THE ECONOMICS OF TORT LAW
A. Three types of costs that result from accidents:
i. Primary costs - associated w/ harm to injured party
a. Ex: cost of medical care and lost earning capacity
ii. Secondary costs - societal costs resulting from accidents
a. Not $ costs, but “costs of bearing the costs of accidents”
iii. Tertiary costs - associated w/ administering the tort system
B. Minimizing one cost may not be consistent w/ minimizing another cost
C. At some point, costs of avoiding accidents would be greater than harm that would be caused by
those accidents
i. Thus, economic goal is to minimize sum of the costs of accidents and costs of efforts to
prevent accidents
ii. Consistent w/ allocative efficiency
iii. Also consistent w/ productive efficiency, where economist interested in avoidance steps
should be least costly available
D. Coase Theorem
i. Rights should wind up in possession of party who values them the most
a. If right owned by Π, Δ will be liable for “breaching duty if Π injured
b. If right owned by Δ, NO duty owed to Π and thus Δ will not be liable
ii. Issue: who will pay more for the right?
a. Rational consumer formula: Value of Right = or < [Probability of Injury * (Damage
or Cost of Avoiding Injury, whichever is lower)]
b. Must compare with Δ’s cost to prevent injury
c. Who would bid more?
iii. Under Coase Theorem, initial assignment will not affect the eventual ownership of the right
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a. But, w/ liability rules, crucial for courts to make correct initial assignment
III. BASIC N
A. Adams v. Bullock, 1919
i. Facts: Trolley wire over bridge was out of pedestrian’s reach and in a safe area. Boy had a
large, 8 ft dangling wire, touched trolley wire, and burned himself. T.C. held for boy.
ii. A.C. reversed finding duty, but no breach; and that injuries or harm were not foreseeable.
a. If company forced to bury wire or do something else, would be costly and not
economically efficient
b. Burden weighed a/g negative externalities; not positive v. negative externalities
iii. In Class Analysis
a. Is child creating externality for RR?
1. RR has property right in placing of live wires where harm not 4Cable as
defined by R-ly anticipated activities of pedestrians
2. Child only has property right as to R activities
b. Want lowest cost avoider (child) to bear costs
1. Child’s unusual behavior created accident
2. Should be held responsible
B. US v. Carroll Towing, 1947
i. Facts: Anna C owned by Conner Co. and was chartered to Pennsylvania RR Co., who
loaded w/ flour belonging to the U.S. Charter required Conner to provide a bargee
(operator/attendant) b/t 8-4. Servants of a tug working for Carroll Towing shifted mooring
lines, which caused the Anna C to break free from pier. She then drifted and tanker
propeller broke hole in her bottom, and she sank. The flour was lost.
ii. Duty (Signaling)
a. Owner’s duty
1. The probability she will break away (P)
2. The gravity of the resulting injury (L)
3. The burden of adequate precautions (B)
b. B < LP? If so, party was N.
iii. Note
a. L&E makes you think more about the components of the problem rather than the
overall maximization and specific equations of economics
iv. In Class Analysis
a. Society wants liability allocated 100% to one party, so that one will have economic
incentive to prevent accident from re-occurring.
b. When people share responsibility, have diminishment of incentive to engage in
preventative measures
c. Coasian solutions
1. Δs get together, one does training, each pay 350K, avoid 500K judgment
2. Corporate Lawyers:
i) Efficiencies to be gained b/t independent companies. By
internalizing costs, companies are better able to act efficiently.
ii) Often, acquisitions eliminate high transactions costs. Don’t have to
compete for the right anymore!!!
d. What a/b the bargee? Didn’t tie up barge, so what is his role? Is he to be a captive
prisoner of the barge?
1. What is standard operating procedure?
i) Industry practice is itself a common law (efficient rules)
ii) Becomes enforceable doctrine!
2. If don’t have industry standard, must do analysis:
i) How much would it cost to keep bargee on boat?
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ii) What is the probability of harm? How is this probability affected
by a new rule of keeping bargee on boat?
iii) Gravity of loss?
3. Large companies are always performing cost benefit analysis. Thinking a/b
strict compliance procedures, not reputational concerns.
i) But … with certain accidents (oil spills), must add reputational
harms to your analysis
e. What data what you compare when deciding who to impose liability on?
