Law and economics cases and materials

Law and Economics Cases and Materials Charles J Goetz Hartfield Professor of Law © Copyrights 1984-2006, All Rights Reserved [Page Deliberately Left Blank] Table of Contents CH 1: ANALYZING CHOICE UNDER ALTERNATIVE RULES A INTRODUCTORY CONSIDERATIONS B ELEMENTARY GAME THEORY THE PRISONER’S DILEMMA THE STUDENT’S DILEMMA: UNIVERSITY v EAGER THE PRISONER’S DILEMMA AS A MATRIX MODEL Exhibit 1.1: PD Matrix Model c THE “PRISONER’S DILEMMA” DEFINED Exhibit 1.1: PD Matrix Model a b 8 10 ANOTHER IMPORTANT, CLOSELY RELATED GAME: “CHICKEN” 11 OTHER USEFUL JARGON: “EXTERNALITIES” 11 ETHICAL AND OTHER EXTRALEGAL BEHAVIORAL REGULATIONS 12 EXTERNAL BENEFITS, EXCLUDABILITY AND “FREE RIDERS” 15 C THE LAW AND ECONOMICS OF PROPERTY RIGHTS 16 ROAD MAINTENANCE PROBLEM Exhibit 1.3 Benefits of Road Repair Levels 16 16 JOINTNESS AND EXCLUDABILITY AS ELEMENTS OF PROPERTY 17 CHICKEN vs PRISONER’S DILEMMA Exhibit 1.4 Road Problem As A “Chicken” Game Exhibit 1.5 Road Problem As A Prisoner’s Dilemma 18 19 19 GAMING ABOUT INFORMATION UNTRUTHS CAN IMPROVE BUSINESS-SCHOOL GRADE; PEER PRESSURE CLASHES WITH ETHICS 20 “CHICKEN” IN ACTION: LAND ASSEMBLY HOMEOWNER BICKERING ENDS $100,000 OFFER FOR HOUSES 22 22 WHAT GENERALIZATIONS CAN BE MADE? 23 D d TRANSFERABILITY AS AN ELEMENT OF PROPERTY 20 23 ASSIGNABILITY OF CAUSES OF ACTION THE CASE OF NIKE v LOBEL 24 25 OTHER KINDS OF PROPERTY RIGHTS IN LEGAL PROCESS Mutuality of Estoppel 27 27 ii Goetz, Law and Economics e Discovery of Computerized Litigation Files BROADCAST MUSIC, INC v MOOR-LAW, INC COASE AND COSTS, “OPPORTUNITY” AND OTHERWISE Allocation of Rights in the Small-Number Context FONTAINEBLEAU HOTEL CORP v FORTY-FIVE TWENTY-FIVE, INC b Applicability of the Coase Theorem c Cases Involving Transactions-Cost Problems BOOMER v ATLANTIC CEMENT CO Bomber v Particular Gypsum Co J WEINGARTEN, INC v NORTHGATE MALL, INC SPUR INDUSTRIES, INC v DEL E WEBB DEVELOPMENT CO SPRECHER v ADAMSON COMPANIES et al a 28 28 30 31 31 32 35 35 37 37 40 43 CH 2: RIVALROUS AND RISKY DECISIONS 47 A 47 BEHAVIOR INVOLVING UNCERTAINTY PROSPECTS AND CERTAINTY EQUIVALENTS 47 EXPECTED VALUES Exhibit 2.1 Computing Expected Values 48 48 RISK PREFERENCE Exhibit 2.2 Money and Utility 49 50 B APPLICATIONS 52 LAW OF THE LEANING TREE 52 THE CASE OF MRS CRISPY’S CHICKEN 53 EX ANTE ANALYSIS OF PUNISHMENTS IN RE JOHN LYNCH RICHARDS v ALLSTATE INSURANCE CO CRAIG v BOREN 54 54 58 60 THE HUNTING OF A TAKEOVER 63 AGENT-PRINCIPAL CONFLICTS OF INTEREST Using Agents To Sell Real Estate Exhibit 2.3 - Real Estate Market Information b Agent-Principal Conflicts in Legal Contracts HEINZMAN v FINE, FINE, LEGUM & FINE a “CURVE” MODELS: MARGINAL AND TOTAL EFFECTS Exhibit 2.4 – Marginal Effect As Slope of Total Curve Exhibit 2.5 - Area Under A Marginal Curve 65 65 65 67 67 69 70 70 Table of Contents iii ATTORNEY- CLIENT RELATIONSHIPS 71 SHOULD SUBROGEES KEEP “EXCESS” RECOVERIES? 72 C LEAST-COST RISK BEARING 73 WHAT IS “LEAST-COST” RISK BEARING? Exhibit 2.6 – Binomial Distribution 73 75 SOURCES OF LEAST COST RISK-BEARING Exhibit 2.7 – Pool of Shared $1 Risks with 40% Probability Exhibit 2.8 – Pool of 10 Shared $1 Risks with 40% Probability Exhibit 2.9 – Pool of 20 Shared $1 Risks with 40% Probability 76 77 78 78 PORTFOLIO ANALYSIS AND THE PRUDENCE STANDARD 79 D OPTIMAL INSURANCE AND RISK ADJUSTMENT 80 “INSURANCE” AGAINST CONTRACT BREACH Exhibit 2.10 (top panel) and Exhibit 2.11 (bottom panel) 80 82 AFTER-THE-FACT INDEMNIFICATION: REALLY INSURANCE? 