Explain the five economic functions of contract law

Reference no: EM13745669

Part -1:

1. Explain why property rights are necessary for investment.

2. Your neighbor uses their front yard as a garbage dump lowering your property value. You are trying to sell your home and believe your neighbor's yard lowers the value of your property by $7500. Your neighbor receives no value from cleaning his yard and values his time at $1,000 a day. The value of each day of cleaning is given by:

MB = 3,000 - 500x

Where x is the number of days spent cleaning the yard.

a. Would it benefit you to pay your neighbor to clean up his yard completely? Why or why not.

b. How many days of paying your neighbor, $1,000 a day, to clean up his yard is efficient? Justify your answer.

c. What is the maximum amount you would be willing to pay each day? Does this change the optimal number of days to pay for cleaning?

d. How would transaction costs affect your answers to b and c? Assume that it costs you $100 each day to contract your neighbor to clean his yard.

3. If property is assigned randomly but then can be bought and sold, with no transaction costs, will the ending distribution be efficient? Justify your answer. What if there are substantial transaction costs associated with buying and selling property. Explain.

4. Explain why a nuisance approach is superior to an eminent domain approach when transaction costs are high

5. Explain the market effect when companies are forced to account for the pollution damages resulting from their operations. What is the overall social welfare effect when companies abate pollution up to the efficient level? What is the effect on social welfare if companies are forced to abate pollution beyond the efficient level? Assume companies operate in a perfectly competitive market.

6. Explain why under strict liability, perfect information, and no transaction costs property rights enforced by injunctions and liability rules enforced by damage awards duplicate market results.

7. Explain why liability rules enforced by damage awards are superior to injunctions when transaction costs are high.

Part -2:

1. Explain each of the five functions of consideration.

2. Explain the five economic functions of contract law.

3. Explain the difference between moral hazard and adverse selection.

4. Explain the economic justification for the rule prohibiting penalty clauses and punitive damages for breach of contract.

5. Explain the economic rationale supporting the inefficiency of liquidated damages clauses.

6. Explain the seven possible remedies for breach of contract along with their pros and cons.

Reference no: EM13745669

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