1. Lowest cost avoider - assign liability to them
2. Ideally, would have comparative N rules to achieve outcome
IV. CONTRIBUTORY N 11/3
A. Introduction
i. Straight application of the hand Formula would mean a party is N and liable when his cost
avoidance is less than the expected harm
ii. Often, however, this may not minimize the costs of accidents
a. Maybe Π could have avoided accident at even lower cost
b. Maybe, activity is one where risks cannot be eliminated, or are actually the source
of utility
iii. Issue: are other doctrines of N more or less efficient than simply focusing on the Δ w/ the
Hand formula?
B. Torts as an Imputed Social K
i. Want to ensure accidents not worth happening don’t happen. Ultimately, question for
society is who will pay for accidents.
a. Want system that will make lowest cost avoiders bear costs of accident
b. If activity’s create externalities, want those costs to be internalized so that will
decide whether worth the risk.
c. Widgets / Pollution example: if costs of widgets greater than what people willing to
pay, should quit producing
ii. What is the efficient approach?
a. Look at loss and probability (expected value of loss).
b. Then determine whether Δ could have avoided cost lower than that number.
c. If lower than expected value of loss, Δ was N.
iii. Problem:
a. If apply Learned hand to Δs, may have situation where Δ can avoid cost at lower
than P*L, but Π may be able to avoid cost at an even lower amount.
b. Here, not acting efficiently. Would rather hold Π at least partly liable, i.e.
contributory N
C. Butterfield v. Forrester, 1809 9 min
i. Facts: horse running on road super fast, someone put out pole and injured horse.
ii. Issue: does contributory N apply.
iii. Analysis:
a. Assuming Δ was N. If Π could have avoided cost (was also N), will apply
contributory N.
b. But … who is the most efficient cost avoider? What test can we apply?
1. Compare dollar figures. If one larger than other, assign liability to lowest
cost avoider.
i) Would be cheaper for horseman to go slow at night than for pole
owner to keep man there to raise pole.
ii) IF split damages b/t two, damages might be lower than each party’s
avoidance cost, so both now better off. This is bad!
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2. See issue w/ indemnification clauses - shift costs to party who can avoid
loss most efficiently
i) Always look for explanations of tort laws that do not fit economic
ideas. Ex: torts as redistribution of health care. How does this
make economic sense?
D. Lenz. v. Ridgewood Associates, 1981 17:30 min
i. Facts: Π slipped on ice on Δ’s property and sued for damages. A.C. reversed T.C.’s
granting of Δ’s SJ.
ii. Duty
a. CL duty to maintain property to avoid injury
b. Two lines of duty:
1. Condition of premises occupied by tenant; and
2. Condition of common areas
3. *This case is about # 2
c. Duty of L to maintain and properly care for common areas
iii. Analysis:
a. Court finds Π’s evidence is enough to overturn Δ’s directed verdicts
1. Ice resulted from natural accumulation
2. There was no duty. If there was a duty, there was no breach.
b. Contributory N (if Π is at all N the Π loses)
1. Objective standard: whether a RPP would have left an apartment for a R-ly
necessary mission
2. Court says it’s a jury questions whether he is N as well or whether he
should have taken the other alternate route
c. Thus, decision turns on jury verdict as to whether Π left an apartment for a R-ly
necessary mission
d. Social consideration
1. Hypo: one leaves to go to class, one leaves to get fresh air.
i) Efficiency outcome: lowest cost avoider will be held liable
a) Fresh air dude held liable.
b) Class dude wins verdict a/g L.
ii) Problem: could cause frivolous lawsuits; evidentiary problems how do juries decide?
2. Hypo: neighborhood of retirees who’s only reason to go out is getting fresh
air v. wealthy neighborhood where all residents must go out to do brain
surgery
i) Interpersonal comparisons of utility problem.
ii) Wealth distribution problem, in that starting place may determine
how utilities are valued.
iii) What a/b bankers? Might create a wealth bias.
E. Crews v. Hollenbach, 2000 50 min
i. Facts: Π was foreman of gas-line repair team; seriously injured by explosion after called to
scene of a gas leak
ii. Issue: Did Π assume the risk by virtue of his occupation?
a. AoR: voluntary and intentional exposure to a known risk which bars recovery to Π
b. Court says yes, even though will not apply primary assumption, or secondary
assumption, but just the overall AoR.
