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University of Toronto St. George
Donald Dewees

Economics 320F An Economic Analysis of Law Midterm Exam Suggested AnswersFall 2003 University of Toronto Joanne RobertsPlease 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 marks10 eachComment on two of the following1 A nonvoluntary transaction never increases utility True or False A FALSE See discussion on page 453 of text In general goods that are acquired through voluntary exchange because such exchange guarantees that goods move to those who value them the most and in doing so makes both parties better off Goods that exchange hands without the consent of both partiesas by theftdo not carry this same guarantee However this does not imply that it is not possible for a nonvoluntary transaction to increase utility For example the MB to the persons taking a good may be very high and the MC to the person from whom it was taken may be very small Such a transaction would clearly increase total utility ie would be efficient even though the transaction was nonvoluntary Examples of such nonvoluntary transactions which may but not necessarily increase utility include but are certainly not limited to instances of necessity or situations in which a government takes property for a public purpose2 The Coase theorem implies that from an economics standpoint society will be indifferent between a rule that prohibits the theft of assets and a rule that permits theft because under either rule the asset in question will wind up in the hands of the party who values it the most True or False A FALSE Theft involves nonvoluntary transactions The Coase theorem applies to situations in which whatever the legal rule voluntary exchanges will ensure that the efficient allocation is arrived at With theft involuntary
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