Summary Law and Economics Robert Cooter and Thomas Ulen PDF

Preview

Summary

Summary Law and Economics Robert Cooter andThomas Ulen->still to summarize: (p33-53),Chapter 1: an introduction to law and economicsSince the sixties, economics has been used to analyze in most fields of law.  Law and economics has become increasingly important: changing the nature of le...

Description

Summary Law and Economics Robert Cooter and Thomas Ulen ->still to summarize: (p33-53), Chapter 1: an introduction to law and economics Since the sixties, economics has been used to analyze in most fields of law.  Law and economics has become increasingly important: changing the nature of legal scholarship, common understanding of legal rules and institutions, and the practice of law  Influence of economics on law visible in the deregulation movement in the 1970’s which was intellectually founded by economics. 1. What is the economic analysis of law? Economics has mathematically precise theories (price theory and game theory) and empirically sound methods (statistics and econometrics) for analyzing the effects of the implicit prices that law attaches to behavior. Economics generally provides a behavioural theory to predict how people will respond to laws. -these can be neutral or loaded with social values -in economics it is often efficiency which is the basis for advise - efficiency and profibility are very closely related which enables lawyers to help businesses. -economic efficiency can be achieved by bargaining and cooperation 2. The primacy of efficiency over distribution in analyzing private law Economics depends on two things: efficiency and distribution.  Incentive effects to make predictions about the consequences of legal effects are used: efficiency is easier to use and more agreed on by economist. Progressive taxation is better method to redistribute means than through modifying legal rights: - Income taxes are precise, using legal rights use crude averages - Distributive effects of legal rights hard to predict - Transaction costs of redistribution is often high - Redistribution by private law distorts the economy more than taxes. 3. Why should lawyers study economics?  The economic analysis unites two important fields.

Chapter 2: A brief review of Micro-economic theory 1. Overview: the structure of micro-economic theory Micro-economic theory concerns decision making by individuals and small groups.  The allocation of scarce resources 2. Some fundamental concepts: maximization, equilibrium, and efficiency Main assumption in economics: each actor maximizes something:

-consumers maximizes utility -firms maximize profit, etc -> Choosing the best alternative that constraints allow: maximization. ->better alternatives have higher numbers: utility function ->feasibility constraint: choosing the highest number Other assumption: each actor is rational. Maximizing behavior of individuals often result into an equilibrium in the market. Equilibrium: pattern of interaction that persist unless disturbed by outside forces Stable equilibrium: one that will not change unless outside forces intervene. Efficiency: (2 conditions) - It is not possible to produce the same amount of output using a lower-cost combination of inputs - It is not possible to produce more output using the same amount of input - Pareto-efficiency: it is impossible to change it as to make one person better off without making another person worse off. 3. Mathematical tools Functions: a relationship between two sets of numbers such that for each number in one set, there corresponds exactly one set of numbers in the other set. -consist of dependent variables and independent variables Graphs: Much can be concluded from the slope. -positive slope: direct relation -negative slope: inverse relation -some graphs are linear 4. The theory of consumer choice and demand Consumers has preferences, these ordered lead to utility function. ->this can be put in a graph via a indifference map. ->is called indifference graph as the consumer is indifferent about which combinations along the line he/she chooses. Problem of consumers choice arises from the collision of consumer’s preferences with obstacles to his/her satisfaction.  Constraints; most common one is limited income: often portayed via a budget-line. Rational consumers search for maximal utility, subject to constraints as income.  This is when marginal cost equal marginal benefits. (MO=MK)  Much of economics is based on search for maximization at this point. Individual demand curve:  Relationship between the price of a good and the amount of that good in the consumers optimal bundle. The demand curve shows this. Ceteris paribus: all other things equal Law of demand: when the price goes up, the demand goes down.