iii. Rule: When Π in a personal injury action becomes aware of previously created risk and
voluntarily chooses to put up w/ the situation, his willingness to take that chance would be
implied and he would be barred from recovery for a risk he chose to assume
iv. Analysis:
a. AoR if…
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1. Π had knowledge of the risk
2. Appreciated the risk
3. Voluntarily exposed himself to that risk
i) Voluntary: no restrictions on his choices (freely/knowingly)
b. Will this result in efficient cost avoidance when Π found to have assumed a
secondary risk under this test? Or, will only be triggered when cost avoidance for
Π is < P*L?
v. AoR (see p. 181)
a. Primary AoR - fire fighters rule - job entails the risk
1. Common thread in cases - Π has already been paid for damages. Lose
automatically
2. Hypo:
i) Jockey thrown from horse, sued. Ct held that due to Primary AoR,
she was liable for risk. She could have bought insurance.
ii) What if thrown b/c bridle breaks? Would imagine would hold up
normally, so likely wasn’t a risk “primary” to the activity.
iii) Saw crack in helmet, told fellow racer. Should you have pulled out
of the race? Now, moving to secondary
3. Hypo: High school football coach’s liability to player who dies from heat
exhaustion.
i) Completely uncompensated - likely secondary
b. Secondary AoR - structurally similar to contributory N
1. If secondary, apply learned hand formula (don’t lose automatically)
2. Private v. public Employee
F. Exam Analysis
i. Argue why different tests should or should not apply
a. Crews test - classic primary AoR case
b. High school football player - what should apply?
ii. Ex: this should be the rule in this set of facts, but if they were different, this should be the
rule. See PPT.
iii. Learned Hand v. Contributory N (AoR)?
V. COMPARATIVE N 11/8
A. Introduction
i. Vast majority of states apply Comparative N over Contributory N
a. Effort to alter perceived inequity resulting from the “all or nothing” application of
N and Contributory N
b. But, what system provides the best cost avoider the maximum incentive to avoid
the harm?
ii. Four Types of N, Thus Far
a. Pure - 100%
1. Loss apportioned among parties according to how fault is allocated b/t them
2. Injured party’s recover is reduced, but not necessarily eliminated, b/c of N
3. Ex: if Π 99% N, and Δ 1% N, Δ pays 1% of damages
b. Modified - greater than or equal to 50%
1. If Π’s N is equal to or greater than Δs, Π gets NOTHING
c. Slight / Gross - greater than slight
1. Π must be slight, Δ gross, to be “off the hook.”
i) Below slight - 10% - Δ gross - 90% = Π will pay 10% of damages.
Trying to avoid paying for everything! Can be a little N here.
2. If Π’s N is more than slight when compared w/ Δ, Π gets NOTHING
d. Contributory - greater than 0% (any N on Π’s part bars recovery)
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iii. PPT - Brain Surgery v. Getting Fresh Air 8 min
a. If deciding b/t two, Π is lower cost avoider. Thus, under contributory N, all
liability may be allocated to Π.
b. Also, if allocate b/t two, won’t take prophylactic measures to prevent from
happening again.
c. Conducting an efficiency analysis. Are these accident’s worth having?
1. Yes - Storm / Brain Surgery
2. No - No-Storm / Brain Surgery - Δ may avoid at lower cost
3. No - Storm / Fresh-Air - Π may avoid at lower cost
4. No - No-Storm / Fresh-Air - both may avoid at lower cost
i) ΠB < ΔB? Π should be liable, b/c lower cost avoider
ii) ΠB > ΔB? Δ should be liable, b/c lower cost avoider
iv. Issue: is Comparative N, in any of its forms, superior in reducing any of those costs?
v. Test:
a. Is accident worth having?
b. Who is lowest cost avoider?
c. What is the outcome under the rule, and is it efficient?
B. Is Contributory N Efficient? 18:30 min
i. PB and DB > P*L.
a. Accident worth having? Yes! Remember, don’t reach Contrib. N unless Δ has
been N, which hasn’t happened here.
b. Efficient, b/c under Learned Hand, Δ will not have to pay, and case will never be
brought.
ii. PB < PL / DB > PL.
a. Efficient? Yes! Δ is never N, so case would never be brought (but see, infra, strict
liability).
iii. PB > PL / DB < PL.
a. Yes! Contrib N in play, b/c Δ has been N. However, Π was not Contrib. N.
Accident not worth having.
b. What is outcome under this rule? ALL liability put on Δ, so accident will not
happen in future. Π will have NO liability, b/c couldn’t have avoided accident at
cost < PL.
c. Efficient? Here, Contrib. N gets us the right answer.
iv. For both parties, B > PL
a. PB < DB.
