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ECON 1450 – Professor Berkowitz Lectures on Chapter 1

ECON 1450 – Professor Berkowitz Lectures on Chapter 1. Positive Analysis Focus on Common Law Systems Importance of Judges for Making Law Posner’s view of “Common Law” Judge Are Judges Political? Many state judges are electedN Normative Analysis Are laws efficient?

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ECON 1450 – Professor Berkowitz Lectures on Chapter 1

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  1. ECON 1450 – Professor BerkowitzLectures on Chapter 1 Positive Analysis Focus on Common Law Systems Importance of Judges for Making Law Posner’s view of “Common Law” Judge Are Judges Political? Many state judges are electedN Normative Analysis Are laws efficient? Efficiency can be measured with consumer and producer surplus
  2. Efficiency Pareto Efficiency Efficient allocations on a PPF Pareto superior allocations Non-comparable allocations Pareto efficiency not always helpful in comparing changes in allocations because of new legal rules
  3. Kaldor Hicks Efficiency Relax non-comparability restriction Compensation criterion – reform made without compensation to losers Typically, there are winners and losers most times that judges make new laws Posner’s common law judge make laws that generate more well-being; and, they can do this because they are shielded from politics
  4. Coase Theorem Suppose there is a free market Suppose economy is at a point A that is not on the production possibility frontier This happens because of a market failure, for example, pollution, monopoly power, free riding of public goods, etc
  5. How to Deal with Market Failures Coase Theorem Has Massive Policy Implication Government Policies Before Coase Pollution – tax polluters Monopoly – break them up or regulate them Public goods – set up tax system for financing them
  6. Policy implications of Coase Theorem Government should set up a good legal system that can assign property rights and enforce contracts If a good legal system is in place, then private parties maybe able to negotiate and move the economy from an inefficient below the PPF to a Pareto efficient point
  7. Farmer and Rancher Example from Coase (1960)
  8. A Coaseian Solution Property rights over the land are not specified; Rancher has a herd of 4 and makes $14; and farmer has losses of $4 Social surplus is $14 - $10 = $4 Socially efficient herd size is 3, with a social surplus of $10.5 - $6 = $4.5 Thus, a herd size of 4 is “Kaldor-Hicks inefficient”
  9. Coaseian Bargain Herd size of 3 is Pareto efficient Start with herd size of 4, then Assign rights over land to rancher -> then a deal can be struck, for example, the farmer pays the rancher $3.75 to reduce her herd size to 3 -> rancher’s profits increase from $14 to 3x$3.50 + $3.75 = $14.25 & farmer’s losses decrease from $10 to $6 + $3.75 = $9.75 Role of government – assign property rights and enforce contracts!
  10. More solutions Suppose property rights are assigned to the farmer Farmer might tell the rancher to remove her herd, and so both parties start with profits of zero; Rancher can work out a bargain, for example, and offer the farmer $6 to cover losses for a herd size of 3. Then the farmer makes $10.50 - $6 = $4.50 and the rancher breaks even (note a bargain with herd size of 4, 2 or 1 will never be struck)
  11. Pre-Coaseian solution Government can problem directly – i.e. it taxes the rancher at $4 a steer (the true marginal cost at the “socially efficient” herd level); In practice the government is often too busy to know how to do this and too busy to enforce this Coaseian solution works when property rights are enforced, contracts are enforced and transaction costs are low!
  12. Coase and Judges Implication of Coase Theorem If transaction costs are low, property rights are enforced and contracts are enforced, then from the standpoint of efficiency it does not matter who receives the property rights Implication -> Judges can pursue distributional objectives without sacrificing efficiency
  13. Bargaining costs If bargaining costs between parties is high (high transaction costs), private agreements are difficulty So, with large transaction costs, law matters for efficiency
  14. Court system in USA Federal system – Posnerian common law judge is relevant – trial judges, appellate judges and supreme court judges have tenure and are shielded to some extent from politics State system – in certain states with elections, Posnerian common law judges are rare – see material online from NYU Law School Brennan Center
  15. Reality Check Niblett, Shleifer and Posner (2010) – JLS – do common law judges make efficient state rulings?? Conduct an empirical study of American state courts Brennan Center – Check Caperton case and the impact of judicial elections When are judges Posnerian and the Coase theorem applies?
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