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ECO320 MIDTERM Questions with Answers
4 questions of property law
Ans: 1: how are ownership rights established? 2:what can be privately owned? #. what may
owners do with their property? 4. what are the remedies for the violation of property rights?
coase theorem
Ans: when transaction costs are zero, an efficient use of resources results from private
bargaining, regardless of the legal assignment of property rights
open range rule
Ans: the farmer is responsible for keeping the archers cattle off his property and bears the
damages if the cattle got in
closed range rule
Ans: the rancher is responsible for keeping the cattle off the farm property and the rancher
bears the damages if the cattle got in
if parties can cooperate
Ans: they will be indifferent to the closed range rule and the open range rule. So: the fence
will be built regardless of which rule applies/ The resulting surplus will be shared and might
go towards building a fence
payoff function for R
Ans: SSr = Wr + T - Crx
payoff function for F
Ans: SSf = Wf - T - Bf(1-x)
rule of first possession
Ans: maintaining low transaction costs by defining property rights clearly and simply is the
rule of first possession (rule of capture). This encourages efficiency by emphasizing the
production of wealth over the transfer of wealth. But, this rule may lead to over investment
prisoners dilemma
Ans: arises with each owner believing that the other owner is "free riding"
rule 1: polluters right to pollute
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Ans: (no bargain) no pollution equipment is installed by the electric company but is
installed by the laundry company. Joint surplus is maximized here
rule 2: owners right to sue for damages
Ans: no solution equipment is installed by either the electric company or the laundry place.
Joint surplus is 1,100. BUT L can sue E for 200.. E bargains by installing the flter for them at
100
rule 3: owners right to sue for an injunction
Ans: pollution equipment is installed by the electric company. Joint surplus is 800. BUT
instead of losing 500, E bargains with L and installs the filters for 100
if normative Hobbes thm is applied to the prisoners dilemma problem
Ans: rule 1 is the most optimal
what does the prisoners dilemma problem showcase?
Ans: that the damages and injunction remedies are equally efficient when the transaction
costs are zero. Also, if the transaction costs are so high to prevent bargaining, the more
efficient remedy is damages
when transaction costs are low
Ans: injunction is the efiicient remedy. BECAUSE the right to innjunction gives the parties a
clearer position from which to bargain
when transaction costs are so high that they prevent bargaining...
Ans: the court may socially optimize the dispute by granting an injunction/ or compensation
(damages) to the party who values the outcome most in relative terms
normative Hobbes theorem
Ans: when transaction costs are so high that they prevent bargaining, the court may
socially optimize the dispute by granting an injunction/ or compensation (damages) to the
party who values the outcome most in relative terms
under the coase theorem, with the opportunity to bargain, different legal rules:
Ans: led to the same economic outcome and optimal social surplus
converse of chase theorem
Ans: when the opportunity to bargain is removed, different legal rules lead to different
economic outcomes and the choice of rule impacts social surplus; when transaction costs
are high enough to prevent bargaining, the efficient use of resources will depend on how
property rights are assigned
Q&A
ECO320 MIDTERM Questions with Answers
4 questions of property law
Ans: 1: how are ownership rights established? 2:what can be privately owned? #. what may
owners do with their property? 4. what are the remedies for the violation of property rights?
coase theorem
Ans: when transaction costs are zero, an efficient use of resources results from private
bargaining, regardless of the legal assignment of property rights
open range rule
Ans: the farmer is responsible for keeping the archers cattle off his property and bears the
damages if the cattle got in
closed range rule
Ans: the rancher is responsible for keeping the cattle off the farm property and the rancher
bears the damages if the cattle got in
if parties can cooperate
Ans: they will be indifferent to the closed range rule and the open range rule. So: the fence
will be built regardless of which rule applies/ The resulting surplus will be shared and might
go towards building a fence
payoff function for R
Ans: SSr = Wr + T - Crx
payoff function for F
Ans: SSf = Wf - T - Bf(1-x)
rule of first possession
Ans: maintaining low transaction costs by defining property rights clearly and simply is the
rule of first possession (rule of capture). This encourages efficiency by emphasizing the
production of wealth over the transfer of wealth. But, this rule may lead to over investment
prisoners dilemma
Ans: arises with each owner believing that the other owner is "free riding"
rule 1: polluters right to pollute
Q&A
, Q&A Q&A Q&A Q&A Q&A Q&A Q&A Q&A Q&A Q&A Q&A
Ans: (no bargain) no pollution equipment is installed by the electric company but is
installed by the laundry company. Joint surplus is maximized here
rule 2: owners right to sue for damages
Ans: no solution equipment is installed by either the electric company or the laundry place.
Joint surplus is 1,100. BUT L can sue E for 200.. E bargains by installing the flter for them at
100
rule 3: owners right to sue for an injunction
Ans: pollution equipment is installed by the electric company. Joint surplus is 800. BUT
instead of losing 500, E bargains with L and installs the filters for 100
if normative Hobbes thm is applied to the prisoners dilemma problem
Ans: rule 1 is the most optimal
what does the prisoners dilemma problem showcase?
Ans: that the damages and injunction remedies are equally efficient when the transaction
costs are zero. Also, if the transaction costs are so high to prevent bargaining, the more
efficient remedy is damages
when transaction costs are low
Ans: injunction is the efiicient remedy. BECAUSE the right to innjunction gives the parties a
clearer position from which to bargain
when transaction costs are so high that they prevent bargaining...
Ans: the court may socially optimize the dispute by granting an injunction/ or compensation
(damages) to the party who values the outcome most in relative terms
normative Hobbes theorem
Ans: when transaction costs are so high that they prevent bargaining, the court may
socially optimize the dispute by granting an injunction/ or compensation (damages) to the
party who values the outcome most in relative terms
under the coase theorem, with the opportunity to bargain, different legal rules:
Ans: led to the same economic outcome and optimal social surplus
converse of chase theorem
Ans: when the opportunity to bargain is removed, different legal rules lead to different
economic outcomes and the choice of rule impacts social surplus; when transaction costs
are high enough to prevent bargaining, the efficient use of resources will depend on how
property rights are assigned
Q&A