1. Yes! Won’t put all costs on Δ and won’t make party’s share.
2. Accident not worth having. Π will bear all the costs.
3. Coasian escape: allow parties to negotiate for right.
b. PB > DB.
1. Accident not worth having.
2. Δ could avoid more efficiently, but b/c Π was N, he gets nothing.
3. NOT efficient rule here (unless have Coasian negotiation).
C. Is Slight / Gross Comparative N Efficient? 37 min
i. PB and DB > P*L.
a. Yes!
ii. PB < PL / DB > PL.
a. Yes!
iii. PB > PL / DB < PL.
a. Yes! Accident not worth having, and under slight gross / Δ will pay, b/c Δ 100%
N.
iv. For both parties, B > PL:
a. PB < DB.
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1. Π will pay ALL, as soon as Π more than slight and Δ less than gross.
2. Efficient? Yes, b/c Π is lowest cost avoider.
b. PB > DB.
1. Clearly, not worth having accident.
2. However, unclear whether Π’s is slight is ambiguous from picture.
3. However, assume Δ is less than slight. Efficient? Maybe.
c. Note: check PPT on 20/80 % v. 35/65 %.
D. Is Modified Comparative N Efficient? 58 min
i. Rule: if 50% or more as Π, you pay.
ii. PB and DB > P*L.
a. Yes!
iii. PB < PL / DB > PL.
a. Yes!
iv. PB > PL / DB < PL.
a. Yes!
v. For both parties, B > PL:
a. PB < DB.
1. Accident not worth having.
2. Π is lowest cost avoider.
3. What is the outcome, and is it efficient? Π will pay full amount!
b. PB > DB.
1. Π wins, b/c clearly less than 50%.
2. But … in comparative liability realm, so if spit was 20 / 80, will pay 20%.
E. Is Pure Comparative N Efficient? 1hr, 3 min
i. PB and DB > P*L.
a. Yes!
ii. PB < PL / DB > PL.
a. Yes!
iii. PB > PL / DB < PL.
a. Yes!
iv. For both parties, B > PL.
a. Similar to prisoner’s dilemma, b/c by both parties not taking steps to avoid loss,
both are uncertain as to which other will do.
b. ??? Listen here
c. ??? Listen here
v. Numbers PPT
a. # 1:
1. Total damages of 1K. Under pure comparative, split 250 / 750.
2. Compare w/ cost of avoidance, which is 300 / 700.
3. Π will avoid accident. Δ will not.
b. # 2:
1. Total damages of 1K. Under pure comparative, split 250 / 750.
2. Compare w/ cost of avoidance, which is $180 / $60.
3. Both will have strong incentive to avoid accident.
4. Chicken game
i) Who, at last second, will invest in avoidance, so that they don’t eat
liability?
ii) Can’t tell, b/c each will think other will invest.
5. Tort law as redistribution of wealth. Is it efficient?
F. Hoffman v. Jones, 1973 - Pure Comparative N
i. Facts: Widow brought wrongful death suits both in her individual capacity and as
administratrix of deceased husband's estate
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ii. Issue: should contributory N be replaced w/ comparative N?
iii. Rule: Court accepts Pure comparative N
iv. Analysis:
a. Comparative N bars Π from recovering any amount over amount he himself added
to the N.
1. Pure – Π can recover any part that is not cause by their N
2. Modified – Π can recover if the Δ is more than 50% N
3. Slight/gross – Π can recover if Π is 50% or less N
b. More equitable, as accidents often caused by N of both parties
c. While contributory favored economic development, but now important to protect
individuals
d. Increased use of automobile / accidents
1. Compensation v. accident prevention as justice
e. Secondary and tertiary costs of accidents
1. Tertiary - costs of bringing cases
2. Comparative may be better at spreading costs and achieving administrative
efficiencies
v. “Historically, contributory N was adopted to protect the essential growth of industries,
particularly transportation. Modern economic and social customs, however, favor the
individual, not industry.” p. 342. Listen @ 11/10, 22:30 - 39 min
a. L & E here is idea that economics can take a valuation, and achieve an efficient
outcome.
b. Utilitarianism v. Individualistic View of Rights
1. Utilitarian - assign liability to farm owner v. train shrieking through is
property
2. This may not represent a present day utility valuation. Maybe its temporal,
i.e. sacrifice individual in favor of future gains for industry
3. Possibly, transferring wealth to future society (could we do this in the
present economy, though?)
c. Shifts in societal values may change how these rules are imposed (i.e. comparative
v. contributory).
d. Bullard: today, more in contributory N area.