Price elasticity of demand: this measures how responsive consumer demand is to changes in price Similar goods: strong reactions The more substitutes for the good, the greater the elasticity. Less than 1: inelastic, larger than 1: elastic 5. The theory of supply Often to do with business firms. Firm: the institution in which output is fabricated from inputs ->again the assumption is that firms are rational and maximize their profit. Total profit: total revenue-total costs ->perfectly competitive markets: - no single player can on its own affect the price. Firms operate in the long-term and the short-term. Short term: at least one input is fixed (fixed costs), other variables are not and lead to variable costs Long run: all inputs can change; no fixed costs. 6. Market equilibrium In perfect competition: this occurs when demand = supply. Monopoly: -only 1 player -firm and industry are identical -high barriers: from legal sources->legal monopolies From scale advantages->natural monopoly ->again maximization of profit is reached when marginal costs equal marginal benefits. Other markets: -oligopolistic market: few players; often leads to game theory -imperfect competition: product differentiation by e.g the use of brands. 7. Game theory ->still to summarize: p33-51

Summary chapter 3: An economic theory of property The law of property: the legal framework for allocating resources and distribute wealth. ->disputes over who gets property:  Classical philosophers: explaining what property is solves this.  Economic theory: predicting the effects of alternative forms of ownership. This specialized on efficiency and distribution.  (Legal) principles on who gets property: rule of first possession. First party to use source owns it. Disputes concerning property; -to who are rights initially dispersed? - what can be privately owned? -what are incompatible uses? (legal concept of nuisance)

-how far can governments regulate property rights? -what are the remedies for the violation of property rights? ->injuction or damages. 1. The legal concept of property Property is a bundle of rights over resources that the owner is free to exercise and whose exercise is protected from interference by others. ->these rights describe what individuals may or may not do with the resources they own. ->these property rights provide the answers of the fundamental questions raised above. Legal rights constituting ownership: -rights are impersonal: property, not persons -the owner is free to exercise the right over his/her property -others are forbidden to interfere with the owner’s exercise of his rights. Alternative bundles of rights can create incentives to use resources efficiently, which maximizes the wealth of a nation. 2. Bargaining theory Theory of bargaining theories: part of game theory.  Parties benefit from cooperating with each other: leads to the cooperative surplus: the value created by moving the resources to a more valuable use.  Parties bargain to come to an agreement to cooperate, or they do not cooperate.  Typical bargaining is about price: ‘car’ example.  Cooperative games as advantage over non-cooperative games such as the prisoners-dilemma. Pay-off matrix as based on values for cooperation and non-cooperation: cooperative solution and non-cooperative solution. ->values in non-cooperative solution is called threat values. In any voluntary agreement, each player must receive at least their threat values, or there is no reason to cooperate. Process of bargaining: 1. Establishing threat values 2. Determining cooperative surplus 3. Agreeing on terms for distributing the surplus from cooperation 4. The origins of the institution of property: a thought experiment -farmhouse example. -example of lack of government: private protection to ownership which is efficient-> by bargaining a centralized government can be established which gives protection and creates thus a sufficient situation. (because of economics of scale) -> this is called the social contract. ->inefficient situations can be resolved by bargaining. In a changing society, new forms of property rights arise continually. 5. An economic theory of property ->bargaining theory can be used generally and successfully. bargaining theory is the basis for economic theory of property and property law.

>

Law is unnecessary and undiserable where bargaining succeeds, and law is necessary and desirable when bargaining fails: Coase theorem aids this. .

