Law and Economics Notes

LAW AND ECONOMICS
ECONOMICS 4450/6450
OUTLINE OF NOTES
DAVID B. MUSTARD

------------------------------------------------- Tue. 1/8

Administration

2. Personal Introduction
    A. Education -Why study economics?
    B. Research
    C. Family
    D. Background/Interests
    E. Unique items

3. Classroom Dynamics
    A. I will ask you many questions in class.
    B. Class Website
    C. Students' Substantive Questions. Never hesitate to ask substantive questions about the material - either in class or during office hours. At the beginning of each class I will try to ask whether anyone has questions about the material from previous lectures or from the reading.
    D. Students' Administrative Questions. To allow me to help people most effectively with the substantive issues, if you have administrative questions, please go to 1) Syllabus/Web site; 2) Classmates; 3) Me.
    E. Review Course Homepage.
    F. Electronic devices

4. How to do well
    A. Principle of quality repetitions--needed to excel in anything
        1) Come to class
        2) Class website provides an outline and guide
        3) Do reading as it is being covered in class
        4) Talk to me in and outside of class
    B. Learn tools of economics - graphs, words and equations
    C. Talk to me before, rather than after exams

5. Going to Law School
    Tristan Mabry, " Economics Enjoys a Bull Run at Colleges - Once Perplexing Subject is a Top Major for Students ." by Wall Street Journal, Nov. 30, 1998.
    Law School Numbers--data on law school acceptances, rejections, and waiting lists.
    Law School Predictor--enter your LSAT and GPA to obtain expected acceptance decisions at top 100 Law Schools.
    Law School Rankings--reports multiple rankings based largely on student quality.
    Law School Rankings by Faculty Research:

6. Class roll

7. Dates
    1/8     First Day of Class
    2/?     Midterm 1 (Tentative)
    3/21   Withdrawal Deadline
    ?/?     Midterm 2 (Tentative)
    4/?     Paper Due
    4/25    Last day of class
    5/7    Final Exam (8-11 am)

1. Introduction to Law and Economics
    Readings:
       Chap. 1 "Introducing Law and Economics"
         Jessica E. Vascellaro, "The Hot Major for Undergrads is Economics." Wall Street Journal, Tues. July 5, 2005.
    Supplemenal Reading:
         Hersch, Joni and W. Kip Viscusi, "Law and Economics as a Pillar of Legal Education." Vanderbilt University Law and Economics Working Paper 11-35, Aug. 6, 2011.

A. What is economics?
    1. Misconception
    2. Definition
    3. Principle/Theory
    4. Goal

B. What is Economic Analysis of Law?
Introduction: Two general ways of thinking about law and economics:
    1. How does law influence economic outcomes?
        a. Execution for armed robbers
        b. Regulations - Requiring features on goods (shut off bars on lawnmowers, job safety concerns)
    2. How does economics give insight into legal issues and concerns?
        a. Why do we get some laws and not others?
        b. Public choice theory

C. What is economic analysis of law good for? Why should you study it?
    1. Economics ties together diverse areas of law, providing a common theoretical structure. This is one attraction to legal scholars of the economic analysis of law.
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    2. Law helps you understand economics: you learn about ideas by specific examples.
    3. The law is also useful to economists as a vast pool of interesting puzzles.
    4. Law provides a lot of data to test economics theories.

D. Development of Law and Economics
    1. History
    2. People
        a. Ronald Coase
        b. Gary Becker (Nobel-prize bio)
        c. Richard Posner
        See also Becker-Posner blog
        d. James Buchanan and Gordon Tullock
    3. Rapid growth since 1960
        a. Journals: Journal of Law and Economics (1958), Journal of Legal Studies (1972), International Review of Law and Economics (1981), American Law and Economics Review (1999), Journal of Empirical Legal Studies (2004).
        b. Economists on staff in law schools.
        c. Law schools integrate economics into core teaching.
        d. Use of economic reasoning in judicial opinions.
        e. Judicial opinions that cite empirical economic studies.

2. Legal Institutions
    Readings: Friedman -Intermezzo (pages 103-111)

Introduction

A. Characterization of Law: Common Law vs. Civil Law
    See Table 1
        "The very idea that the law might not be identified with legislation seems odd both to students of law and to laymen. Legislation appears today to be a quick, rational, and far-reaching remedy against every kind of evil or inconvenience, as compared with judicial decisions, the settlement of disputes by private arbiters, conventions, customs, and similar kinds of spontaneous adjustments on the part of individuals.”
    - Bruno Leoni, "Common Perception of Law"

B. Characterization of Case: Criminal vs. Civil

C. Legal Standards
    1. Preponderance of Evidence
    2. Beyond a reasonable doubt
    3. Clear and convincing

D. Structure of Courts:
    1. Trial Courts     2. Regulation
    Segal, David. "For Law Schools: A Price to Pay the ABA's Way." New York Times, Dec. 17, 2011
    2. Appellate Courts
    3. Supreme Courts - US