G. Dutton v. Travis, 1996 - Modified Comparative N
i. Facts: Δ was driving and hit Π, an elderly woman crossing the street. DC granted SJ for Δ,
finding Π contributory N. Π appealed.
ii. Issue: did DC err in finding Π contributory N?
iii. Analysis:
a. NE uses form of Comparative fault where Π cannot recover if Π’s fault is greater or
equal to Δ’s fault
1. Δ has burden of proving, under facts most favorable to Π, that Π’s N is
equal to or greater than Δ’s N, as a matter of law
b. Court introduces some recent standards
1. When a pedestrian leaves a place of safety, there is contributory N
2. Pedestrian who crosses street required to keep constant lookout for his or
her own safety
3. Jury question presented if injury results from situation where injured
concluded he could avoid injury
c. Π obviously crossed when shouldn’t have, but Δ also did not exercise due care in
observing her surroundings as a driver
d. Lowest cost avoider problem (pedestrian not cross (low cost) vs. the accident)
iv. Holding: under modified comparative N, genuine issue of material fact existed as to
whether Π’s N was > or = Δ’s N so as to bar Π’s recovery
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H. Efficiency of N Rules PP 11/10 10 min - please listen too!
i. Relates to chicken game, prisoner’s dilemma
ii. Is the accident worth having?
iii. Is the lowest cost avoider liable?
VI. STRICT LIABILITY
A. Introduction
i. Party is liable for damage caused by her activity, even if there is no showing of N
ii. As an economic matter, SL differs from N in important ways:
a. Court’s decision that one has acted N-ly means that harm could have been avoided
at a lower cost that the harm itself
1. In SL, this comparison is NOT made
b. Under N, if harm was avoidable at relatively low costs, harm-causing party must
internalize: (1) cost of the harm or (2) its avoidance.
1. SL focuses on activity itself, and classifies some results whose costs must
be internalized, regardless of whether firm could have R-ly avoided them.
2. Firm then must decide whether to avoid or pay for the harm (similar to
Hand Formula, but only deciding profit-maximizing interest).
iii. Judicial Issue
a. When should an externality be internalized?
iv. Note:
a. While SL and PL often associated, not synonymous, i.e. PL case could be based on
N Std.
v. Bullard:
a. In SL regime, party assigned liability will NOT take preventative measures to keep
accidents from happening again.
b. Ex:
1. Woman murdered in dark parking lot.
2. Cost to avoid would be prohibitively too high for both Π and Δ.
3. Thus, NEITHER party will take steps to avoid in the future.
vi. ***Didn’t read Indiana Harbor, but probably should
B. Indiana Harbor Belt Railway v. American Cynamid Company, 1990
i. Facts: Tank leaked and spilled almost 5K gallons of fluid; EPA ordered yard to clean up,
which cost 981K. Π (RR yard) sued Δ manufacture / shipper for costs of clean up. D.C.
found for Π. 7th Cir. reversed, as Δ not SL.
ii. Two count complaint:
a. Δ maintained leased tank car N-ly;
b. B/c shipping material through the Chicago Metro area was abnormally dangerous
activity, Δ’s are SL.
iii. Rule: R. 520: Six factors to determine whether SL applies: 1hr, 1 min
a. Existence of high RH;
b. LH of great harm;
c. Inability to eliminate risk through R care;
1. Most important
d. Extent activity is common usage;
e. Inappropriateness of activity to place;
1. May simply reflect disguised N determination
f. Extent to which value to community outweighed by dangerousness
iv. Analysis:
a. 53rd in the 125 most dangerous transported materials
1. T.C.: accident was not b/c of the chemical’s properties (corrosiveness), but
rather carelessness
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2. A.C.:
i) Reasoning is flawed, b/c using truisms rather than fact.
ii) “Large quantities of anything” can create problems
v. “If the vast majority of chemicals spills by RRs are preventable by due care, the
imposition of SL should cause only a slight, not as they argue a substantial, rise in
insurance rates b/c the incremental liability should be slight.” 55 min
a. If all accidents covered under N, leaves almost no accidents for SL.
b. This is a N case, deciding under SL will make NO difference to insurance co.
vi. “… the feasibility of avoiding accidents simply by being careful is an argument a/g SL”
vii. Tertiary costs
a. Administrative costs very high! No need for prolonged, costly litigation w/ SL
b. “If you punish someone enough, you can change the weather” - summary at class
end.