83 “RISK DISTRIBUTION” INSURANCE AGAINST HARMFUL EVENTS NATIONAL STEEL SERVICE CENTER v GIBBONS 85 85 E JUSTICE AND FAIRNESS 88 A Contractarian Theory of Justice as Fairness Exhibit 2.12 – Social Choice Matrix Exhibit 2.13 – Maxi-Min Social Choice Matrix 88 89 91 FAIR DIVISION SCHEMES: DIVIDE AND CHOOSE 91 EQUITABLE DISTRIBUTION OF VOTING POWER Pivotal-Voter Measure of Political Power Exhibit 2.14: Power of a Voter Via Representation b An Equilibrium-Displacement Measure of Voter Power Exhibit 2.15: Potential Displacement Via Single Voter Exhibit 2.16: Electoral College Power Under Alternative Theories a EFFICIENCY ASPECTS OF FAIRNESS STATE OF IOWA v HENRY PARRISH “PATERNALISM” IN THE LAW 92 92 94 94 95 96 96 96 100 CH 3: INTERTEMPORAL COSTS AND BENEFITS 103 A INTEREST RATES AND “PRESENT VALUES” 103 Exhibit 3.1: (1+r)n Compound Interest Growth Factors 105 iv Goetz, Law and Economics Exhibit 3.2: 1/(1+r)n Discount Factors B VALUING THE BENEFITS OF INTERESTS IN LAND 106 108 DETERMINING THE VALUE OF A LEASEHOLD 108 VALUING A PROPERTY ENCUMBERED BY A LEASE 108 C INTEREST ON DAMAGES AND PENALTIES 109 PREJUDGMENT INTEREST ON DAMAGES BUSIK v LEVINE 109 109 “BACK DOOR” PREJUDGMENT INTEREST? UNITED TELECOMMUNICATIONS, INC v AMERICAN TELEVISION AND COMMUNICATIONS CORP 113 113 113 PREJUDGMENT INTEREST ON PENALTIES 115 D E EVALUATING LOST FUTURE INCOME AS DAMAGES 116 Exhibit 3.3: Lost Income Damages, Assumption Set #1 Exhibit 3.4: Lost Income Damages, Assumption Set #2 BEAULIEU v ELLIOTT DOCA v MARINA MERCANTE NICARAGUENSE, S.A 117 118 119 123 COMBINED UNCERTAINTY AND DISCOUNTING 129 Introductory Considerations Tintd Hypothetical Exhibit 3.5: Tintds’ Probability of Survival to Various Birthdays b Annuity Hypothetical c Life Tenancy and Remainder Rights a 129 130 130 130 131 AVERAGE vs actuarily expected LIFE earnings Exhibit 3.6: Average Lifespan vs Actuarial Calculations 132 133 RISK SELECTION AND RISK COMPENSATION Exhibit 3.7: Analysis of Rentals 134 135 DEFAULT COST UNDER “BACKDOOR” INTEREST SCHEMES Exhibit 3.8: The “Time Price” Interest Subterfuge 136 136 F G TAX TREATMENT OF TORT DAMAGES 139 DeLUCCA v UNITED STATES 139 FAIRNESS IN EMPLOYEE BENEFITS 142 Table of Contents v Contributions to Pension Plans LOS ANGELES DEPT OF WATER AND POWER v MANHART 142 142 CONSTRUING THE AGE DISCRIMINATION IN EMPLOYMENT ACT 145 CH 4: MAPPINGS AND “DEMAND” DECISIONS 147 A 147 TOPOGRAPHICAL MAP READING Decisions Based on Spatial Locations Exhibit 4.1 – Topographic Map Showing Relevant Features 147 148 INDIFFERENCE CURVE MODELS AND MARKET DECISIONS Exhibit 4.2: Economic Topography and Constraints 149 149 B GROUP DECISIONS UNDER MAJORITY RULE 151 “Rational” Group Preferences MODELING OF VOTING DECISIONS Topographic Model of 3-Person Majority Rule Decisions Exhibit 4.3 – Topographic Map of Budgetary Decisionmaking b A MATRIX MODEL OF VOTE TRADING Exhibit 4.4 – Voters’ Benefit Changes For Measures A & B a C D E F G 151 152 152 152 153 154 DECISIONMAKING IN THE COURTS 155 STATE OF MISSOURI v BARTON HARRIS v RIVERA 155 156 EDGEWORTH BOX ANALYSIS OF CONTRACTS 158 CONTRACTUAL