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Agenda for 8th Class

• Slide Handouts• Office hours

– Canceled this week – Email me for appointment

• Economic Analysis

• Assignment for Next Class– ## 43-49 (pp. 196-204)– Questions to think about / Writing Assignment for Group 2

• Questions on pp. 198, 200, 204

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Review of Lucy Diamond• Basic question for judges

– How much should judges be influence by sense of justice, consideration of consequences

– How much should judges just read text of statute and other authoritative legal sources

• Positivist– Just look at authoritative legal sources

• Natural law / Pragmatist– Take into account sense of justice, consequences

• Especially when can find ambiguity in authoritative texts• In US, contrast is not so great

– Because Equal Protection Clause and other parts of Constitution • Require judges to consider fairness• Are authoritative legal sources

• Considerations– Do fear that judges will abuse authority?

• Impose own policy preferences rather than democratic preferences?– Do fear that judges lack necessary knowledge?– Do fear that legislation is often poorly drafted?– Do fear that legislatures/Congress are unable to fix bad legislation?

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Economic Analysis• Use of economics, mostly micro-economics (price theory and

game theory) to understand, evaluate and improve law• Sophisticated form of cost-benefit analysis, where costs &

benefits may not be ordinarily monetized– Benefits include clean air, health, home cooked food.

Anything that would “pay” for in money or time.– Costs include personal injury, lost time, discomfort

• Economic analysis is NOT– Analysis of impact of legal rules on GDP

• b/c GDP does not take into account pollution, crime, or other non-traded goods that people care about

– Analysis in terms of effects on federal budget• b/c need to take into account benefits as well as costs of government

programs– Analysis of monetary costs of tort system

• b/c must take into account injuries and other harm deterred by threat of tort sanctions

• b/c money paid by defendants to plaintiffs is transfer, not cost (see later slides)

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Ex Ante v. Ex Post• Economic analysis is mostly concerned with ex ante

perspective, not ex post• Ex post– who pays damages and who receives them• Ex ante– effect liability has on potential defendants’ actions• In tort, primary issue is not who bears losses, but what rule

would give potential injurers the best incentives to take efficient precautions which would avoid accidents

• In contract, the primary issue is what rule gives contracting parties the best incentives to make efficient investments and perform contracts (when it’s efficient to do so)

• Also concerned with potential plaintiffs’ actions– They can often take precautions to avoid accidents as well– They may be able to mitigate damages– They may have information which potential defendants need

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Distinction Between Cost and Transfer• Fundamental distinction between costs and transfers• Transfers.

– Payment of money from defendant to plaintiff– Payment of money by government not in return for goods or servics, e.g.

social security, “welfare”– No net social gain (or loss) [simplification]– Gain to recipient offset almost exactly by loss to payee

• Private costs and benefits, but no social cost or benefit– Of course, transfers have some cost

• Plaintiff and lawyer time required to win lawsuit• Taxes impose costs – IRS agents, taxpayer time, tax preparer time,

distortion of work/leisure and market/non-market work decisions• But we will often ignore those “second order” costs

• Costs– Use of scarce resources

• Payments made in exchange for goods and services, b/c recipient must use scarce resources (time, materials, capital) to produce good or services

– Anything people would pay to avoid• Time, annoyance, discomfort

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Questions on Cost-Benefit Analysis• 1. What is a non-legal situation in which you recently used cost-benefit

analysis?• 2. Was there a recent non-legal decision in which you did not use cost-

benefit analysis? If so, why not? Is it possible that you were implicitly using cost-benefit analysis, even if you did not realize you were doing so? Are there non-legal decision for which cost-benefit analysis is not helpful? Whether to spend your vacation lounging on the beach or hiking in the mountains? Whom to date or marry?

• 3. Use cost-benefit analysis to analyze United States v. Smith. What are the costs of imposing longer sentences on those who exchange guns for drugs? What are the benefits?

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Questions on Cost-Benefit Analysis• 4. Use cost benefit analysis to analyze the issue in the Boyd-Liggett-Crigger

line of cases. What are the benefits of imposing liability on manufacturers for the harm caused by defective products? What are the costs? Boyd, Liggett, and Crigger were decided in the early 20th century, before the rise of the regulatory state. There are now a wide variety of federal and state agencies which regulate product safety. For example, the Food and Drug Administration (FDA) regulates the safety of food and medicine, the National Highway Traffic Safety Administration (NHTSA) regulates automobile safety, and the Consumer Product Safety Commission (CPSC) regulates other consumer products. Do the activities of these agencies increase or decrease the benefit of product liability law?

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Questions on Cost Benefit Analysis• 5. Construct a cost-benefit chart for negligence similar to the one above for

contract remedies. Compare the Hand formula for negligence to either (a) strict liability or (b) no liability, or both. In this comparison consider a precaution that would cost $9000 but that would avert accident costs of $1 million. An accident of that magnitude would occur with 1% probability if the precaution were not taken, but would occur with 0% probability of the precaution were taken. The precaution relates to an activity which generates $1 million in profit for the defendant. In putting numbers in the chart, remember to make a reasonable assumption about whether the defendant will take the precaution, and that that assumption may differ depending on the legal rule. That is, it is possible that the defendant would take (or not take) the precaution if the rule were negligence according to the Hand Formula, but not take (or take) the precaution if the rule were strict liability.

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Valuing Nonmonetary Costs & Benefits• How much is park worth?

– Might as question if conducting cost benefit analysis to determine • whether park should be build• whether park should be sold to alleviate budget deficit

• 2 methods– Surveys

• If park not yet built, usually ask willingness to pay (WTP)– Ask people “who much would you be willing to contribute to have

a park built at…”• If park already built, usually ask willingness to accept (WTA)

– How much would you have to be paid in order to consent to the demolition of the park at ….

– Assess behavior• How much more expensive are houses near park, controlling for

other factors• How much do home values go up when park is built nearby• How much do home values go down when park is demolished