C. SL Conclusion
i. Provide for damages in context where, for one reason or another, can’t make LH Formula
work
ii. Mode 1:
a. Scenario where accidents ARE worth having, and there is an allocative efficiency
question as to who is the most efficient bearer of the cost of the accident,
b. Here, the accident will NOT be prevented, b/c no efficient way to do so
iii. Mode 2: proxy (alternative) scenario:
a. Very difficult, costly or uncertain when try to apply LH formula where think there
is at least one efficient cost avoider, but not sure who it is.
b. Here, SL steps into LH’s role
VII.
THE TIME VALUE OF MONEY AND DISCOUNTING 11/15
A. Dollar today worth a lot more than dollar in future, b/c dollar loses value
i. Risk of inflation
a. Ex: loaf of bread in Yr 1 costing $1 will costs $1.06 in Yr 2
b. Rule of 7’s:
1. If something  at 7% a year, it will double in 10 years.
2. If  at 10% a year will double in 7 years.
ii. Time Value of Money PPT
a. Value tends to  as time goes on.
b. Today, people comment on low rate of inflation which helps seniors. But … get
low interest rates.
1. Whenever make investment, how much risk are you taking?
2. Are they paying you enough for your risk?
B. Idea of Present Value
i. What is the value of receiving money in future in present day dollars, i.e. assuming a certain
rate of return (discount rate) what amt of investment will yield X dollars at end of period?
a. Should we get a lump sum or fixed annual payment?
b. What will the total be at the end of the period?
ii. Ex: If injured by someone else’s N and unable to work, what single sum would make you
whole?
a. Any lump sum you collect today can be invested, and you would t/f be better off
than if you were paid in annual installments
b. Thus, should receive PV of those future annual payments
c. PV = total amount “discounted” by amount can expect to earn on safe investment
iii. Δ’s want to exaggerate the discount rate
a. Discount rate is expected rate of return
1. See PV of Annuity Table PPT
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b. Higher rate of return, lower front load payment client will get
c. Thus, Π’s lawyer should make sure discount rate is fair, and overcome client’s bias
of taking lump sum
1. It’s my money, and I want it now!
2. Also, Π’s who get lump sum spend $ extremely quickly
VIII.
RISK AVERSION AND THE DIMINISHING MARGINAL UTILITY OF MONEY 39 min
A. Risk Aversion
i. People tend to be risk averse, i.e. the place a negative value on risk, especially when
associated w/ a loss
a. Generate psychic income by protecting one’s self from risk
b. Often, avoiding risk is valued higher than an equal gain.
ii. Coin flip hypo: most would rather get out of situation altogether
iii. However, sometimes people to pay to experience risk…
a. Ex: casino goers
b. Ex: riding scary roller coaster
c. However, most of this takes place in controlled circumstances
B. Diminishing Utility of Money
i. As one’s wealth or income increase, the value attributed to each additional dollar declines
a. If true,  in utility rusting from losing a certain sum of $ would be greater than the
 in utility resulting from gaining that same amount
b. Often, pleasure of gaining another dollar not as great as pain felt from giving up
dollar
ii. Insurance
a. Hypo: 10 of use w/ identical risk of losing 1K. If all willing to pay 100, eliminate
risk. Why do we do this? Don’t know who will bear the cost.
1. Costs of 1K reflects risk aversion
2. Shows people value avoiding risks
b. If look as every additional dollar as a growing cost, paying 100 up front is a pretty
good deal.
iii. Expected Value Coin Flip PPT 47:30 min
a. Hypo
1. Heads you win 10K
i) .5 * 10K = 5K
2. Tails you lose 5K
i) .5 * (5K) = (2.5K)
3. Present value (expected value) = 2.5K
b. Who would finance such a transaction?
1. Someone who is able to spread the risk over repeat players of the same kind
of bet.
c. If class could collectively share gains and losses, class would likely take bet.
iv. Risk of Buying an Annuity
a. Interest rates  after buy annuity.
b. Inflation , income stream initially calculated can’t maintain standard of living your
client wanted 54:30 min
c. Some would rather manage assets themselves
v. Deal or No Deal 1hr, 1 min
a. When have 10 suitcases left, and they offer 150K; expected value is 250K. Player
inevitably turns it down.
b. Is that showing risk aversion? NO, showing the opposite! People are being given
150K, marginal utility of which is probably the same as if they won the 850K
c. Picking people who will behave a certain way if money not in their pocket.