E. Jurisdiction
    1. Federal
        a. Map
        b. Cases
    2. State
        a. Limited vs. General jurisdiction
     b. Slides

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F. Legal Process
    1. Cause of Action
    2. Complaint
    3. Defendant
    4. Discovery
    5. Summary Judgment/Directed Verdict
    6. Verdict
    7. Appeal
    8. Stare Decisis

G. Economic Freedom
    Readings:
    1. "Legal Reform and Development." The Economist, Tues. June 5, 2008 (1.5 pages)
    2. Stossel, John. 2010. "How Government Perpetuates Native American's Cycle of Property." FoxBusiness.com. Nov. 29 (6:30 video)
    3. Forelle, Charles. "Ailing Greece Tries Tag Sale." The Wall Street Journal, June 28, 2011. Video at 2:00-2:45 discusses how Greek's property rights have hindered economic development.
    4. Herbert G. Grubel. 1998. "Economic Freedom and Human Welfare: Some Empirical Findings", Cato Journal, Vol. 18, No. 2 (Fall): 287-304.

Optional Reading: James Gwartney, Randall Holcombe, and Robert Lawson, "The Scope of Government and the Wealth of Nations." Cato Journal, Vol. 18, No. 2 (Fall): 163-190.

    1. Indexes of Economic Freedom
        a. Definition
        b. Heritage Foundation
        c. The Fraser Institute - Overview
        d. How is economic freedom calculated?
        e. Example of US: Corporate Tax Rate
    2. Conventional Wisdom through the 1970s
        a. International Examples
        b. Domestic Examples
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   3. What happened since the 1970s (esepcially since 1990)?
        a. International Evidence
        b. Domestic Evidence
    4. Since 2007
    5. Economic Freedom of the U.S. States
       a. Fraser Institute
       b. Mercatus Center, George Mason University
6. Empirical Studies
        a. Economic Freedom and Economic Growth
        b. Economic Freedom and Broader Measures of Human Welfare
          Slides
          Current example from Haiti
        c. What constitutes causal evidence?
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            What problems do we frequently face when using data?
            Example of inequality
            a. DeParle, Jason. 2012. "Harder for Americans to Rise from Lower Rungs." New York Times, (Jan. 4).
            b. See slides
        d. When we correct for the above problems, what are the implications for the role of economic freedom?
        e. References on Economic Freedom and Outcomes
        f. Economic Freedom and Political Freedom (Freedom House)--See also M. Friedman and R. Friedman Free to Choose.
        Quote: "Because we live in a largely free society, we tend to forget how limited is the span of time and the part of the globe for which there has ever been anything like political freedom: the typical state of mankind is tyranny, servitude, and misery. The nineteenth century and early twentieth century in the Western world stand out as striking exceptions to the general trend of of historical development." Milton Friedman, Capitalism and Freedom, 1962.
            1) What is political freedom? How is it measured? (pages 27, 34-35)
                Changes over time (pages 8 and 20-23)
                Differences across regions (p. 10 and 25-26)
                What nations are politically free? Map
            2) How does economic freedom affect political freedom?
            3) How does political freedom affect economic freedom?
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3. Market for Legal Services
    Readings:
   Chap. 2 "Tools for the Economic Analysis of Law" (This reviews material from intermediate micro).
    Computing expected value (Example 1)

Introduction

A. Economic objective of law
    Minimize social costs
    1. Social cost
    2. Administration cost
    3. Error costs
    4. Incentives created by errors

B. Market for Legal Services
    1. Quantity control--how does requiring students to pass the bar affect the market for legal services?
    2. Price control
    3. Principal-Agent/Compensation--what is the optimal compensation?
        a) billable hours
        b) services performed
        c) contingency

C. What is the equilibrium number of complaints ?
    # complaints = f(# injuries, filing cost, expected value of claim,...)

D. When does it pay to file a suit?
    1. Decision Rule
    2. Computing the expected values- Example 1
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E. When does it pay to settle out of court? Why take it to trial?
    Example: See Table 2.
    Why the differences in expected value?
    Discovery/Compulsory pooling of information

F. Loser-pays-all vs. US System (each-pays-its-own)

G. Bargaining (Unequal information and different bargaining costs)
    1. Nuisance Suit
    2. Defendant's optimal response
        a. Filtering
        b. Randomizing

H. Efficiency

4. Property Law
Reading: Chapter 3 "Private Property and Public Goods"

Introduction
    Philosophical view
    What is property?
    Bundle of rights
    Quote: "You are horrified at our intending to do away with private property. But in your existing society, private property is already done away with for nine-tenths of the population; its existence for the few is solely due to its non-existence in the hands of those nine-tenths. You repoach us, therefore, with intending to do away with a form of property, the necessary condition for whose existence is the non-existence of any porperty for the immense majority of society." Karl Marx, The Communist Manifesto, 1848.