A. Coase theorem Coase preferred efficiency: the legal rule should encourage efficiency. ->efficiency requires allocating the right to the party who values it most Transaction cost: the cost of communication and other costs: all the impediments to bargaining. Coase Theorem: when transaction costs are zero, an efficient use of resources results from private bargaining, regardless of the legal assignment of property rights.  This theory decides on when property law is important: when transaction costs are high enough to prevent bargaining, the efficient use of resources will depend on how property rights are assigned. B. The elements of transaction costs Transaction costs: The cost of exchange which takes place in three steps: 1. Location of exchange partner->search costs 2. Bargain has to be struck->bargaining costs 3. The bargain has to be enforced. -> enforcement costs Search costs; Standardized products have often lower search costs than special goods. Bargaining costs: bargaining is easy when threat values are known: lot of public information. However in reality there is a lot of private information. -> bargaining is difficult when a lot of private information has to be turned into public information. Difficulties for bargaining: -when there is a lot of private information -unclear ownerships rights -many parties -hostility -language limitations -> see table 3 p77 C. The normative coase theorem and Hobbes theorems Some transaction costs are endogenous to the legal system: legal rules can lower obstacles to bargaining sometimes.  Legal objectives: - Lowering transaction costs Normative Coase theorem: structure the law so as to remove the impediments to private agreements. Normative Hobbes theorem: structure the law so as to minimize the harm caused by failures in private agreements: the law should allocate property rights to the party who values them the most. D. Lubricate or Allocate? Coase vs. Hobbes There are 2 ways in which law can increase efficiency: -law can lubricate by lowering transaction costs (COASE) -law can allocate rights to the party who values it the most (Hobbes) Reality is often not so easy: no way of knowing which party values it most.

TC < IC (information costs)->follow procedure IC< TC allocate the right to the party who values it most. 4. How are property rights protected? The remedies available to a common law court consist of legal or equitable actions: Legal actions: payment of compensatory money damages Equitable actions: injunctions: court order directing the defendant to perform an act or refrain from acting. (usual remedy for property law) Most legal disputes are settled by bargaining between two parties without going to trail, but the terms of the bargaining are affected by the remedy that would be available at trail. Hobbes: law needs to adapt the rule for which the non-cooperative rule is efficient. Coase: inefficient allocations of rights will be cured by private agreements, if bargaining is successful. What are efficient remedies? ->this depends on transaction costs. General rule: when transaction costs preclude bargaining, a switch in remedy from injuction to compensatory damages makes the victim no worse off, whereas the injurer may be better off. (Calabresi and Malamed): Where there are few obstacles to cooperation (low transaction costs) the more efficient remedy is to enjoin the defendents interference with the plaintiffs property (injunction) Where there are obstacles to cooperation (high transaction costs) it is more efficient to reward monetary damages. 5. What can be privately owned?-public and private goods Should property rights be privately or collectively held? Pure private goods: one persons use precludes another’s.->there is rivalry in the consumption of private goods. Public goods: no rivalry. Property rights over private goods are cheap to enforce, however public goods makes allocating rights difficult and expensive-> efficiency therefore requires that private goods are held privately, and that public goods are held publicly. Private goods: efficiency requires that parties who value it the most use it. Public goods: existence of free riders who do not pay for its use. - Another distinction between them lies in the different transaction costs. 6. What may owners do with their property? Common law general rule: any use is allowed that does not interfere with other people’s property or other rights. ->maximal liberty. - Liberty is restricted which can be explained by external costs concept: private bargaining cannot solve external costs. 7. On distribution -alternative: basing property on distribution rather than efficiency.

->government should distribute wealth from rich to poor for the sake of social justice. There is huge disagreement about redistributive ends, but agreement on redistributive means: the most efficient means of redistribution uses up the least value to accomplish the transfer. Reasons why taxes are superior to allocation of property rights as means of distribution: -income tax targets precisely, whereas property law rely on crude averages -reshuffling rights may create adverse affects and might not receive the intended outcome -redistribution by changing legislation distort the economy more in the long run. Appendix-the philosophical concept of property 1. Utilitarianism Value of goods are measured by the net pleasure or satisfaction that it creates: Purpose of property law: maximize the total pleasure or satisfaction obtained from material and other resources. -> of the whole society, thus giving it to the one who values it most 2. Distributive justice Property law should achieve distributive justice Aristotle: democracy will favor an equal distribution of wealth, whereas an aristocracy will favor the distribution of wealth according to the virtues of various classes. Purpose of property law in this view: policy of redistributive justice whereby the valuable assets of society are periodically redistributed to achieve an equal redistribution. ->focus on a just process of redistribution rather than just outcome. 3. Liberty and self-expression Private property: protect personal liberties. Private property connected to markets, best alternatives to governmental planning. ->liberal views: private property as protection against dictatorial authority of governments. Marxist take other end: abolishment of private property as it is used to keep elites in power. Hegel: property makes sure for self-expression 4. Conservatism and the origins of property Focus on origins of property: rules are subject to the rules of natural selection.

