Reference no: EM131017997

Law and Economics

Problem Set 1

ONLY A SELECTION OF QUESTIONS AND PARTS OF QUESTIONS WILL BE GRADED. ANSWER CONCISELY.

The textbook has two main themes.  The first is normative.  The law should be designed to maximize efficiency.  The second is positive.  At any given point in time the law is imperfect, but over time it tends to adapt in the direction of improved efficiency.  The economist's notion of efficiency is a very general one.  Roughly speaking, an allocation is efficient if it "maximizes the size of the pie", taking resources and technology(including the technology of acquiring information) as given.  Roughly speaking, the "size of the pie" is the sum of happiness or utility in the population. As we shall see, many factors affect the size of the pie, but the three most important are incentives, transaction cost, and risk sharing. 

A somewhat different perspective is as follows:Most individuals are selfish and try to get as much of the pie for themselves as they can. As a result, their interests often conflict.  The purpose of the legal system is to resolve these conflicting interests at least cost, in terms of the size of the pie.

Since we have covered very little of the material in the course, the aim of this problem set is to get you thinking along these lines.

In the Anglo-American tradition, there are two bodies of law.  There is administrative law, which comprise the legal rules imposed by government, and there is the common law, which is law based on case history, without an explicit legal code. 

In Western Europe and their former colonies, there are two main types of legal systems/traditions.  There are common law legal system, in which law is a mix of common law and administrative law.  These are found in Great Britain and its former colonies, including the United States.  And then there are civil law legal systems, where all the law is administrative law, deriving from legal codes, the Code Napoleon in France being the most famous.  These are found in most of continental Europe, and its former colonies.

There are two main bodies of common law, civil law (which could be termed private law) in which the plaintiff in a law case is a legal individual (perhaps a company), and criminal law (which could be termed public law) in which the plaintiff in a law case is the government.

Note that, confusingly, the term "civil law" is used in two different senses.  The first describes continental European legal systems.  The system describes the private law component of the common law system in the Anglo-Saxon tradition. 

In this course, we shall be focusing on the civil law of the Anglo-Saxon common law system that derives from legal precedent rather than a codified body of laws.  The main branches are property law, contract law, tort law, and criminal law.  We may deal with some other branches of the law if time permits.

1. Hammurabi's Code    

Hammurabi's Code is not the oldest known legal code, but it is the oldest that is nearly complete.  Hammurabi is the sixth Babylonian king.  The code was written in Akkadian using the cuneiform script around 1750 BC.

For each of the following three laws, first comment on the law's incentive effects, and second on why legal practice today differs from that set out in the code.

a) "If any one "point the finger" [accuse of illicit sexual activity] at ---  the wife of anyone and cannot prove it, this man shall be taken before the judges and his brow shall be marked."

b) "If anyone is committing a robbery and is caught, then he shall be put to death."

c) "If a herdsman to whose care cattle or sheep have been entrusted, be guilty of fraud and make false returns of the natural increase, or sell them for money, then shall he be convicted and pay the owner ten times the loss."

2. Magna Carta

From expert discussion provided in articles on the Web, explain the link between the Magna Carta and the importance of common law in the English legal tradition.

3. Property Law

'The right to roam has long been recognized in Finland, Norway, and Sweden where anyone is entitled to hike across or camp in the countryside on the property of another as long as one does not disturb the owner." 

a) Why do you think there is not the right to roam in the United States?

b) Do you think there should be the right to roam? Why or why not?

4. Contract Law

You have flown to another city for an important job interview.  In your hurry to leave, you have forgotten your alarm clock.  Before you go to bed, you arrange a wake-up call with the hotel.  You wake up the next morning to find out that you have slept through your job interview.  The hotel neglected to give you a wake-up call.

a) Should you be able to sue the hotel for breach of contract? Why?

b) If yes, and if you win the case, then for what should you be compensated? Why?

5. Tort law:California's law concerning the damage done by falling trees or tree limbs

A farmer decides to subdivide his land, keeping one lot for himself that contains the family homestead and an old stand of trees that provide shade for the homestead, which he cares for well. The stand of trees runs right along his side of the boundary of his lot.  When he sells the neighboring lot, he warns the buyer not to build near the boundary since one of the trees might blow down in a windstorm.   The neighbor ignores his warning and builds his house close to the boundary.  An intense windstorm blows one of the trees down, damaging the neighbor's house. 

a) Under California law, who is responsible for the damage, and why? [The answer is on the web at www.yourlegalcorner.com/articles.asp?id=78&%3Bcat=estate]

b) An alternative law would be that a landowner is always responsible for any damage done by his trees to neighboring properties (strict liability).  Give one argument in favor of the California law, and one in favor of strict liability.

6. Burden of Proof

Recall that (when the null hypothesis is that an accused person is innocent) a Type I error occurs when an innocent person is found guilty, and that a Type II error occurs when a guilty person is found innocent.  The expected social cost of judicial error in a case equals the (probability of a Type I error times the social cost of a Type 1 error) + (probability of a Type II error times the social cost of a Type II error).  Another social cost is the cost of collecting evidence. 

Let s denote the strictness of the burden of proof of guilt, which has a minimum value of zero and a maximum value of 1. 

Table 1 below gives the assumed probabilities of Type I and Type II errors as a function of the strictness of the burden of proof, holding fixed the amount of evidence collected.

s =	0.0	0.1	0.2	0.3	0.4	0.5	0.6	0.7	0.8	0.9	1.0
Pr.Type I error	0.5	0.45	0.40	0.35	0.30	0.25	0.2	0.15	0.10	0.05	0.00
Pr.Type II error	0.5	0.505	0.52	0.545	0.58	0.6125	0.68	0.745	0.82	0.905	1.0

a) Fill in the blanks in Table 2 below, for the criminal case where the cost of a type I error is 5 and the cost of a Type II error is 1. ("ex cost" is expected social cost).

What therefore is the strictness of the burden of proof that minimizes the expected cost of judicial error (the "optimal" strictness of the burden of proof)?

b) Fill in the blanks in Table 3 below, for thecopyright infringement case where the costs of a Type I error and a Type II error are both 2. What is the strictness of the burden of proof that minimizes the cost of judicial error?

c) Explain in words in one sentence why the optimal strictness of the burden of proof is higher for the criminal case than for the copyright infringement case.

d) How qualitatively would collecting more evidence affect the probabilities of Type 1 and Type II errors?

e) What is the broad rule for determining the socially optimal amount of evidence to collect?