A. What can and should be owned?
    Reading: Chapter 3 "Private Property and Public Goods"
    Pierson v. Post (case #2) and Hammonds v. Central Kentucky Natural Gas Co. (Case #3).

    1. Reasons for and against private property
        a. Reasons for property rights
            See Table 3.
            Investment vs. Rent-seeking
        b. Reasons against property rights (for commons)
    2. When does it pay to define and enforce property rights? When do we use commons instead of property rights?
        Examples
        Solutions Table 4
        Technology can change things
    3. What conditions must be met for property rights to be established?
    4. Boundaries
        a. Real Property
           1) Pierson v. Post (Supreme Court of NY 1805)
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       2) Can boundaries move?
               Stop the Beach Renourishment Inc. v. Florida Department of Environmental Protection (USSC, 2010)
         Stack Island: Louisiana v. Mississippi (USSC, 1995)
           3) Adverse possession
        b. Boundaries above and below the surface
            Air rights and underground reserves
            Hammonds v. Central Kentucky Natural Gas Co. (Court of Appeal of Kentucky, 1934)
        c. Intellectual property
            1) Patents
          2) Copyrights
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B. Public Goods
    1. Definition
        Table 5
    2. Examples
    3. Market Failure
    4. Solutions

C. Protection and Remedies
    Introduction
     1. Liability Rule/Damages
     2. Property Rule/Injunction
     3. Both
     4. Relative Benefits (Damages vs. Injunctions)
     5. Efficiency
         a. Transactions Costs are high
         b. Transactions Costs are low
         Calabresi and Melamed Rule
   6. Changes in transactions costs, costs of enforcement and monitoring
        Introduction
        a. Technology
        b. Strategies
            1) Pursue violators
            2) Pursue sellers

D. Externalities
    Reading: Chapter 4 "Externalities"
    1. Definition
    2. Examples
    3. Market Failure
    4. Solutions

E. Government Restrictions on Property and Takings
        Reading: Chapter 6 "Government Takings and Compensation"
                    Linked readings on Poletown, County of Wayne, and Kelo cases

    1. Eminent Domain/Takings - 5th Amendment of the US Constitution
        a. Conditions
        b. Holdout
        c. Government incentive
        d. Cases
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             1) Poletown Neighborhood Council v. City of Detroit (Michigan Supreme Court, 1981)
               Case Summary 1
                Case Summary 2
                Case Summary 3
           2) County of Wayne v. Edward Hathcock (Michigan Supreme Court, 2004)
            3) Kelo v. City of New London, CT (USSC, 2005)
        e. Responses to Kelo
            1) State Legislation
            2) Presidential Executive Order. (George W. Bush, June 23, 2006)

    2. Judicial Philosophy
        a. Active Liberty: Interpreting Our Democratic Constitution by Stephen Breyer.
        b. A Matter of Interpretation: Federal Courts and the Law by Antonin Scalia.
    3. Zoning
        a. General examples
        b. Local examples
    4. Regulations
    5. Covenants
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    6. Water

5. Coase Theorem
Reading: Chapter 5 "The Coase Theorem"
Thomas W. Hazlett, " Looking for Results: Interview with Nobel laureate Ronald Coase on rights, resources, and regulation ," Reason Magazine.

A. Coase Theorem
    1. Transactions Costs
    2. Efficiency
    3. Example of business that strives to reduce transactions costs or "friction". See the first 1:40 of the video.

B. Examples
    Table 6 - Coase Theorem

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C. Overview of Coase
    1. Fundamental change in thinking
    2. Coase's view of regulation
    3. How does Coase think government should be involved in economy?
    4. New Institutional Economics
D. When does it make sense to apply Coase?
E. Efficiency vs. Justice

6. Intellectual Property
    Reading: Chapter 8 "Intellectual Property"

Introduction
    1. Law school curriculum
    2. Purpose: Property rights over Information
    3. Information goods and Public goods
    4. Fixed vs. Marginal costs
    5. Market failure and solution
    6. US Constitution, Article I, Section 8: "To promote the Progress of Science and useful Arts,
by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries."

