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Economics for Lawyers

Economics for Lawyers

Richard A. Ippolito
Copyright Date: 2005
Pages: 456
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  • Book Info
    Economics for Lawyers
    Book Description:

    Whether dealing with contracts, tort actions, or government regulations, lawyers are more likely to be successful if they are conversant in economics.Economics for Lawyersprovides the essential tools to understand the economic basis of law. Through rigorous analysis illustrated with simple graphs and a wide range of legal examples, Richard Ippolito focuses on a few key concepts and shows how they play out in numerous applications. There are everyday problems: What is the social cost of legislation enforcing below-market prices, minimum wages, milk regulation, and noncompetitive pricing? Why are matinee movies cheaper than nighttime showings? And then there are broader questions: What is the patent system's role in the market for intellectual property rights? How does one think about externalities like airport noise? Is the free market, a regulated solution, or tort law the best way to deliver the "efficient amount of harm" in the workplace? What is the best approach to the question of economic compensation due to a person falsely imprisoned?

    Along the way, readers learn what economists mean when they talk about sorting, signaling, reputational assets, lemons markets, moral hazard, and adverse selection. They will learn a new vocabulary and a whole new way of thinking about the world they live in, and will be more productive in their professions.

    eISBN: 978-1-4008-2922-4
    Subjects: Law, Economics

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-xiv)
  3. Introduction
    (pp. xv-xxii)

    The purpose of this course is to provide the economic foundations for the study of law and economics, and to provide law students with the elementary tools that are required to interact with clients in both a corporate and a government setting. Contracts written in a corporate setting are meant to help the firm attain its business objectives. Corporation counsel can more effectively integrate these goals into legal documents if they understand the underlying rationale and goals of the contracts. Tort actions are integrally involved with the notion of economic damages, and the presentation and cross-examination of expert testimony. Government...

  4. Chapter 1 Finding the Optimal Use of a Limited Income
    (pp. 1-40)

    The best place to start the study of economics is with a model of consumer decisions. Each of us has a limited income and must make choices about how best to allocate it among competing uses. Compared to a bundle of goods and services that are given to us with a market value of $20,000, most of us would prefer to have a $20,000 income to spend as we want. Why? Because each of us has different preferences for different goods and services, and thus, the “value” of a dollar is higher if we have the opportunity to spend it...

  5. Chapter 2 Demand Curves and Consumer Surplus
    (pp. 41-81)

    In chapter 1, I described how a consumer went about the task of allocating scarce income among competing demands. While the indifference curve model is useful for assessing some economic problems, notably those involving the restriction of free choice on the allocation of income, in general, most economic problems that we care about occur at the market level. In this chapter, I derive the demand curve for some commodity, like clothing, at the market level and begin the analysis of “efficient” market transactions at the more aggregate level.

    I start by deriving the demand curve for clothing for a single...

  6. Chapter 3 Supply Curves and Flow of Resources Also Sunk Cost, Opportunity Cost, and Transactions Cost
    (pp. 82-126)

    We now have derived the demand side of the market. The market demand curve is the summation of many individual demand curves, each of which reflects optimal consumption choices based on income and tastes. Price was simply given. In this chapter, I show how supply conditions are developed in the market. I then combine demand and supply concepts to develop the notions of equilibrium output and long-run sustainable price in a market.

    The easiest place to begin is to think of some ore like nickel. Suppose that there are two countries in the world that have nickel deposits, countryA...

  7. Chapter 4 Using Demand and Supply Curves to Evaluate Policy
    (pp. 127-152)

    You now know how to derive market demand and supply, how to think about the idea of long-term sustainable price, and how to value the surplus that free trade confers. In this chapter, you will learn more about the “power of the market.” Just like a river that wants to take the path of least resistance to the ocean, markets want to attain an equilibrium price and quantity. Rivers can be “trained” to attain different flows but only at great cost, and often unanticipated effects arise: building levees to block off all floodplains higher up on the Mississippi River, for...

  8. Chapter 5 The Economics of Monopoly
    (pp. 153-193)

    Until this point, I have assumed that the market is competitive in the sense that there are a sufficient number of firms so that no one firm can influence price. The optimal behavior of each firm yields the market supply curve. The interaction of demand and supply conditions gives the equilibrium price. The relationship between this price and the sustainable price determines whether entry or exit occurs in the industry. In this chapter, I entertain the opposite assumption: there is only one firm in the industry, which means that it has the power to set price. I will argue later...

