ECONOMIC ANALYSIS OF THE LAW

ECONOMICS 169

Donald Wittman

Fall  2017

 



 

(a) Somali Pirates and (b) Stocks versus bonds for human capital (click on)




1. INTRODUCTION

Should a surrogate mother be allowed to keep the fetus? Should the hospital, the donor, the Red Cross or the patient be liable for the harm if a patient contacts hepatitis from a blood transfusion? Should there be regulations against smoking in airplanes? Should plea-bargaining be allowed? Should hostile corporate takeovers be encouraged? Should a bystander be found liable for not rescuing a drowning person if the rescue could have been accomplished with little risk to the potential rescuer? Should homeowners be allowed to force a cattle feedlot to move without compensation by the homeowners if the cattle feedlot was there before the homes were built?

The answers to these questions are found in economic theory.  In this course we use economic analysis to explain various areas of the law, including civil procedure and criminal, corporate, contract, accident, bankruptcy, and environmental law. Along the way, we explain why production is organized in a certain way. For example, why McDonalds™ is a franchise, while Safeway™ stores are a single corporation. As another example, we explain why stockholders have limited liability.

The connection between law, organization and economics is very close. Economics is the study of what, how and for whom. Standard textbooks in economics define the field as the study of resource allocation in the presence of scarcity. Laws affect resource allocation and help to determine what, how, and for whom. For example, a law that finds trucking companies liable for accidental harm will create incentives for more careful driving by truckers. A well-ordered society will tend to choose laws that promote economic efficiency. Laws create a public ordering; that is, they organize society in a certain way.  Private entities are also organized in a certain way. For example, in corporations, stockholders provide capital and managers of the firm provide day-to-day decisions. Economics provides the key to understanding why firms and society are organized in particular ways.

Economics also provides insight into many ethical issues. Why is theft wrong? If three men are in a lifeboat and only two can survive, is it ethical to throw one of the people overboard, and if so, how should this be decided? And returning to some of the questions posed in the first paragraph (because legal and ethical issues are often entwined), when does being first deserve extra consideration and what duties are owed to strangers?


REQUIRED  READING:


Economic Foundations of Law and Organization  is available at the bookstore. For obvious reasons, the book and my lectures are closely linked. By having the book you do not have to take as many notes in class, but instead make annotations and think.

 

The first 4 chapters are on the web.

 

There are 5 non-comprehensive exams and 5 homework assignments. Homework assignments are due by the end of class on the day they are due (no exceptions).  Except for diagrams, the homework assignments must be typed.

 

There are no makeup exams. Nor can you take exams early. So please tell your parents right now not to book a flight to Costa Rica for you without checking with you first. A legitimate excuse for missing an exam shifts the scoring to the other exams if you also do all of the review questions associated with the test. So you will not be penalized for only taking 4 exams. Going to a Van Morrison concert is not a legitimate excuse.


HOW TO DO WELL IN THIS CLASS

Students usually find the material fascinating. But I am a hard grader and a significant number of students fail this course. So here is some advice on how to do well.


The book has to be understood backwards and forwards (including boxed examples). Make sure that you can repeat the argument on your own rather than merely follow the logic. Some of the homework questions can be answered by copying directly out of the notes. But this is nearly useless in preparing for the exam. If you need to, first read the answer in the chapter, then write the answer without looking back .

 

The review questions at the end of the chapters are a good place to start studying for the exam. Always make sure that you know the definitions first so that you are clear regarding the concepts. Then see whether you can explain the ideas logically and coherently. Economic theory employs deductive reasoning and you will be tested on the logic of the argument. If diagrams are required, make sure that you label them. Outlining in yellow and reading  the chapters twice is rarely sufficient. You must understand the material. It is very helpful if you study in groups, taking turns explaining to each other. Attending section is always a good idea.  And do not go there just to have the section leader lecture to you. The best way of learning is to explain and then get feed back on where you might be wrong. It is better to be embarrassed in section than to do poorly in the exam. Athletes do not learn to  be good athletes just by watching; for similar reasons, doing well on a test requires practice in explaining answers.  Most of the answers to the exam questions will have been covered both in lecture and in the book, but not all. Therefore, you should both read the book and attend class.

 

I give 5 exams. There are several reasons for this strategy. It keeps you up with the work. It provides quick feedback regarding your understanding of the material, and creates greater focus and as a result deeper understanding. Each homework counts for 2% of your grade. The first 4 exams count for 15% of your grade each.The final counts for 30% of your grade.

 

Cheating is an automatic F and a visit to your Provost.



N
ote that The lecture notes that are available on online are merely a guide to organizing your thoughts. 
They may not cover some material that I covered in class or was covered in the book. Exams are based on these latter two sources.