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vi. Chocolate Bars PPT 1hr 6 min
a. Offer kid chocolate bar now, or offer three in an hour. Always take bar now.
b. If take time in which offering bar, say will be either in a year or a year in a day, will
always take 3 chocolate bars
1. Further out extend the first payoff, more that our perception of the
difference grows and the immediacy of the return diminishes
2. Acting irrationally!
c. Works w/ $ too!
1. As time goes on, make more rational choices
IX. PUNITIVE DAMAGES
A. Kemezy v. Peters, 1996
i. Facts: Π sued Officer Peters, alleging he beat him w/ a night stick while moonlighting as a
security guard. Π awarded 10K in compensatory and 20K in punitive damages. Δ
appealed, as Π did not put into evidence Δ’s net worth.
ii. Issue: Is Π required to produce to the jury Δ’s net worth when seeking punitive damages?
iii. Rule: No.
iv. Analysis:
a. Why award punitive damages?
1. Compensatory damages do not always compensate fully
2. Ensure tortious conduct is not under-deterred (efficiency based analysis)
i) Everyone injured doesn’t always sue
ii) Want to be sure damages adequately deter accidents not worth
happening
3. Ensure people channel transaction through the market when the costs of
voluntary transactions are low
4. When a tortious act is concealable, a judgment equal to the harm done by
the act will under deter
5. Award of punitive expresses the community’s abhorrence at the Δ’s act
6. Punitive damages relieve the pressures on the criminal justice system
7. Head off breaches of peace by preventing violent self-help
b. Δ argues that forcing him to introduce evidence of his net worth is an admission
that his conduct warrants punitive damages
c. Δ should not be allowed to plead poverty if his employer or insurance company will
pick up the tab
d. Analysis suggests the wealthy will be more likely than the poor to engage in
activities for which the punishment is a fin
CH. 4: ECONOMIC OF PROMISSORY OBLIGATIONS
I. INTRODUCTION
A. Formation of K increases wealth and utility
B. But … when behavioral assumptions examined, questions raised as to:
i. Consent
ii. Capacity
iii. Mistake
iv. Unconscionability
a. Be able to make efficiency based argument in support of on exam!!!
b. Leave bleeding heart outside of exam!
v. Efficiency
C. Macro and Micro Component
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i. Macro: why do we have K law at all, or why would we ever enforce a gratuitous promise?
ii. Micro: what constitutes an offer, when should non-performance be excused, what is the
appropriate remedy?
D. Coasian Perspective
i. Issues
a. Broad: should there be a publicly financed system of K enforcement?
b. Narrow: whether liquidated damages clauses should be enforced
ii. How would a transaction-cost-free market settle these questions?
E. Contract Modes 9 min
i. Reflects application of efficient set of rules
ii. Re-distributional function
a. Ex: Unconscionability
F. Final Thoughts
i. Having a public system of K law adjudication and enforcement is not costless. Do the
benefits of having such as system exceed the costs?
ii. Is the system that has evolved consistent w/ my notion of economic justice?
iii. Rawls’ “veil of ignorance”
II. REVEALED PREFERENCES
A. K reflects revealed preferences of parties
i. Irrational, sometimes?
ii. Exam: explain whether would accept guilty plea of person similar to Moran
B. Have enforcement, b/c societal value in binding self to K
i. Use public mechanism, typically
ii. But … have private mechanisms as well (arbitration)
C. Objectivist Theory
i. Standing outside of understanding of parties is an objective standard to determine what K
means
a. “Objective indicia of meaning”
ii. Modern approach
iii. Holmes quote from Frigaliment
a. “… the making of a K depends not on the agreement of two minds in one intention,
but on the agreement of two sets of external signs—not on the parties' having meant
the same thing but on their having said the same thing.”
iv. Why do we have Ks?
a. Bullard: Must be b/c of objectivist philosophy
III. WHAT DO ECONOMISTS WANT FROM THE COURTS?
A. Economists will ask: “what did they bargain for at time they revealed their preferences?”
B. But … if Coase’s Theorem is accurate and TC low, parties can bargain for right later
i. What is the right result?
ii. Does it matter if courts get right result?
C. Judges and Lawyers
i. Judges, whether they know it, use tools in determining most efficient approach
ii. Lawyers try to predict which laws judges will apply.
a. Saves litigation costs.
b. Not a/b disagreement b/t parties, but disagreement as to what court will interpret it
to mean.