REALLOCATION THROUGH “EFFICIENT BREACH” Exhibit 4.5 – Indifference Curve Model of Efficient Breach 158 159 CONSUMER CHOICE: MODELING PROMISSORY RELIANCE 161 Exhibit 4.6 – Intertemporal Model of Promissory Reliance 162 PERMISSIBLE AND IMPERMISSIBLE EFFECTS OF GOVERNMENT GRANTS 164 MATHEWS et al v MASSELL TILTON v RICHARDSON Hypothetical: Christian Friars Wine Sales to Military 164 167 172 BRIBES VERSUS THREATS 172 UNITED STATES v BUTLER STEWARD MACHINE CO v DAVIS CARROTS vs STICKS 173 176 177 vi Goetz, Law and Economics H MEASURING RESPONSIVENESS: ELASTICITIES 179 HARRIS v McRAE UNITED STATES v E I DU PONT DE NEMOURS & CO 181 182 LEGAL APPLICATIONS FROM DEMAND THEORY 184 CH 5: CHANNELING BEHAVIOR VIA LEGAL INCENTIVES 187 A 187 TORT LIABILITY MODELS THE LEARNED HAND RULE: A MARGINAL COST-BENEFIT FORMULATION Exhibit 5.1 – Marginal Cost and Marginal Benefit of Precautions 187 188 THE HYPOTHETICAL MODEL UNDERLYING THE DIAGRAMS Exhibit 5.2: Effect of Recognizing Only 75% of Actual Harm 189 190 ERRORS IN THE APPLICATION OF TORT LAW Incorrect Assessment Of Damages 190 190 Mistakes In Applying The Liability Standard Exhibit 5.3: Probability of Jury Requiring Care Level Exhibit 5.4: Behavior Effects of Errors Regarding Care Standard 191 192 194 a B MULTI-PARTY HARM PRODUCTION FUNCTIONS 195 Precautions That Minimize Net Social Cost of Accidents Exhibit 5.5 – Multiparty Social Cost Function #1 195 196 Comparative Negligence Exhibit 5.6 – Multiparty Social Cost Function #2 BENTZLER v BRAUN VICTOR SCHWARTZ, COMPARATIVE NEGLIGENCE, p 297 STATE v KAATZ 197 198 200 200 201 C THE “LEVEL” OR QUANTITATIVE PROBLEM 202 GREENLAWN NEIGHBORHOOD ASSOCIATION v FIRST GUARANTY BANK 204 204 TAKING COST-MINIMIZATION SERIOUSLY(?) 205 The Case Of Innocente v Vinho Drunks Won’t Let The Preacher Alone 205 206 PROMISE-BREAKING ANALYZED AS A TORT 206 D E Economically Optimal Damages For Broken Promises 206 Sec 90, Restatement Of Contracts 211 Table of Contents CENCO, INC v SEIDMAN & SEIDMAN HYPOTHETICAL: PERILS OF A TAXJACQUES PERFORMANCE DEFINITION AND RELATIONAL CONTRACTING Exhibit 5.7 Exhibit 5.8 BEST EFFORTS PROVISIONS Exhibit 5.9 HYPOTHETICAL: INTERWOOD v FORREST LUMBER BLOOR v FALSTAFF BREWING CO vii 212 215 216 219 221 224 225 228 229 CH 6: SUPPLY AND SYSTEMIC INTERACTIONS 236 A 236 PRODUCTION COSTS AND CONTRACT BREACH Cost Conditions For A Firm Producing Standprods Exhibit 6.1: Costs at Alternative Outputs 236 237 Cases About Damages for Breaches of Duty JERICHO SASH AND DOOR CO v BUILDING ERECTORS, INC NOBS CHEMICAL, U.S.A., INC v KOPPERS CO., INC CURT’S TRUCKING CO v CITY OF ANCHORAGE LUND v COMMONWEALTH 238 238 238 240 243 B ADJUSTMENT OF A COMPETITIVE INDUSTRY 246 a b c d e C D A Simons Model of Competitive Equilibrium Part I Initial Equilibrium State Exhibit 6.2: Graph of Firm’s Cost Curves Exhibit 6.3: Short-run Equilibrium of Supply and Demand Partial Displacement And Short-Run Equilibrium Adjustment Exhibit 6.4: Costs to Firm Paying ASD Royalty Progress Toward New Equilibrium Additional Implications A Simple Mathematical Model [Optional] Exhibit 6.4b: Solutions of Market Model 246 246 247 248 248 249 249 249 250 252 Bankruptcy Laws And Fixed Costs 252 INCIDENCE ANALYSIS: SHIFTING AND PASSING ON 253 HANOVER SHOE, INC v UNITED SHOE MACHINERY CORP ILLINOIS BRICK CO v