  9. Chapter 6 Public Goods and Common Resources Toward Understanding the Economics of Property Rights
    (pp. 194-227)

    The subject matter raised in chapter 5 provides a natural setting to pursue the public goods and common resource problems. The theater example introduces the rationale for adding demand curves vertically; this is a classic characteristic of public goods. In addition, however, public goods share a common feature: the difficulty and perhaps impossibility of collecting revenues from users. Since producers naturally are reluctant to produce goods for which they cannot earn a competitive return, we have the potential for underprovision of public goods.

    The market for innovation is a classic example of public goods. Patents are designed to establish property...

  10. Chapter 7 Externalities The Coase Theorem
    (pp. 228-246)

    When two parties enter into a trade that has no substantial impact on a third unrelated party, then the outcome is expected to be socially beneficial. As we saw in chapter 1, Ken and Jane are expected to find a way to reach the contract curve, regardless of their starting position. Both are better off from trading, and no one is worse off. Thus, the transaction produces a Pareto efficient outcome. It is time now to pay closer attention to market transactions that affect third parties.

    As you will learn in subsequent chapters, problems can arise when parties in transactions...

  11. Chapter 8 Pollution in the Workplace: Contract or Externality? An Introduction to the Rules of Law
    (pp. 247-281)

    In this chapter, I address a contract that has no externalities, and thus, one that normally does not warrant intervention. In reality, there are many situations in which public intervention in markets is advocated on the argument that at least some participants are so ill informed about a hazard that we might just as well treat itas thoughit were an externality. The argument assumes that market participants cannot find an efficient solution without outside intervention. These debates often arise when workers are exposed to pollutants that contribute to adverse health after a long period of exposure. I consider...

  12. Chapter 9 Lemons Markets and Adverse Selection Signals, Bonds, Reputation, and Tie-ins as Solutions
    (pp. 282-320)

    I mostly have assumed that market participants have full information. In this chapter, I discuss some problems that arise from the absence of perfect information and show how the market finds solutions to these problems. Chapter 10 presents “sorting” solutions to poor quality. The most important lesson to learn in these chapters is not how imperfect information increases the costs of markets, but rather that clever and resourceful market participants find ways to overcome seemingly unsolvable problems that arise from poor information. Some solutions involve the use of contracts of one kind or another; others do not. The concept of...

  13. Chapter 10 Sorting as a Solution to Asymmetric Information Coaxing Market Participants to Divulge Valuable Information
    (pp. 321-347)

    Sorting is a mechanism that allows market participants to discover information before they engage in a transaction. Usually sorting is observed when information is asymmetric. Often, sellers have the informational advantage over buyers, but not always. If sellers have more information, then buyers sometimes can set up a “sort” that encourages sellers to divulge valuable information and, in so doing, improve the efficiency of the trade. If the sorting is effective, it does not matter whether sellers know that information is being pried from them.

    Anytime market participants make a choice, a sorting function is performed and information is conveyed....

  14. Chapter 11 Moral Hazard and Agency Problems When Mispricing Affects Behavior
    (pp. 348-379)

    In the last chapter, I discussed sorting and selection issues at some length. I supposed that worker or product attributes were given, and that the problem for the market was to devise methods to identify either low or high quality. In this chapter, I turn to a discussion of “moral hazard.” In general, the “hazard” arises in instances in which some product or service is underpriced. Price is set below the marginal cost of production, thereby encouraging too much use. The flip side is to view overuse as a kind of reckless behavior, which is why the problem sometimes is...

  15. Chapter 12 Game Theory and Related Issues Strategic Thinking When Players Are Few and Information Is Poor
    (pp. 380-416)

    Game theory is an area of study that broadly includes strategic behavior between two (or a few) actors. Usually, either party does notknowwhat action the other party will take in the game but can sometimes predict his actions based on available information. In this sense, game theory is a tool to help make decisions under conditions of imperfect information. In almost all game theory models, one party makes a move,taking into account the possible reactions of some other player. If I engage in actionA, what are my adversary’s possible responses? If I engage in actionB,...

  16. Index
    (pp. 417-421)