A. Copyrights
    1. History
        a. Origins
        b. 1672: first and only recorded copyright in colonial US
        c. 1709: Statute of Queen Anne (UK)
        d. 1789: US Constitution
        e. 1831: Sheet music
        f. 1865: photographs
        g. 1870: works of art
        h. 1897: musical performances
        i. Copyright Act of 1976:
        j. Audio Home Recording Act of 1992
        k. Digital Millennium Copyright Act (DCMA) of 1998
        l. Sony Bono Copyright Extension Act of 1998
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    2. Originality
        a. Must have some original contribution--not just facts. Feist Publications, Inc. v. Rural Telephone Service Company, (1991)
        b. Idea vs. Expression: Detective Comics Inc. v. Bruns Publications (2nd Circuit, 1940)
        c. Reverse engineering: Lotus Development Corporation v. Borland International, Inc. (USSC 1996)
    3. Strength
    4. Length
        a. Individual
        b. Anonymous or work for hire
    5. How obtained
    6. Elements
    7. Affirmative Defenses
    8. Remedies
    9. Examples
       a. Sony Corp of America v. Universal City Studios, Inc. (1984)
       b. A&M Records, Inc. vs. Napster, Inc. (2001).
          1) Analogue
          2) Digital
          3) Transport technology
          4) Napster facts
          5) Subsequent cases
             Metro-Goldwyn-Mayer Studios (MGM) v. Grokster (USSC 2005)

B. Patents
Introduction
    a. Rate of technological change has outpaced most predictions
    Henry L. Ellsworth, U.S. Commissioner of Patents (mid 19th century), commented on the proposed construction of a new building for the U.S. Patent Office. He thought that a new building should not be too large or expensive because, “the advancement of the arts from year to year taxes our credulity and seems to presage the arrival of that period when further improvements must end.”
    In 1899, Charles H. Duell, commissioner of the U.S. Office of Patents, pronounced, "Everything that can be invented has been invented."
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     Role of technology over time - quotes
    b. New policy debate about role of patents
        Mark Cuban Interview. 2011. "Cuban on Investing: Diversification is for Idiots." The Big Interview. Wall St. Journal (Aug. 12). Starting at 16:30-19:20.

    1. Introduction
    2. Defintion-objectives
    3. Types
       a. Utility
       b. Design
       c. Plant
    4. Who obtains?
    5. Process to obtain
    6. Length
    7. Boundary decision
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    MIDTERM #1
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    8. Elements
       a. Own
       b. Infringement
           1) Claim interpretation/bounds
       2) Direct infringement (composition)
           3) Doctrine of equivalents (methods, functions, results)
       c. Harm
    9. Affirmative Defenses
        a. Equitable Defenses
        b. Experimental Use
    10. Remedies
        a. Injunctions
        b. Damages
    11. Patents assign monopoly rights - See Table 7
        Economic Application: pharmaceutical industry
    12. Examples
Summary
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C. Trademarks
Reading
    Inchauste, Francisco. 2009. "Color: The Next Limited Resource?" Six Revisions. Nov. 9
    Case: Slickcraft v. Sleekcraft

    Introduction
    Definition: The term trademark includes any work, name, symbol, or device, or any combination thereof –
    1) used by a person, or
    2) which a person has a bona fide intention to use in commerce
and applies to register on the principal register established by this Sct, to identify and distinguish his or her good, including a unique product, from those manufactured or sold by others and to indicate the source of the goods, even if that source is unknown.
    Lanham Act Section 45, 15 U.S.C. Section 1127.

    1. Objective
    2. History
    3. Benefits
    4. Types
        a. Arbitrary
        b. Fanciful
        c. Suggestive
        d. Descriptive
    5. Length of protection
    6. How obtained
    7. Elements
        a. Ownership
        b. Likelihood of consumer confusion
            1) The similarity in the overall impression created by the two marks (look, phonetic similarities, underlying meanings)
            2) The similarities of the goods and services involved (including an examination of the marketing channels for the goods)
            3) The strength of the plaintiff's mark
            4) Any evidence of actual consumer confusion.
            5) The intent of the defendant in adopting its mark.
            6) The physical proximity of the goods in the retail marketplace.
            7) The degree of care likely to be exercised by the consumer.
            8) The likelihood of expansion of the product lines.
            Not all tests are created equal!
        c. Harm
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    Review of Midterm #1
     8. Defenses
        a. Functionality
        b. Abandonment
            1) Disuse of mark
            2) Name
        c. Generic
        d. Parody
    9. Remedies
        a. Injunctions
        b. Damages
    10. Case Study- Slickcraft v. Sleekcraft
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    11. Other Marks
        a. Collective Marks
        b. Buildings: Chrysler, Longaberger, and Rock and Roll Hall of Fame.
    12. Extensions
        a. Soviet Union
      b. Advertising
            1) How does advertising affect prices and quality?
            2) History
            3) Characteristics: Simple, search, experience
        c. US Master Tobacco Settlement (1998)
          Commercials: Flintstones,
          New visual warnings. New Warnings.
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        d. Campaign finance reform
            1) McCain-Feingold (2002)
            2) Ruled unconstitutional (Dec. 2009)

