Chris Economics & Policy Flashcards
Kaldor-Hicks
The benefit would exceed the cost by some considerable margin
(“This person benefits so much that they could compensate this person for all their losses, and have plenty to spare.”)
The idea of a contract in Wonnell world
Converting what would otherwise be a Kaldor-Hicks efficient transaction into a Pareto efficient transaction.
Weeds out transactions that are inefficient.
(if you think X is worth 1 and doing it would cost me 2, we’re both gonna walk away; cannot be made mutually beneficial)
Pareto Efficiency
Making persons better off without making any persons worse off
Coase
Answers “What legal rule would result in an efficient handling, resolution of this problem?”
If transaction costs are 0 (or rather low enough to make a transaction practical), the parties will bargain around any inefficient rule & every legal rule will be efficient.
(If there’s a legal rule→Kaldor-Hicks BUT If you let people bargain→pareto)
Reality Check of Coase Theorem Application in Nuisance cases
After an injunction, people are not willing to bargain in the way that a simple coase theorem might suggest they would be.
It is not common for people to bargain around nuisance
[Wonnell Commentary: There could be issues with the interpretation of transaction costs or the theorem itself, but it’s more likely that by that point in the suit the parties just hate each other.]
Arguments: Why do we have duty to rescue over a contractual obligation?
Transaction costs, impracticality, no realistic chance of negotiating deals in emergencies
Counter Argument for: Why do we have duty to rescue over a contractual obligation?
Contracts would be Pareto efficient in a rescue scenario if 3rd parties aren’t adversely affected.
Theory Behind Restitution Plans
To avoid unjust enrichment of the ∆
- contracts are based on consent that you cannot always get
- establishes a quasi-contract between the parties to what they would have agreed to if they had been able to negotiate.
- mutually beneficial
What’s wrong with just requiring a duty to rescue?
raises issues of liberty (you have the right to do something else, and issues of long term utility
Long-Term Incentive Effects of an affirmative duty to rescue (Rescuers)
- Loses some incentive to become useful if by acquiring knowledge or being in a specific location they are conscripted to help others
Long-Term Incentive Effects of an affirmative duty to rescue (Rescuees)
- Loses some incentive to avoid needing rescue, allows π to act more recklessly
Solution to Efficiency POV
(Fear that you’ll invest too much in things that cause negative externalities & too little in things that cause positive externalities )
Contracts –> pay to positive; only works in low transaction costs
(other examples restitution, duty to rescue, tort law in general,
Property Rules
Sternly forbidden from violating the entitlement without consent
Ex: punitive damages, injunction
Liability Rules
Okay to violate entitlement if compensated after the fact
Ex: compensatory damages
Benefit of Property Rule
Sensitive to idiosyncratic or subjective value (eminent domain fair market value example) to avoid Monopoly/extortion threat
Against Property Rule
Creates a kind of monopoly or hold-out rule.
Insolvent ∆Policy Discussion
Workers Comp Trade-Off
π can be at fault, but cannot recover non-economic damges
Cheaper Cost Avoider
relevant in a situation where harm could have been avoided by alternative precautions
it might have been easier or “cheaper” for one party than the other
Argument for abolishing applied assumption of risk
AAR is unnecessary for a plaintiff’s loss
& Comparative negligence made the implied assumption of risk irrelevant.
Strict Liability Policy
PROS:
* Compensate harmed parties
* SL puts a price on an activity, as opposed to a care decision.
(Posner) Incentives for Strict Liability not given to ∆ in negligence cases
to experiment with methods of preventing accidents that involve not greater exertions of care assumed to be futile, but instead relocating, changing, or reducing, perhaps to the vanishing point, the activity giving rise to the accident.
(through the denial of an excuse to be more careful)
Economic Argument in Defense of the No J&S for non-economic damages Rule
Rational people don’t want to buy insurance against non-economic losses.
The double-sided “strongest argument” for J&S Liability
Insurance - societal desire to have someone pick up the πloss & that the torts system will provide assurance of this
The disappointment of consumer expectations could be relevant to risk-utility because
Our test of an effectively designed product is risk-utility & one must weigh that the reasonable alternative design would not disappoint expectations in certain ways.
The more consumers expect a certain kind of safety the more likely a safer Alt. Design is to be reasonable.
(Test: Is this product too risky, given that there’s a reasonable alternative design that would capture a lot of the utility of the product without being so dangerous)
Why is RAD preferable to the Consumer Expectations Test?
CET is Narrow in applicability (it doesn’t apply to technical things)
In reality, when you look at all the cases, π always alleges RAD –> will not make cases more efficient
Some courts that purport to care about it actually REQUIRE RAD in arguments
Consumers expect that the company would have used a reasonable design.
Argument against Warning Defects
You should be able to replace these claims with negligence actions. When you warn against everything you warn against nothing
Argument for Collateral Source Rule
Deterrence: Without this rule, ∆ would not pay a price for having caused the loss. If you want to deter the loss, you have to compensate
Argument against Collateral Source Rule
It’s perverse; sort of double assurance
Argue YES: Does liability insurance eliminate the incentive for safety
It creates a moral hazard - whenever you assure against a risk the magnitude of that risk increases
Ex: Houses that have insurance burn down more often
Argue NO: Does liability insurance eliminate the incentive for safety
There are always exclusions
If you develop a reputation as somebody who incurs a lot of tort liability, you may have your insurance premiums raised and or you may lose the ability to get insurance altogether
Argue that the tort system is not a good system of insurance
HUGE administrative costs make it an irrational mechanism of insurance. If the goal is to just insure, then everyone should be required to simply get 1st personal insurance (cheaper)
Saves time, with an insurance model you don’t even care about whose fault it is.
(Posner) The focus should be on cost control, on deterrence rather than insurance.
Why can you argue that a negligence system (rather than SL) can give both parties the incentive to take care, even without contributory negligence defense
Basically, game theory. (∆ fears suit, π fears bearing losses)
In Strict Liability, the π is given no reason to take care to avoid the accident.
[But, Contributory»_space; Comparative]
Property Rules vs Liability Rules
2 different ways of protecting an entitlement
Property: sternly forbidden from violating entitlement without consent; sensitive to idiosyncratic or subjective value; creates monopoly/holdout issue
(ex: injunction)
Liability: it’s okay to violate the entitlement if you compensate after the fact
(ex: compensatory damages, eminent domain)
Considerations for “What is the best remedy for nuisance?”
You want to weigh the factors of Property Rules vs Liability Rules
Hard to capture π subjective value –> Damages will get that wrong
Balance w/ Holdout problem
[Concept Illustration: if it’s going to be significantly more costly to shut the ∆’s operation down, than any harm that’s being done to the π –> reliability rule, just award damages. But if it’s not gonna be that bad, if the burden on the dependent is not that great, then we’ll issue an injunction.]
Reciprocal character of externalities
Cannot say that one activity is imposing a cost on another when the alternative is to have the other impose the cost on them (relevant to nuisance)
Efficiency, as conceptualized by Wonnell, is a
It is the property of a change from one state of affairs to another state of affairs, wherein people respond to the change by different incentives that are created.
As a result of the behavioral change, people’s welfare is affected (good or bad)
