Final Exam

(You may omit all of any numbered question or questions for 20% credit)

I. What is rent seeking? Why does it lead to inefficient outcomes? Briefly explain the relevance of rent seeking to inefficiencies associated with two of the following: (10 points)

A. Burglary

B. Monopoly

C. Speculation

D. Efficient punishment

II. The law protects some entitlements (such as my ownership of my car) with a property rule, and others (such as my right not to have people run into my car) with a liability rule. (10 points)

A. Briefly explain the difference between the two kinds of rules.

B. What are the advantages of each? How should we decide which to use in each case?

III. Answer either A or B (5 points)

A. We might measure the value of your life to you either by the price you would accept to sell your heart for immediate transplant or by the costs you are willing to bear in exchange for a small reduction of some life threatening risk–buying better brakes, say. Why do those two approaches give such strikingly different results?

B. Shooting at someone and missing does no harm, so why do we punish it?

IV. What are the advantages of treating something as property rather than as commons? The disadvantages? What are the implications of your answer for the differences between copyright law and patent law? (10 points)

V. What problems will arise with each of the following divorce laws? In each case, how are the parties likely to modify their behavior in response to the law? (10 points)

A. No divorce, ever.

B. Divorce by mutual consent.

C. Divorce at the request of either party.

D. As in C, but with a large penalty paid by the breaching party to the other party.

VI. Explain how negligence liability solves the problem of giving the right incentives to both parties to an accident, provided that a court has sufficient information. How does the result change if some precautions are unobservable by the court–and, in this context, what does "unobservable" mean? (10 points)

VII. People using power lawnmowers are sometimes injured by them. What determines whether a rule of caveat emptor (the consumer bears the cost of the injury) is better or worse than a rule of caveat venditor (the seller is liable for damages)? Explain. (10 points)

VIII. Answer both parts: (15 points)

A. If catching and punishing criminals is costless, what is the efficient level of expected punishment? Why?

B. If catching and punishing criminals is costly, is the efficient level of punishment higher than the answer to part A, lower, or sometimes higher and sometimes lower? Explain briefly.

C. One problem with private enforcement of law is that low probabilities of deterrence must be balanced by large penalties, which defendants may be unable to pay. What were the ways in which the legal system of saga period Iceland dealt with that problem?

IX. Briefly explain the economic analysis of either tie-in sales or retail price maintenance (just one of the two). Include both the conventional incorrect analysis (and what is wrong with it) and a more plausible explanation of what is going on. (10 points)

X. Briefly explain (10 points)

A. What it means to say that one legal rule is more efficient than an alternative rule.

B. Evidence for and against the claim that common law legal rules are efficient (answer briefly--two or three examples on each side are plenty). Extra points for examples not in the book.

[Zero Credit Question for those who have free time at the end of the exam]

XI. Describe one important element in the problem of designing an efficient legal system that the textbook does not deal with. Suggest how it might be incorporated into the economic analysis of law. (0 points)