D. Trade Secret Law
          "'Trade Secret' means information, including a formula, pattern, compilation, program, device, method, technique or process that: 1) derives independent economic value, actual or potential from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; 2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy." - (Uniform Trade Secrets Act)
    Examples: Coca-Cola,
    1. Law
    2. Remedies
        a. Injunction
        b. Damages
        c. 3rd party
    3. Puzzles
        a. Why do trade secrets not receive the same level of protection as patents?
        b. If trade secrets are not patentable, then why are they protected at all?
Domain Names

7. Regulation and Public Choice
    Reading: Chapter 7 "Price Regulation"
        Associated Press. 2011. "Appeals Court Rules Against Health Law Mandate," New York Times, Aug. 12, 2011.
        Bruce Yandle, " Bootleggers and Baptists in Retrospect," Regulation vol. 22, no. 3 (1999).
         James Buchanan, "Public Choice: Politics Without Romance," Policy vol. 19, no. 3 (Spring 2003).
     Jonathan H. Adler, "Rent-Seeking Behind the Green Curtain," Regulation vol. 19, no. 4 (1996).

A. What is regulation?

B. When May Regulation increase social welfare? The following are necessary but not sufficient reasons for increasing efficiency with government involvement.
    1. Public good - Table 5
        a. non-rival
        b. non-excludable
        c. free rider
    2. Externalities
        a. Positive
        b. Negative
    3. non-competitive market structures - Table 7
        Example: Credit-Ratings Agencies: Standard and poord, Moody's, and Fitch
    4. Information asymmetry
        2001 Nobel Prize winners

C. Costs and Benefits of Regulation
    1. Benefits
        a. Concentrated
        b. Obvious
        c. Do they reduce economic inefficiencies? When can they make people better off?
        d. Official estimates: OMB. "2011 Report to Congress on the Benefits and Costs of Federal Regulations and Unfunded Mandates on State, Local, and Tribal Entities"
            Benefits: $132 - $665 billion. Costs: $44 - $62 billion

    2. Costs
        a. Dispersed
        b. Hidden
        c. Unintended consequences
        d. Estimates of costs of federal regulation only:
            1) Nicole and Mark Crain: $1.75 trillion (2008) or 14% of GDP or $8,086 per employee.
            2) Regulatory costs on small businesses of less than 20 people: $7,647 per employee.

D. Regulation History
    1. The beginning: Interstate Commerce Commission (1887)
    2. Episodic increases in regulation
    3. Periodic decreases in regulation
       Example2: Civil Aeronautics Board, telecommunications,
    4. Current federal agencies: Over 320 federal agencies - over every sector of the economy.
       a. Legislative Agencies: 11 (US Copyright Office, ...)
       b. Judicial Agencies: 5 (Administrative Office of the US Courts)
       c. Executive Agencies:
          1) Excutive Office of President: 17 (National Security Council, OMB)
          2) US Department of Agriculture: 18 (Food and Nutrition Service, Office of Rural Development, Rural Housing Service)
          3) US Department of Commerce: 11 (Bureau of the Census, Bureau of Economic Analysis, US Patent and Trademark Office)
          4) US Department of Defense: 33 (NSA, NCIS)
          5) US Department of Education: 9 (Federal Student Aid, NCES)
          6) US Department of Energy: 6 (Federal Regulatory Energy Commission, Power Marketing Associations)
          7) US Department of Health and Human Services: 10 (Centers for Disease Control and Prevention, NIH)
          8) US Department of Homeland Security: 8 (Federal Emergency Management Agency, US Secrety Service)
          9) US Department of Housing and Urban Development: 2 (Federal Housing Administration)
          10) US Department of the Interior: 9 (Bureau of Indian Affairs, National Park Service)
          11) US Department of Justice: 51 (BATF)
          12) US Department of Labor: 11 (Bureau of Labor Statistics, Center for Faith Based Neighborhood Partnerships, Wage and Hour Division, Women's Bureau)
          13) US Department of State: No agencies, many bureaus
          14) US Department of Transportation: 12 (Federal Aviation Administration, Federal Highway Administration, Saint Lawrence Seaway Development Corporation)
          15) US Department of the Treasury: 11 (Bureau of Public Debt, IRS, US Mint)
          16) US Department of Veteran Affairs: 3 (Veterans Health Administration)
       d. Independent Agencies: 68 (Advisory Council on Historic Preservation, African Development Corporation, Consumer Products Safety Commission, Central Intelligence Agency, US Postal Service)
       e. Pending: 1 (Corporation for Travel Promotion)
    5. Inspectors General
    6. Boards and Commissions
    7. Quasi-Official Agencies: (US Office of Peace, American Institute in Taiwan)
    8. Private Regulatory Corporations: (Public Company Accounting Oversight Board, ICANN)
    9. Self-Regulatory Boards: (Municipal Securities Rulemaking Board, National Futures Association)
    10. Government Enterprises: (Federal Home Loan Mortgage Corporation-Fannie Mae, Federal National Mortgage Corporation-Freddie Mac)
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E. Purposes of Regulations
    Introduction
    1. Protect the environment
    2. Reduce economic inefficiencies that may result from monopolies, oligopolies or imperfect information of consumers
    3. Increase fairness (as some perceive it) or redistribute income
    4. Protect people from making bad decisions
    5. Improve products
    6. Set rules for the use of common resources

