320 Exam review.docx

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University of Toronto Mississauga
Robert Barber

320 Exam review Contract Law 1. Enable people to cooperate by converting non- cooperative games ( prisoner’s dilemma) into a cooperative game  Most important – enforceable contracts that parties know are enforceable solves prisoner dilemma situations 2. Efficient information disclosure  Help parties negotiate the exchange of information suited to their situation  (cooter) Information that is disclosed should only be enforced if that information can bring resources to greater wealth generating resources AND it was paid for by its owners 3. Secure optimal performance  Proper design of the ICC for agents ensures performance  Accomplished by the expectation damages rule 4. Secure optimal reliance  Agents should be motivated by contract to perform  Principals should not over rely for an inefficient gain or an excessive loss from a breach in contract 5. Minimize transaction costs of negotiating contracts  Supplying efficient default terms and conditions  Terms such as what a party should pay another party if a breached contract exists , allowing incomplete contracts to perform is pareto optimal 6. Foster LT relationships  Links back to 1. Multi-period contract game helps counteract prisoner dilemma issues  Encourages relationship over enforcement  Reduces reliance on courts Private Law of Property  Is a remedy assigned to owner of a property that allows the owner to obtain damages ( or injunction against) a polluter of this property  Polluter knows this therefore will internalize the externality as a cost and adjust production accordingly  Pollution is not completely eliminated but is reduced to a socially optimal level ( pareto) Injunction  Remedy assigned to the owner of property- can prohibit the externality , shut down firm, forcing it to move operations  Injunction is efficient when joint social surplus is optimal o Ex. If a threat of an injunction induced the polluter to adopt to a cheaper technology that is not available to the victim to reduce pollution o When transaction costs are too high, injunction is efficient if the owner of the property right values it more than the opposing party Threat Point  Values below which parties will refuse to negotiate  First step in bargaining process -Represents Nash equilibrium in the prisoner`s dilemma model  Anything negotiated above the threat points represents surplus gained through contracting Normative Coase theorem  Theory stating that laws are structured to remove obstacles from private agreements  Laws should be clear enough to minimize transaction costs (lawyer fees) and disagreement costs  When transaction costs are high, efficient resource allocation requies assigning property rights to the party that values it the most  Ex. Laws that guarantee tenants advantages in contract, consumer protection laws for purchased goods Transaction Costs  Costs from bargaining or exchanging  Derived from : o Search costs (finding the right contract) o Document costs ( fees in drafting agreements) o Enforcement costs  Represents a direct reduction in joint social surplus regardless of who pays them  Ex: lawyer fees, court costs Optimal Expectation damages Measures  Expectation damages measures what leaves a principal indifferent between a performed contract and breach of contract  Under theorem of coase, when transaction costs are low, expectation damages and specific performance remedies are equally optimal, but differ in distributional results. Optimal Reliance Damages  Measures what leaves a principal indifferent between no contract and breach of contract Note: When both expectation damages and reliance damages are optimal in a given situation, then the efficiency condition under both measures of damages allows the Principal to rely on the contract at the socially optimal level. Property Law 1. How are ownership rights established 2. What can be privately owned 3. How can we utilize these properties 4. How is property law enforced /remedies for violation Rule of First Possession  Transaction costs are usually low  Similar to finders keepers  Efficient when competition for this scarce resource is low so that the finder can efficiently make investments in this resource knowing that they will own it  Inefficient when there is heavy competition for this resource where competitors may use strategies to try to block access to this resource Public Goods (ex. Beach)  Public good are non excludable – everyone has free access to the beach  Public goods are non rivalrous- Allowing one individual access to a public good does not diminish another’s level of usage  It would be more costly to try to exclude ppl than the case of private properties  Therefore it must be publically owned and maintained by the government – prone to free rider effects  To test : do costs of public enforcement exceed private enforcement Public Goods (information)  Non rivalrous but generates high transaction costs (costly to produce but cheap to transmit)  Hard to appropriate sale value of information because once sold, the consumer becomes a potential competitor of the initial producer  Consumers choose to be free riders paying no more than the transmission cost  Suggests that an unregulated will produce suboptimal amounts of information – need for government intervention for information ( government supply of information or subsidy to private provision of info/ est
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