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Economics 320F – An Economic Analysis of Law
Midterm Exam
Suggested Answers
Fall 2003
University of Toronto
Joanne Roberts
Please answer all parts of the exam in the exam booklet provided.
Calculators are permitted.
This test will be marked out of 50.
The marks for each question are noted throughout the exam.
Part 1: [20 marks -- 10 each]
Comment on two of the following:
1. Should society take as its objective the eradication of all crime? Of all pollution? Of
all accidents? On what basis should society allocate its scarce resources toward
reduction of crime, pollution, accidents, and other bad things?
A Efficiency suggests that resources should be allocated toward the reduction
of these bad things to the extent that it is efficient to do so. The efficient
allocation of resources to the reduction of one of these bad things is the level
at which the marginal benefit of allocating the last unit of a resource to the
reduction in question equals the marginal cost of allocating that last unit. If
fewer resources are allocated to the reduction of the bad thing such that the
marginal benefit of adding an additional unit of resource is greater than the
marginal cost that would be incurred, it would clearly be efficiency
enhancing to allocate that additional unit. On the other hand, if more
resources than this level were allocated such that the MC of adding the last
unit is greater than the MB of doing so, it would be efficiency enhancing to
reduce the level of resources so allocated. Therefore, in general, it is not
desirable from an efficiency point of view to allocate resources so as to
eradicate all crime, all pollution and/or all accidents. Instead, resources
should be allocated such that no more (and no less) than an efficient level of
each of these things occurs.
2. Recently, steps have been taken in the United States to ban the commercial market in
human blood. The principal argument given was that commercially-provided blood is
more likely to be infected with hepatitis, the AIDS virus, and other harmful elements than
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is volunteered blood. Can this ban be justified on efficiency, or any other, grounds?
What would be your prediction about the effect of such a ban?
A Volunteers donate blood because they gain some satisfaction from making a
contribution to a public good (the supply of blood). Paying people for their
blood may induce some people who are at high risk of having infected blood
(e.g., drug users) to contribute their blood in order to receive such a
payment. This, in turn, may increase the need for costly screening
procedures. Banning such the commercial-provision of blood would
potentially reduce these costs, but would also clearly reduce the amount of
blood that is donated (perhaps causing shortages of blood as is common in
Canada where there is no commercial provision of blood). Whether this
would be efficient depends on the MC of the extra screening that would be
saved by the implementation of such a ban in relation to the MB of the
additional volume of blood that would no longer be collected. If the cost
savings outweigh the benefits forgone, then the ban would be efficient. Even
if the ban were not efficient, there may be other moral or ethical
justifications for banning people from selling their blood.
3. The Coase theorem says that, in a world of zero transaction cost, it would make no
difference at all how property rights (or the legal liabilities that define those rights) are
assigned. True or False.
A False. The Coase theorem says that in a world of zero transaction costs the
assignment of rights (or liabilities) to one party or another will not affect the
final allocation of those rights since parties will be able to negotiate market
transactions which will ensure an efficient outcome (at least in the long-run).
However, the theorem does not suggest that there is no difference – the
distribution of wealth is clearly affected by the assignment of the rights since
the party to whom they are assigned can (potentially) extract a payment from
the other party in exchange for the right (or some of the rights).
Part 2: [30 marks -- 15 each]
Answer both of the following questions.
1. Criminal Law and Drugs
a) Discuss, using supply and demand diagrams, why increasing the severity of
punishment for selling drugs may actually increase the amount of drug-related
crime (Hint: you need only consider an addict’s demand for drugs). In your
discussion, note carefully the assumptions that you must make in your analysis
(about the shape of the demand curve, the story told about why drug use and
crime are connected, etc.).
A [See the discussion at page 507-9 of the textbook.] The popular explanation
for the link between increased drug use and increased crime is threefold: 1.
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