F. Theories of Regulation:
    1. Public-interest
    2. Special interest
        a. Capture
        b. Example Mississippi gambling
    3. Baptists and Bootleggers
        Reading: Bruce Yandle, " Bootleggers and Baptists in Retrospect," Regulation vol. 22, no. 3 (1999).
    4. Public Choice
        Reading: James Buchanan, "Public Choice: Politics Without Romance," Policy vol. 19, no. 3 (Spring 2003).
        Optional Reading: Lott, John R. Jr. 2009. "States Hit Hardest by Recession Get Least Stimulus Money." July 19.
        a. Society
        b. Journal
        c. Yields a rich set of testable hypotheses
    5. Rent Seeking
    Economic Rent: economic profit from unique resources (skill, monopoly rights or special favors).
    Quote: "Even in the best state which society has yet reached, it is lamentable to think how great a proportion of all the efforts and talents in the world are employed in merely neutralizing one another. It is the proper end of government to reduce this wretched waste to the smallest possible amount." John Stuart Mill, Principles of Political Economy, 1848.
    Reading: Jonathan H. Adler, "Rent-Seeking Behind the Green Curtain," Regulation vol. 19, no. 4 (1996).
        Examples.
           1) Unocal, Ben Lieberman, "Regulatory Mousetraps", 1 April 2003, Tech Central Station.
    6. Government Failure

G. Analysis
    1. Analyze with supply and demand curves
    2. Some possible questions to ask:
        Is there a market failure?
        Who benefits from the regulation?
        Who is hurt by the regulation?
        How does this regulation affect relative prices?
        How do people/firms/agencies respond?
        Do regulations accomplish their goals?
        Are there unintended consequences?

H. Examples
    1. Infant Airline Seats: Government proposal
    2. Corporate Average Fuel Economy (CAFE) Standards
        Optional Readings: Kazman, Sam, " Uncle Sam's Killer Cars ," New York Post, March 10, 2002.
            Grady, Robert E. "Light Cars Are Dangerous Cars." Wall St. Journal, May 22, 2009.
    3. Minimum and Living Wages
    4. Higher cost gasoline in urban areas
    5. FDA Drug Regulations
    6. WalMart in Maryland
    7. Cash for Clunkers
8. HOPE Scholarship
    9. Markets for organs--quantity regulation
        a) Trends - figures
        b) Solutions
           1) current system
            2) markets
            3) Lifesharers
            4) Mandated choice; opt-out; and others.
            Optional Reading: Thaler, Richard. "Opting In vs. Opting Out." 2009. New York Times, Sep. 26. (courtesy of John Dixon)

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    No Class
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8. Tort Law
    Reading: Chapter 13 "Torts: The Economics of Liability Rules"
    Chapter 14 "Compensatory Damages
    Overlawyered.com
    Andy Miller, " Grady makes $15 million bet: Huge malpractice deductible reflects squeeze ,"
Atlanta Journal Constitution, 7 October 2002

A. Introduction
    1. Definition
    2. Types of torts
    3. Differs from criminal law
    4. Differs from contract and property law

B. Traditional Theory of Torts requires 3 elements
    1. Harm
        a. What is harm?
        b. What is the goal of tort law?
        c. Types of harm
            1) Tangible
            2) Intangible
            3) Wrongful
            4) Probabilistic
    2. Breach of duty/Negligence
        a. Standard for negligence
        b. What makes care reasonable?
        c. Binary vs. Continuous
3. Causation
        a. "Cause-in-fact" / But-for
        b. Proximate cause
        c. Problems with cause
            1) Coincidental causation
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          2) Dual causation
            3) Probabilistic injury
C. Cases
    Palsgraff v. Long Island Railroad Co. (1928)
    Others

D. Optimal market for accidents/torts?
    1. Goal: minimize the social cost of accidents
            SC=wx+p(x)A
    p(x) = probability of an accident is a decreasing function of the care or precaution (x) one takes.
    A = monetary value of the harm from the accident
    w = cost per unit of precaution

    2. Rule: Efficient if the marginal social cost = marginal social benefit.
    Efficient when the decision maker(s) internalize the marginal costs and marginal benefits of their actions.