Chapter 4: Topics in the Economics of Property law Property law creates a bundle of rights that the owners of property are free to exercise as they see fit, without interference by the state or private persons. Property law fosters private exchange by removing the obstacles to bargaining ( Coase theory) When bargaining costs are low, resources will be allocated efficiently. Private ownership is appropriate when there is rivalry and exclusion in the goods. I.

What can be privately owned?

Information has some features of a public good.

 Intellectual property law is the law dealing with information, including: the patent system, the copyright system, the trademark system, and trade secrets. A. Information economics Since the industrial revolution, innovation has caused wealth to grow at compound rates. An economic innovation provides a better way to make something or something better to make.  Supply curve shifts through the right and the consumers surplus is bigger: more wealth  Innovations can make whole industries appear, disappear and restructure them.  Innovation can disrupt and make entire communities  Innovation sometimes reffered to as ‘ creative destruction’ highlighting the downsides of innovation. Most economies innovation looked at positively. A company that innovates has a competitive advantage; however after some time competition causes the innovation to diffuse.  When diffusion is complete a new equilibrium is reached. This means that an innovation creates an disequilibrium and the innovator receives benefits as long as it persist, but competition can destroy these benefits quickly. ->legal intervention needed to enable innovation to occur. Transactions in information: -credibility -nonapproprability: cheap to sell and costly to produce. ->enables free riders.  Information use is nonrivalrous  Information use is nonexcludable  These public goods charcheteristics makes it difficult for private markets to produce info. 4 remedies: -subsidies -charitable contributions (donations) -trade secrets protection: NDA (non-disclosure agreements) -intellectual property law; patents, copyrights, trademarks, etc. B. Intellectual property Owning property: excluding others from using it. ->dyamic efficiency: price rewards the creator resulting in more innovations ->proper intellectual property rights: innovator need not fear that innovation is used: static efficiency Intellectual property rights create monopoly power. ->patens and copyrights are temporal legal monopolies with variation in breadth and duration. ->may result in overuse (and overpricing) and too low dissemination. ->leads to major trade tensions between developing world and developed world. ->intellectual property law in reality clashes with economic efficiency due to interest of elite companies. 1. patents: broad or narrow? ->exclusive rights to inventions, in which the invention is for a new process, machine, manufacture or composition of matter; - must be non-obvious -must have practical utility -must be unknown to the public.

When granted, the patent is a 20-year legal monopoly on the use of the invention. Others who want to use the invention may purchase the right to do so->licensing: use the invention of thirth parties in exchange for payment such as royalties.  Anyone not having a license or a patent may not use the invention and the patent-holder can go to court if he/she does use it. Patents create protection in duration and breadth; Duration: number of years between a patents registration and it’s expiration Breadth: how similar an invention can be without infringing the patent. What is the efficient breadth? -broad patents encourage fundamental research, narrow patents encourages development -> if the social value of investment on fundamental research exceeds the social value of investment on developing applications, then patens should be broadened. -> in law: doctrine of equivalents-> court rulings about how nearly equivalent two inventions must be before finding patent infringement. Patent protection should be broader for those with little stand-alone value and narrower for those with large-stand alone value. What is the efficient duration? -patents create monopolies: the optimal life of a patent is that which strikes the best balance between encouraging creativity and discouraging dissemination. -> MO=MK apllies! Much controversy on ideal breadth and duration of patents and what can be patented. - Unregulated market will generally undersupply information whereas in some markets it will be over-invested. - Some innovations create natural monopolies: no need for legal monopolies as well. ->this often takes place in networks: network effects (hub and spokes) 1. Copyright Copyright grants writers, composers and othe...