[You may omit any complete question or questions for 20%. This does not apply to individual sections within a question]


I.             Producing steel involves internal costs, such as the time and effort of the steelworkers, and external costs, such as pollution. Answer all parts.                                                              (15 points)


1. Briefly explain why it is only the external costs that pose a problem for getting an efficient outcome.







2. Briefly sketch the three alternative approaches [Regulation, Pigou, Coase] to solving that problem that we have considered.











3. For each of the three alternatives, describe a situation where it doesn’t work and briefly explain why.












II.           Answer one of the following two questions:                                              (10 points)


A. When governments take land under the power of eminent domain, they are required to compensate the owner for the land's value. What is the economic argument in favor of that requirement? Against?


B. What is the argument for the "coming to the nuisance" defence? What is the argument against?











III.       Pick one of the following and briefly explain it:                                          (10 points)

A. The argument discussed in class for why increasing the penalty for crimes of passion, such as killing someone in a blind rage, might result in fewer such crimes.


B. My neighbor sues me because noise from my factory makes it hard for him to sleep. The court agrees that my factory is a nuisance and must decide whether to award damages or grant injunctive relief—forbid me from operating the factory unless I either can make it much quieter or can get permission from my neighbor. Discuss the advantages of each. What circumstances might be relevant to deciding whether damages or injunctive relief is preferable?


C. Suppose someone attempts to commit murder by casting a magic spell on the intended victim. Will a legal rule that punishes even impossible attempts, attempts by methods that cannot succeed, reduce the number of successful murders? Explain.








IV.       Under current law, if I tortiously kill you I owe damages to your heirs. The amount of damages owed is both what your heirs receive, which can be thought of as a sort of insurance, and what I pay, which can be thought of as a penalty for my act. Is there any reason to expect the optimal amount for the two purposes to be the same? Explain.                                                                                              (10 points)








V.         Ownership of a piece of land is really ownership of a bundle of rights related to that land. Answer both:    (10 pts)

1. Give examples of several of the rights included in the bundle.






2. Give an example of a right that might plausibly belong in either of two bundles—the one associated with my property or with my neighbor’s. What sort of considerations should determine which bundle it goes in?








VI.         Explain briefly why property rights are sometimes undesirable—why it is sometimes more efficient to treat things as a commons. Illustrate your explanation with examples from either: (10 points)


A. the case of primitive peoples—reasons why it sometimes is and sometimes is not desirable for them to treat land, or other things, as private property.


B. the case of intellectual property—why it is efficient to provide protection for some forms but not others.













VII.     Answer one of the following:                                                                      (10 points)

A. Should contracts made under duress be enforceable under all, some, or no circumstances? Explain.


B. What is a "penalty clause?" Why might a rational individual agree to a contract containing one?











VIII.   Answer one of the following:                                                                      (10 points)

A. Summarize Margaret Brinig’s explanation for why the custom of giving engagement rings became common when it did.


B. Suppose we shift from divorce by mutual consent to unilateral divorce—either party can walk out of the marriage without penalty.  In the short run, who is worse off or better off as a result of the change? Explain. In the longer run, how do people adjust their behavior in response to the change? Explain.













IX.       Answer all parts                                                                                         (15 points)

1. What does “negligence” mean in tort law as interpreted by economists? 



2. Briefly explain Posner’s argument for why strict liability is efficient for ultrahazardous activities.







3. Briefly explain how, with a perfectly informed court, negligence liability solves the problem of giving both parties the correct incentive to take precautions.








X.         What is the "optimal number of murders?" Is it zero? Explain.                    (5 points)





XI.       In what sense are some punishments more efficient than others?  What is the net punishment cost of execution? Imprisonment? Explain why stigma might be a more efficient punishment than a fine.       (10 points)










XII.       Discuss any one of the following questions:  (5 points)


A. Why did victims of crime in 18th century England prosecute offenses?


B. How did the legal system of saga period Iceland deal with the problem of judgement proof defendants? Note that the problem is not only how to punish them but how to make it in someone's interest to prosecute them.


C. Residents of Shasta County punish neighbors who violate local norms in a way which is costly for both the person inflicting the punishment and the person receiving it. Is there a reason why doing things this way is more important in that system than in an ordinary legal system?


XIII.    Do all three parts:                                                                                        (15 points


1. Briefly explain what it means to say that one legal rule is more efficient than an alternative rule.






2. What reasons are there to expect common law legal rules to be efficient? To be inefficient?











3. What evidence is there for and against the claim that common law legal rules are efficient (answer briefly–two or three examples on each side are plenty).)








XIV.   Answer one of the following questions:                                                      (10 points)


A. Why do some civil cases get tried, instead of settling?


B. Suppose we changed our legal rules so that, when a criminal defendant was acquitted, the state was required to reimburse him for the costs of his defense—lawyer fees, time in prison, etc. What would the consequences be? What would be good arguments for and against the change?


[Neither of these was discussed in class; both require original thought.]