    3. Ford Pinto
        a. Context
        b. Summary
        c. The calculation: Table 8
        d. Value of life estimates
             a. Example 1
           b. Example 2
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E. Liability
     Table 8.2 (Cooter and Ulen) shows how things break down by type of liability rule
    1. Unilateral Rules
        a. No Liability
        b. Strict Liability (with perfect compensation)--only two elements
    2. Bilaterial rules
        a. Negligence with perfect compensation
        b. Contributory Negligence
        c. Strict liability with contributory negligence
        d. Comparative Negligence
        e. Joint and several liability
    Table 9

F. Setting the Standards--how do lawmakers decide on a rule?
    1. The Hand Rule
    2. Statutory
    3. Social customs/mores - common law
    4. Public choice

G. Compensatory Damages
    Readings: Chapter 14 "Compensatory Damages"
    1. Goal
    2. Types
       a. Property Damage
            1) Real property
            2) Personal property
       b. Lost Income and Lost Value of Services
       c. Personal Injuries
        d. Impact on Indirect Parties

H. Punitive Damages
    Readings: Chapter 15 "Punitive Damages"
    1. Under what conditions are they awarded?
    2. Who should receive the money?
    3. History
4. Why do they exist?
    5. Policy
    6. Academic research
    Optional Reading: Eaton, Thomas, David B. Mustard, and Susette Talarico. "The Effect of Seeking Punitive Damages on the Processing of Tort Claims." Journal of Legal Studies. Vol. 34, No. 2 (June): 343-370.

I. Class action
    1. What is a class action tort?
    2. Why do we allow class actions?
       Example: The Authors Guild, Inc., et al. v. Google Inc. (2010)
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    MIDTERM #2
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9. Risk and Uncertainty
     Readings:
     Friedman -Chapters 6
     Lehrer, Jonah. "How Uncertainty Cripples Us," Wall St. Journal, January 8-9, 2011
     Taylor, John. "Want Growth? Try Stable Tax Policy," Wall St. Journal, Dec. 21, 2011.

    A. Making decisions under uncertainty
        - Maximizing expected utility instead of utility
        1. Expected payoff
        2. Risk/spread/uncertainty
     B. Preferences for risk
        1. Risk averse
        2. Risk neutral
        3. Risk loving
        4. Management compensation policies
    C. Dealing with Risk
        1. Contracts-see below
        2. Government policies
        3. Insurance
            a. Risk premium
            b. Moral Hazard
                1) Externality
                2) Insurance company responses
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            c. Adverse selection
            d. Information assymetries
    D. Examples
        See Cases link--case #8
    E. Can extend risk aversion to other areas
        1. Years of life
        2. Risky activities
        3. Political contexts

10. Contract Law
Readings:
    Chapter 9 "The Economic Functions of Contract Law"
    Chapter 11 "Contract Law and Distributive Issues"

A. Introduction
    1. What is a contract?
    2. Why have contract law? Why do we want contracts to be enforceable?
        - For many trades we need no contracts.

B. Non-contract enforcement mechanisms
    1. Reputational penalty
        What is a reputational penalty?
        Example 1: House builder
        Example 2: Department store refunds
        Example 3: Orthodox Jews in NY diamond trade
    2. Bonds
    3. Hostages

C. Purpose of Contracts
    One purpose of contract law is to promote cooperation by converting situations with noncooperative solutions to situations with cooperative solutions.
    Tables 10a and 10b

D. Elements of a Contract
    “Otho would have been Bilbo’s heir, but for the adoption of Frodo. He read the will carefully and snorted. It was, unfortunately, very clear and correct (according to the legal customs of hobbits, which demand among other things, seven signatures of witnesses in red ink).”      - J.R.R Tolkien, The Fellowship of the Ring
    1. Offer
    2. Acceptance
    3. Consideration
    4. Verbal vs. Written
        a. Gratuitous promise
       b. Gratuitous promise with reliance
    5. Examples
        Is it reasonable?
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    Review MIDTERM #2

E. Possible Defenses/When might courts not enforce contracts
    Readings: EEOC v. Waffle House
    1. Third party effects - think of it as an externality
    2. Incompetent parties
    3. Duress/Undue Influence
        a. Duress
        b. Semi Duress (Necessity)
        c. Contracts of adhesion
4. Parties we believe incompetent because we are sure those terms cannot be in their interest (much weaker exception)
        a. Consumer repossession agreements
        b. Higher interest loans for some people
        c. Unreasonable penalty clause. But there may be good reasons for inclusion:
           1) May be the best solution to adverse selection
           2) May compensate for the risk of judgement-proof breach
           3) May reflect distrust of the court's ability to correctly measure damages.
           4) Private version of a property rule, which makes sense when transaction costs are low and/or courts are expensive or incompetent.
    5. Fraud
    6. Others: impossibility, frustration of purpose, mutual mistake about the facts, mutual mistake about the identity, unilateral mistake, duty to disclose, procedural unconscionability.