IV. REDUCING TRANSACTION COSTS
A. Introduction
i. How would exchange work in a world w/out K law?
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ii. Think a/b general role of K-ing process and judicial involvement
B. Frigaliment Importing Co. v. BNS, 1960 25 min
i. Facts: Frigaliment ordered a lot of “chicken” from BNS. However, attached different
meaning to word than BNS. BNS, who was new to business, shipped older chicken, b/c
was only way could profit on terms of sale. Frigaliment can’t use old chicken.
ii. Analysis:
a. Π argued if willing to accept shity chickens, wouldn’t have paid so much!
1. Δ’s counter: should have known by low price weren’t getting good
chickens
2. Here, dealing w/ K doctrine of mistake of fact. Efficient?
i) NO: creates profit for opportunistic people
ii) Could look at difference in price, decide what is fair
iii) Business v. Retail context - here, have repeat player
iv) Who is most efficient loss avoider?
a) High burden to have seller keep an eye on the buyer’s
offered price
b) External rules of thumb
c) EXAM: banish should from exam.
1) Offensive to economics.
2) Say “why they ‘should’ do is less costly”, i.e. “the
better approach is.”
b. Will rule change people’s behavior? Will they now be more efficient?
c. What a/b different meanings in different portions of the same K?
1. Say one thing one place, should mean same thing another place
2. You speak, you define rule
3. *Construction rule: “If mean narrower, say narrower” LISTEN @ 51 min
i) When you use a term w/ both broad and narrow meaning, burden
should always be on person claiming narrow interpretation
ii) If mean a sub-set of the category, SAY SO! Otherwise, will
interpret term to include ENTIRE set.
iii) Bullard: this is efficient general rule
iv) Efficiency theory as to why it would cost less to impose this rule.
Remember, All we care a/b is the ultimate cost to society
4. Should place burden on person buying good, b/c will cost less.
d. ***Coase taught us…
1. Want right rule
2. Even if wrong rule want predictive rule, b/c then parties may bargain for
rule
C. Lowering Transaction Costs
i. Possible contingency is that parties will not agree on definition of a term, even though at
time of K-ing, may not perceive a problem
ii. K law provides default definitions or a process for determining definitions (gap-filing
function)
D. Allocating Risks
i. Parties don’t always do upfront, which is where court must step in
ii. Ex: risk of consequential damages or some unforeseen circumstance that makes
performance more difficult
E. Trade Usage as Gap Filler
i. Efficient?
ii. What if one party is industry newcomer and other is veteran?
a. Economic justification
b. Consistent w/ economic justice?
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V. K LAW AND DISTRIBUTIVE OUTCOMES
A. Introduction
i. Distributive Implications
a. Public system of K enforcement increase access to courts by those who might not
be able to afford private enforcement and arbitration services
b. K law may be seen as means of achieving economic justices, inconsistent w/
traditional notions of efficiency
ii. Can K law alone have a meaningful distributive impact?
B. Jones v. Star Credit Corp., 1969 58:30 min
i. Facts:
a. Seller sold freezer unit for $900 ($1,439.69 including credit charges and $18 sales
tax) having actual retail value of $300.
b. Buyers and welfare recipients brought action to reform sales K which was allegedly
unconscionable.
ii. Rule:
a. If the ct finds K or any clause of K to have been unconscionable at time made, ct
MAY:
1. Refuse to enforce K;
2. Enforce remainder of K w/out unconscionable clause; OR
3. So limit application of any unconscionable clause as to avoid any
unconscionable result.
b. Unconscionable: weakness in the bargaining process that is shown by gross
inequality of bargaining power together w/ terms unreasonably favorable to the
other party
iii. Analysis:
a. Selling for $900 ($1,439.69 including credit charges and $18 sales tax) a freezer
unit having an actual retail value of $300 was, under the UCC, unconscionable.
b. “The law is beginning to fight back a/g those who once took advantage of the poor
and illiterate w/out risk of ether exposure or interference”
1. Bullard: of course they took risk!
c. EXAM QUESTION 1 hr - In many states, loans up to $400 for 1 month are
allowed at an annual rate of 522%. Is that efficient?
1. Rule: risk / benefit analysis
i) Argue market drives high risk, hence the high interest rate
ii) Is it the borrower’s fault that they are not educated?
2. Cause and effect explanation
i) Let people pay; OR
ii) Regulate
3. Welfare could step in
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