The Government’s Role in Economic Efficiency
Government’s Role in Economic Efficiency
Law and Economic Efficiency Criminal Law | Prohibits actions that harm others. E.g., theft, robbery, fraud, assault and murder | Shifts behaviour away from harmful activities toward Pareto-improving activities. | Contract Law | Establishes rules for writing and enforcing contracts and penalties for failure to fulfil. | Enables Pareto Improvements involving future promises, such as financial contracts or work performed by employees. | Property Law | Establishes rules for private ownership of land and other asserts; ensures that rewards from assets accrue to the owners. | Enables owners to sell or rent property to those who can use it most profitably. | Tort Law | Allow those harmed by dangerous activities or products to sue for damages. | Enables Pareto Improvements that require reasonable assumption of safety. | Anti-Trust Law | Prevents business behaviour that limits competition at the expense of consumers. | Limits market power lower price and production closer to economic efficient levels. |
Market failure
A market that operates inefficiently without government intervention. 4 general types of market failures * Monopoly markets * Externalities * Public goods * Information asymmetry
Externalities
An externality is a by-product of consumption or production that affects someone other than the buyer or seller. Coase Theorem
The Coase theorem states that – when side payments can be negotiated and arranged without cost – the private market will solve the externality problem on its own, always arriving at the efficient outcome. The allocation of legal rights determines gains and losses among the parties, but does not affect the action taken. If private parties can costlessly bargain over the allocation of resources, they can solve the externalities problem on their own. Requirement of 0 cost in side payments can only be satisfied by: 1. Legal rights are clearly established 2. The number of
Law and Economic Efficiency Criminal Law | Prohibits actions that harm others. E.g., theft, robbery, fraud, assault and murder | Shifts behaviour away from harmful activities toward Pareto-improving activities. | Contract Law | Establishes rules for writing and enforcing contracts and penalties for failure to fulfil. | Enables Pareto Improvements involving future promises, such as financial contracts or work performed by employees. | Property Law | Establishes rules for private ownership of land and other asserts; ensures that rewards from assets accrue to the owners. | Enables owners to sell or rent property to those who can use it most profitably. | Tort Law | Allow those harmed by dangerous activities or products to sue for damages. | Enables Pareto Improvements that require reasonable assumption of safety. | Anti-Trust Law | Prevents business behaviour that limits competition at the expense of consumers. | Limits market power lower price and production closer to economic efficient levels. |
Market failure
A market that operates inefficiently without government intervention. 4 general types of market failures * Monopoly markets * Externalities * Public goods * Information asymmetry
Externalities
An externality is a by-product of consumption or production that affects someone other than the buyer or seller. Coase Theorem
The Coase theorem states that – when side payments can be negotiated and arranged without cost – the private market will solve the externality problem on its own, always arriving at the efficient outcome. The allocation of legal rights determines gains and losses among the parties, but does not affect the action taken. If private parties can costlessly bargain over the allocation of resources, they can solve the externalities problem on their own. Requirement of 0 cost in side payments can only be satisfied by: 1. Legal rights are clearly established 2. The number of