F. Potential Problems
    1. Fine print problem
    2. One sided contracts - should the offer of a reward be enforceable?
        Broadnax v. Ledbetter, 99 S.W. 1111 (Tex. 1907)
        Glover v. Jewish War Veterans of US 68 A.2d 233 (1949)

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G. Remedies
   1. Specific Performance
    2. Expectation damages
    3. Reliance damages
        One purpose of contract law is to secure optimal reliance
        over reliance, under reliance and optimal reliance
    4. Liquidated damages

H. Why do we need laws about contracts?
    Why not just enforce the contract, letting the parties define all the rules?
    1. Courts know better
    2. Parties have different bargaining power (monopoly buyer or seller)
    3. One must still decide whether a contract exists and what its terms are
    4. Parties cannot specify all possible alternatives

I. Arguments for freedom of contract
    1. Efficiency
    2. Parties have the most information
    3. Can respond quickly and usually relatively easily to changes.

J. Court enforcement of contracts (“filling in the gaps”)
    1. How should courts rule?
        a. We want efficient ruling
        b. Predicts what parties would have agreed to
        c. Gaps reduce costs
    2. Who should bear risks? How do we efficiently allocate risk?
        a. Factors to consider in allocating risk
        b. Examples
           1) Drunk driver
           2) Building a home
        Summary
      3. Breach of contract
        Question 1: When will contracts be breached?
        Question 2: When is it justified to breach a contract?
            Example 1: Great Depression
            Example 2: Business deal
            Examples 3: Weddings and golf tournaments
        a. Objective of efficient performance and efficient breach
           One purpose of contract law is to secure optimal commitment to performing/breaching
        b. Coase Theorem
            Will an enforceable contract always be fulfilled? Table 11a

K. Contract Applications
    1. Marriage
    2. Employment
    3. Anti-gouging laws in natural disasters

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11. Economics of Antitrust
    Readings: none

A. What are trusts? What is anti-trust?
B. Why are we concerned about monopolies?
C. Example Microsoft Case
    1. What were the primary allegations against Microsoft?
    2. Why do some believe that Microsoft is a monopoly?
D. "Unfair competition" vs. Evidence of harm to consumers
E. Potential for harm vs. Actual harm
    Focus on avoiding market dominance
    Predatory Pricing
    National Resident Matching Program
G. Antitrust enforcement
    1. Agencies
       a. Federal Trade Commission
       b. Department of Justice
    2. Herfindahl-Hirschman Index (HHI)
    3. Historical Antitrust Division Action
       Concentrated: HHI > 1800 (challenge if index is raised by > 50 points by the merger)
       Moderate Concentration: 1000 < HHI < 1800 (challenge if index is raised by > 100 points by the merger)
       Unconcentrated: HHI < 1000
    4. Problems with

12. Criminal Law
    Readings:
     Chapter 18 "Why Criminalize?"
     Chapter 19 "The Rational Criminal"
     Chapter 20 "Efficient Levels of Deterrence"

A. Introduction
    Becker
    Federalization of criminal law
    Fast and Furious

B. The market for crime
        1. Supply
        2. Demand
            a) Derived demand
            b) Who demands?
        3. Equilibrium
        4. Comparative Statics
        5. Application

C. What is the optimal level of crime?
        1. Benefits of reducing crime
        2. Costs of reducing crime
        3. How can we change probabilities and punishments to make lowering crime more socially efficient?
        4. What is the relationship between cost per offense and probability and punishment?
        5. Market for drugs

D. Tort/Crime Distinction
        1. Enforcement
        2. Victim
        3. Standard of proof

E. Why have Criminal law? Why don't we just use tort law?

F. Efficient Crimes

F. Private vs. Public deterrence

G. What Has Happened to Crime?
        1. How do we measure crime?
            a. FBI - Uniform Crime Reports
            b. Bureau of Justice Statistics - National Victimization Survey - See BJS
            c. Comparing the two measures
        2. Crime over time
        3. Composition of crime
        4. Crime across regions
            a. Regions of country
            b. US, Atlanta, Athens - Table 12
        5. Crime across countries
        6. Crime data of many types
        7. Human Trafficking

H. Guns and Violence - Quiz "Guns - Just the Facts! "
        1. Current city suits
        2. Ownership and Crime
            a. Over time
            b. Across groups of people
            c. Across nations
        3. Accidents
        4. Suicide
        5. Concealed weapons
            a. Laws - Florida
            b. Violations by license holders
            c. Self-defensive uses

I. Discrimination
1. Arrests
2. Sentencing

13. Securities Law - Basic v. Levinson - Fraud on the Market
    Readings: Jennings-packet
                    Soderquist-packet (Available from Beljean's bookstore Nov. 25)
    Cause of Action
    Case Facts
    National Resident Matching Program
    Elements
    Economic Theory
    How does Economics change what needs to be shown