Final Exam

Economic Analysis of Law

Santa Clara University

School of Law, Spring semester 1997


(You may omit any complete question or questions and receive 20% of the possible points)


Note that some questions require you to answer all parts, some only one or two parts.


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

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

B. Briefly sketch the three alternative approaches to solving that problem that we have considered.

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

II. (10 points)

A. Explain the difference between protecting ownership of something with a property rule and protecting it with a liability rule.

B. What are the relative advantages of each sort of rule; in other words, how do you decide which appropriate when?

III. 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 pts)

A. Burglary

B. Monopoly

C. Speculation

D. Efficient punishment

IV. Over the past fifty years, marriage in the U.S. and similar countries has become less common and less stable. We discussed several possible explanations. Pick one, explain it, and discuss evidence and arguments for and against it. (10 pts)

V. Apple is contracting with Motorola for the provision of special computer chips for the next generation of Apple Computers. Among the possible problems they anticipate are: (10 pts)

1. Designing the chips might take longer and cost more than Motorolla currently expects.

2. Apple might change its plans while Motorola is designing the chips, requiring expensive modifications in the design.

The contract can specify which party bears the risk in each case--whether, for example, in case 1, Motorola is required to stick to the previously agreed price, or may revise the contract to pass on the additional costs to Apple.

A. You are an Apple attorney helping to draft the contract. Which risks should you assign to Motorola? Which risks should you assign to Apple? Why?

B. Your law partner asks you what you are doing. You reply that you are trying to draft an efficient contract. He asks "Why? Shouldn't we just draw up whatever terms for dealing with such risks are most favorable to our client?" How do you answer him?

VI. Pick one of the two following situations and explain whether the person who "caused" the accident should be liable and why. (10 points)

A. Coincidental causation: A bus was hit by a falling tree and some of the passengers were injured; they sue the bus company, claiming that if the bus had not been ahead of its schedule due to driving over the speed limit, it would not have been under the tree when the tree fell.

B. Redundant causation: A hiker is found dead with two bullets in him, one through his heart and one through his brain. It turns out that the shots were fired simultaneously by two hunters, both of whom thought he was a deer. His widow sues for wrongful death.

VII. A particular crime does $2000 of damage each time it is committed. The table below shows how the enforcement cost (apprehension cost plus punishment cost) and number of offenses vary with the effective penalty. What should the penalty be? Briefly justify your answer. Note that total enforcement cost is falling as effective penalty increases; why might that happen? (10 points)

Effective Penalty in $s

Total Enforcement Cost in $/yr

Number of Offenses/year




























VIII. Answer one of the following two questions: (5 points)

A. Explain briefly, in your own words, what "the optimal number of automobile accidents" means and why it is not zero.

B. Explain briefly, in your own words, what "the optimal number of murders" means. Is it zero? explain.

IX. Discuss any two of the following questions: (10 points)

A. How did potential victims of crime in 18th century England make deterrence into a private good?

B. How did the privately enforced legal system of saga period Iceland make it possible for a plaintiff to get justice against a more powerful defendant?

C. How do residents of Shasta County punish neighbors who repeatedly allow their cattle to stray into their fields and do damage? Why do they use those punishments instead of other and apparently more efficient alternatives?

X. Answer one of the following two questions: (10 pts)

A. Under our legal system, some wrongs are treated as torts and some as crimes.

1. Briefly describe the differences between the two systems.

2. If we wished to have a system in which all offenses were treated as torts, what problems would arise and how might we deal with them?

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

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