SYLLABUS for ECONOMIC ANALYSIS of the LAW


THERE MAY BE SOME CHANGES MADE TO THE SYLLABUS


YOU WILL BE NOTIFIED OF ANY CHANGES ON THE WEBSITE


EACH PART OF THE BOOK IS COMPOSED OF SEVERAL CHAPTERS, WITH A ONE PAGE INTRODUCTION. ALWAYS READ IT.

 

 

FRI SEPT 29           L1.     INTRODUCTION       

 

                     L2.     RATIONAL BEHAVIOR, PREFERENCES AND PRICES

        

                     L3.     PARETO OPTIMALITY

 

                                   L4.     COST-BENEFIT ANALYSIS  (SKIP SECTIONS WITH  #)


MON OCT 2            L5.     TRANSACTION COSTS

 

                                 L6.     FENCING IN AND FENCING OUT


WED OCT 4            L7.     COASE VERSUS PIGOU

 

 

FRI OCT 6              L8.     HOW TO THINK LIKE AN ECONOMIST: TWO HAWKS AND A FENCE
        

                                 L9.     SMOKING REGULATIONS

                                HOMEWORK 1 DUE: C3#3, C4#4, 6#1    That is, chapter 2, question 1 at the end of the chapter, etc.

 

MON  OCT 9           L10.     RULES OF THUMB: SPORTS AND DRIVING RULES


 

WED OCT 11          L11.  THE PROTECTION OF ENTITLEMENTS

 
 

FRI OCT 13             TEST 1:  COVERING LECTURES, L1-L9

 

MON OCT 16           L12.     PROPERTY RIGHTS OR COMMUNAL RIGHTS IN KNOWLEDGE?

 

 

WED OCT 18           L13.     LIABILITY FOR HARM OR RESTITUTION FOR BENEFIT*

 

                                  L14.     TAKINGS: SHOULD THERE BE COMPENSATION FOR REGULATION


FRI OCT 20              L15.     COST MINIMIZATION AND THE ROLE OF LIABILITY RULES

 

                                 YOU SHOULD READ AND  UNDERSTAND THE # SECTIONS IN THIS CHAPTER


                                 HOMEWORK 2 DUE: .C11#2, 11#4,  12#1


 MON  OCT 23         L16.     NEGLIGENCE RULES


                                YOU SHOULD READ AND UNDERSTAND THE # SECTIONS IN THIS CHAPTER
 
                                 (EXCEPT FOR THE SECTION ON NEGLIGENCE WITH CONTRIBUTORY NEGLIGENCE).
 
  

WED  OCT  25         L17.     CRIME AND CRIMINAL LAW



FRI OCT 27             TEST 2: COVERING L10-L14
 

MON OCT 30           L18.     MITIGATION OF DAMAGES AND LAST CLEAR CHANCE

 

 

                                  L19.     THE GOOD SAMARITAN RULE 
  

 

WED NOV 1            L20.     THE ROLE OF BEING FIRST IN ALLOCATING ENTITLEMENTS

                 

         

FRI NOV 3               L21.     DEFAULT RULES AND BREACH OF CONTRACT

 

                                HOMEWORK 3 DUE:  C15#2, C16#1D, 18#2            

 

M0N  NOV 6            L22.     WHEN IS A HANDSHAKE A CONTRACT AND WHEN IS A WRITTEN CONTRACT NOT A CONTRACT

      

 

WED  NOV 8           L23.    MARRIAGE AS CONTRACT: FAMILY LAW         

 


FRI NOV 10            NO SCHOOL VETERANS DAY 
     


MON NOV 13         TEST 3 COVERING L15-L20



WED  NOV 15         L24.   EXPLODING COKE BOTTLES

   

FRI  NOV  17           L27 THE MARKET FOR INSURANCE


                               
HOMEWORK 4 DUE: C21#7, C22#3, C23#4


 

MON  NOV 20         L28.    ROYALTIES FOR ARTISTS AND INSURANCE FOR INVESTORS



WED  NOV 22        L30   BANKRUPTCY
 


FRI NOV 24           NO SCHOOL THANKSGIVING

          

MON NOV 27        TEST 4 COVERING  L21-L24

                                                                                   


WED NOV 29         L31 ONE OF THE FOLLOWING: HEALTH INSURANCE, AUTO INSURANCE OR DEPOSIT INSURANCE

        
    

FRI DEC 1             L32.   THE GOVERNANCE OF ORGANIZATION

             

                              HOMEWORK 5 DUE: C27#2, C281#2, 30#1


MON DEC 4          L33.    CORPORATE LAW AND AGENCY PROBLEMS



WED DEC 6          
L35.    ORGANIZATIONAL RESPONSE TO OPPORTUNISM       

 

FRI DEC 8            L38.     THE INTERNAL ORGANIZATION OF THE FAMILY




WED DEC 13   12:00-1:30 PM  FINAL EXAM:


COVERING:

Chapters 27, 28, 30 (only pages 286-287 and material in gray boxes), 32, 33, 35, 38. L31 will also be covered, but there is no equivalent chapter in the book.
BE THERE ON TIME