Study Questions: Units I and II

IA. The relationship between law and economics

1.	In resolving legal disputes, what is the distinction between the ex post perspective of lawyers and the ex ante perspective of economists?

2.	List and briefly describe:
	a.	the sorts of things economists can do for lawyers and the law.
	b.	the criticisms that get raised against the economic analysis of law.
	c.	possible responses to the criticisms you listed in part b.

IB. Review of microeconomic theory

1.	Expain briefly what it means to say that a change increases efficiency.

2.	Decide whether the following is true or false, and support your answer: every Pareto improvement is a Kaldor-Hicks improvement, but not every Kaldor-Hicks improvement is a Pareto improvement.

3.	What is market failure? What can cause it?

IIA. Legal institutions and processes

1.	What is a "diversity jurisdiction" case? What conditions must be met for federal courts to hear such a case?

2.	For each of the following: (1) describe what the term or expression means, and (2) briefly describe an efficiency trade-off that you think might be related to it.
	a.	injunction
	b.	stare decisis doctrine
	c.	nolo contendere

3.	Complete the following table contrasting civil and criminal cases:
	Civil case Criminal case Who files a case?     Approximately what percentage of cases get settled without a trial?     What is the burden of proof?     What "penalties" are available?     Which side has the last opportunity to speak?     Which side can appeal?

IIB. Foundations for the economic analysis of the common law

1.	Decide whether undertaking each of the following tends to make economic efficiency (1) increase, (2) decrease, (3) remain the same, or (4) change in an uncertain direction.
	b.	A privately beneficial activity which generates pecuniary externalities.
	a.	A privately beneficial activity which generates nonpecuniary externalities.
	c.	Rent-seeking behavior.

2.	a.	State the Coase theorem.
	b.	Explain how the Coase theorem results in the following conclusions stated by Friedman:
		(1)	"The existence of externalities does not necessarily lead to an inefficient result."
		(2)	"Pigouvian taxes do not in general lead to the efficient result."
		(3)	"The problem is not really externalities at all; it is transaction costs."

3.	Decide whether the following is true or false, and support your answer: For a normal good, consumers must be offered more to give up an amount that they have than they would be willing to pay to acquire it. (Hint: refer to "The Coase theorem and the initial assignment of property rights" worksheet.)

4.	A factory pollutes a lake which is also used by 20 vacation resorts. It would cost the factory $1,000,000 a year to prevent the pollution. Each resort faces the following alternatives (remember that there are 20 resorts):
		1. Operate as a resort on an unpolluted lake, making $100,000/year profit.
		2. Operate as a resort on a polluted lake, making $40,000/year profit.
		3. Operate as a hunting lodge, making $60,000/year profit, whether or not the lake is polluted.
	a.	Complete the following table of total net gains from the alternative options available to the factory and the 20 vacation providers:
	Factory option Pollute Prevent pollution 20 vacation providers operate as... Resorts     Hunting lodges
	b.	Which option is most efficient? Explain briefly.
	c.	For each of the following decide (1) which outcome will occur without bargaining; and (2) whether the outcome will change if bargaining occurs:
		(a)	The factory has the right to pollute if it wants to.
		(b)	Any resort can enjoin the pollution, so the factory can only pollute if it has permission from all the resorts.

5.	A newly opened electric company emits smoke which dirties the wash hanging at a nearby laundry which has been operating for many years. No other parties are affected by the smoke. Two options exist for eliminating the smoke damage: (1) the installation of scrubbers by the electric company, or (2) the installation of air filters by the laundry. The laundry sues to seek an injunction preventing the electric company from emitting smoke.
	a.	If the parties cannot bargain, how would you decide what court decision to recommend? Explain briefly.
	b.	How would your answer to part a change if the parties can bargain costlessly?

6.	a.	What four policy options exist for coping with an externality does Coase discuss?
	b.	Complete the last column of the table below to indicate which option is best in each case:
			External costs Transaction costs Management costs Regulation costs Best option Case 1 High Low High High   Case 2 High High Low High   Case 3 High High High Low   Case 4 Low High High High
	c.	Briefly explain your decision in each case from part b.