ECON 141 Law and Economics Issues involving law: rules of conduct economics: study of human action under scarcity Our approach economists venturing.

ECON 141 Law and Economics

Issues involving law: rules of conduct economics: study of human action under scarcity

Our approach economists venturing into legal territory

Course content some theory, very little quantitative many applications to contemporary issues

Some contemporary issues involving law and economics

Eminent domain Regulation of consumption:

soda tax, drug prohibition Intellectual property: trade

secrets, patents, copyrights Music/software/video

DRM and piracy Open source software

Occupational licensing Building codes

Campaign finance Health care Public education, student

loans Antitrust Labor law Limited liability Bank regulation Money production Tariffs & quotas Trade sanctions

Class #1 definitions & concepts

Values Utility and Welfare Efficiency Economics Law Property Rights Markets Government Market failure; government failure Anarchy Forms of government

Values

Subjective and ranked, not measured. In our minds, not inherent in things Values are revealed by choices Values change constantly. Prices are objective and measured in money units. Confusion in terminology: prices are sometimes

called “market values”

Utility and Welfare

Utility is the benefit we get from scarce goods or services

It is not measurable But we can distinguish utility from disutility

“Social utility” is a problematic concept. How do we compare one person’s utility with

another? Can we add up people’s inidividual utilities to

arrive at “social utility”? Welfare is our sense of satisfaction, closely

related to utility. Cannot be measured Cannot be compared between individuals

Efficiency

Efficiency: getting maximum value from what you have.

Since values are subjective, efficiency is subjective

Problem: social efficiency “social efficiency” means getting the most “social

welfare” from a situation, but if social welfare can’t be identified, neither can social efficiency

Economics

The study of people making choices under conditions of scarcity

Scarce goods and services can only be acquired by foregoing something else

Scarcity can increase or decrease As economists we only study cause and

effect. When we make policy recommendations we are stepping outside the bounds of economics

Law

Law: rules of conduct Ethical basis of law

Natural law (Aristotle, Rand, Rothbard) Utilitarianism (Bentham, Mises)

Forms of law statute law case law common law

People will not produce and exchange unless they feel secure in their property rights

Kindergarten ethics

Don’t hit the other children Don’t take the other children’s toys

Property

Valuable goods, land, ideas, etc. over which some person or persons exercise legitimate control

When you own something, what you really have is rights to certain actions with respect to that property Use it Neglect it Destroy it Sell it or donate it

Public property: an oxymoron?

Rights

Definition of rights: Assertions that others have a duty not to

interfere with some action Two ways to justify rights

Natural law, religious or secular Utilitarian

Categories of rights Property rights “Human rights” Freedom of speech Freedom of religion etc.

Governments are the main violators of rights Are property rights subservient to “human

rights”?

Markets

“The market” in economics refers to the collection of all voluntary transactions.

The essence of market transactions is that they are voluntary Contrast criminal or government actions which

are based on actual or threatened violence Physical markets:

Farmers’ markets Swap meets Stock markets eBay etc.

Government

Definition: a group of people who enjoy a legitimized monopoly on the use of force (violence) in a given area at a given time

“Legitimized” means that most people accept their government, at least passively

Violence (coercion) Initiated: by criminals and government agents Defensive: by individuals or government agents

(police, armed forces) Threats of violence are often all that is necessary

in many circumstances

Perfect competition and monopoly

Perfect competition So many sellers that no one has pricing power Everyone sells identical products No innovation No advertising marginal revenue = marginal cost = price

Monopoly Single seller (of what?) Seller can raise price above marginal cost Two kinds of monopoly

Enforced by government Arising in market

Market failure

Said to occur when market transactions fail to live up to some ideal

Text discussion blames markets for failing to meet standards of perfection (p. 16) 1. Markets are not perfectly competitive 2. Asymmetric information: sellers know more

than buyers about products 3. Products that entail negative externalities

(harmful effects on third parties) are over-produced by markets

4. Markets under-produce public goods (benefits not limited to those who pay)

5. There are transaction costs

Public Interest and Public Choice Theories of Government “Public interest” view of government:

Politicians and bureaucrats are always motivated by “the public good”

Taught to high school students “Public choice” view: incentives faced by

politicians and bureaucrats Income Prestige Power

Government failure

Pigou: government intervention needed to correct market failure

Almost universally accepted without question Can governments correct market failures?

Are the incentives right? Can government agents acquire the knowledge

necessary to achieve the desired goal? Do they have the necessary long-term

perspective? “Nirvana is not an option”

Anarchy

Common meaning: chaos Literal meaning: no government Anarchists (specifically anarcho-capitalists,

e.g. Hummel, D. Friedman) claim all legitimate social services can be provided by private organizations including: Protection services Prosecution and adjudication Roads & highways Schools

Forms of government

Limited constitutional government Socialism

Government ownership of the means of production

Class hatred Fascism

Nominal private ownership of the means of production but government exercises control

Racial or nationalistic hatred

Laissez-faire –limited government

Government confined to Police Courts of law National defense

All other activities are privately, voluntarily financed and produced Money Roads -- construction and operation Schools Health care etc.

Socialism

Government ownership of the means of production Factories Farms Mines etc.

Individual ownership of some consumer goods Food Clothing etc.

Fascism

The popular notion that socialism and fascism are at opposite poles on the political spectrum is wrong. There is actually little significant difference.

Means of production remain in nominal private ownership but government agents direct all production

Not essentially different from socialism Nazi was short for National Socialist

Nolan chart

Mixed economies

U.S. Constitution created a limited federal government

Limitations are now almost entirely ignored. We have a “mixed economy” The U.S. is moving away from freedom

Toward fascism? Toward socialism?