Law and Economics Outline

Law and Economics – Dillbary – Fall 2012
 
Introduction
 
–          Economics is about use of resources & incentives
·         Money – is just a $ value on resources
·         Football game? à benefits, costs, opportunity costs
·         Love (or altruism) is a state in which the welfare of one person is a positive function of the welfare of another à If H loves W then an increase in W’s happiness or utility will be felt by H as an increase in his own happiness or utility or welfare
 
–          The economics of Fairness…
·         Rawls
·         Utilitarians
·         Welfare Maximizer (Posner) & Harsanyi
·         Distributive Justice
·         Corrective Justice
 
–          Sometimes the law asks economic questions
·         Damages; Antitrust; Corporation; Criminal Law
 
–          Analyze the effects of legal rules
·         Comparative v. Contributory
–          Positive approach – What is the law?
–          Normative approach – What should the law be?
 
Costs
 
–          Accounting cost – backward looking (how much I paid)
–          Opportunity Cost
o   Cost of education
Ø  Fees to UA – $20,000/year
Ø  Opportunity costs – “What could I have earned had I invested my time in another opportunity?”
o   Applications? à Husband, a housekeeper, was injured in accident ($1,000).  What should be the damage to W?
Ø  Housekeeping costs
Ø  Loss of companionship
Ø  Loss of consortium – factors in estimating damage
–          Quality and nature of relationship
–          Exclusivity
–          Age
–          Sunk Costs – non-recoverable fixed costs that we ignore – rationale decision-makers do not consider sunk costs when making decisions (i.e. tornado/building hypo)
·         Maximize welfare?
o   Maximize utility
o   Minimize disutility
–          Indirect (Hidden) Costs – costs which one incurs although they do not require a monetary exchange (although they can be assigned a dollar value)
·         What’s the cost of eating a burger?
·         The National Alliance for Nutrition and Activity (NANA)
o   Value marketing – Value meal/Combo
o   People eat more
o   Consume more calories and fat
·         Solutions?
o   Education
o   Nutrition Labels
o   Size control (“Bottomless Bowls”) & sharing w/ friends
o   Go on diet
o   Increase prices?
Ø  Yes – internalize the cost
Ø  No – what would consumers eat?
 
Rationality & Behavioral Economics
 
Main Assumption: Individuals & firms are rational
–          Shopping spree?
–          Buying a Gucci for $5,000 v. a generic product?
–          Altruism?
 
People are Rational?
–          Rational – people are trying to do their best subject to a constraint of resources – seeks to maximize her own utility (achieving the highest preference)
 
A “Utility Function” is just an ordering of preferences
–          Maximizing utility means that an individual makes choices as if she tries to maximize some numerical number but not because she actually seeks to do so.  The number assigned to each preference is only an order of ranking preferences
–          Economics – utility function is just an order of preferences
–          Philosophy – it means the level of pleasure/happiness
 
Rational Decision v. Conscious Decision?
–          Economics is not a theory about consciousness
–          People respond to incentives
 
Rationality and absence of information?
–          Rationality does not mean that the consumer has full information
–          It only means that the cost of info > the benefits if it is acquired
 
 
Behavioral Economics
–          BLE: How do “real people” differ from “homo economicus”
–          “Endowment effect” – is placing a higher value on something one currently owns compared to the value the same person would place on the identical item if she did not have it
·         Informational Value – would incur new costs to adapt to something new
·         Hidden costs?
·         Social Capital?
·         Consumer’s surplus? (value a watch $20 but got it for $15 – probably wouldn’t sell it for $15 b/c you still value it $20)
 
Bounded Rationality – judgment errors – bad (but predictable) rules of thumb
–          Hindsight bias – individuals assign high probabilities to events simply because they occurred
–          Optimism bias – individuals believe that their own probability of facing a bad outcome is lower than it actually is
 
Bounded Will-Power – people often take actions that they know to be in conflict with their own long-term interests
–          “Survive the Holiday” programs to avoid overeating/shopping spree
–          Rationale – people may value the short-term benefit more than they disvalue the long-term effects
 
Bounded Self-Interest – many people care about both receiving and giving “fair” treatment (tips?) – they are too nice/spiteful than predicted
–          Radiohead – put album online for free
–          Thaler & Dawes – farmers put produce on a table and asked for donations – cut the cost of hiring someone to monitor the produce
 
Rose v. Brown & Williamson Tobacco Corp.
–          Norma Rose – smoking since the 1940s
–          Claim:
·         Cigarettes smoked from 1960-1993 negligently designed
·         Tobacco companies should have sold only “light” cigarettes
·         “Light cigarettes were available during the relevant period”
–          NY Rule – alternatively designed product must be as useful as original product
–          Isn’t a cigarette inherently bad (cancer…)?
–          Why do people smoke?
·         Just for the motion?
·         Is it the inhaling? à “a person could presumably smoke lettuce”
·         Cigarette – “useful”/”function” – subjective sensations/feelings & psychological effect
·         If this is so subjective – how can one prove to the court that regular cigarettes are better/more pleasuring than light cigarettes or that light cigarettes are as useful? à look to what consumers are buying – doesn’t matter why they are buying more regular cigarettes than light cigarettes – the fact that they are buying more regular cigarettes serves as evidence that people prefer regular to light
–          Test – “Given the subjective nature of the benefits of smoking, the validity of light cigarettes as an alternative to regular cigarettes could not be demonstrated directly, but only through evidence of their acceptability”
–          Dissent’s proposed test – pg. 12, Note 2 – If tobacco companies stoppe