ILLINOIS 254 255 ANTICOMPETITIVE SUPPLY RESTRICTION 258 Exhibit 6.5: Expansion versus Market Spoilage CLARK v UNIVERSAL BUILDERS, INC STATEMENT OF U.S DEPT OF TRANSPORTATION BEFORE THE INTERSTATE COMMERCE COMMISSION, WESTERN COAL INVESTIGATION-GUIDELINES FOR RAILROAD RATE STRUCTURE GHEN v RICH CONSTRUCTION INDUSTRY ASSOCIATION OF SONOMA COUNTY v CITY OF PETALUMA 259 269 278 280 283 viii Goetz, Law and Economics Exhibit 6.2a: Correctly Graphed Cost Curves Exhibit 6.3a: Completed Graph of Demand and Shifting Supply Curves 289 289 286 Table of Contents In Belle Terre the Supreme Court rejected numerous challenges13 to a village’s restricting land use to one-family dwellings excluding lodging houses, boarding houses, fraternity houses or multiple-dwelling houses By absolutely prohibiting the construction of or conversion of a building to other than singlefamily dwelling, the village ensured that it would never grow, if at all, much larger than its population of 700 living in 220 residences ‘Nonetheless, the Court found that the prohibition of boarding houses and other multi-family dwellings present urban problems, such as the occupation of a given space by more people, the increase in traffic and parked cars and the noise that comes with increased crowds According to the Court, “A quiet place where yards are wide, people few, and motor vehicles restricted are legitimate guidelines in a land-use project addressed to family needs This goal is a permissible one within Berman v Parker, supra The police power is not confined to elimination of filth, stench, and unhealthy places It is ample to lay out zones where family values, youth values, and the blessings of quiet seclusion, and clean air make the area a sanctuary for people” 416 U.S at 9, 94 S.Ct at 1541 While dissenting from the majority opinion in Belle Terre on the ground that the regulation unreasonably burdened the exercise of First Amendment associational rights, Mr Justice Marshall concurred in the Court’s express holding that a local entity’s zoning power is extremely broad: “[L]ocal zoning authorities may properly act in furtherance of the objectives asserted to be served by the ordinance at issue here: restricting uncontrolled growth, solving traffic problems, keeping rental costs at a reasonable level, and making the community attractive to families The police power which provides the justification for zoning is not narrowly confined And, it is appropriate that we afford zoning authorities considerable latitude in choosing the means by which to implement such purposes.” 416 U.S at 13-14, 94 S.Ct at 1543 (Marshall, J., dissenting) (emphasis added) (citations omitted) Following the Belle Terre decision, this court in Los Altos Hills had an opportunity to review a zoning ordinance providing that a housing lot shall contain not less than one acre and that no lot shall be occupied by more than one primary dwelling unit The ordinance as a practical matter prevented poor people from living in Los Altos Hills and restricted the density, and thus the population, of the town This court, nonetheless, found that the ordinance was rationally related to a legitimate governmental interestthe preservation of the town’s rural environment-and, thus, did not violate the equal protection clause of the Fourteenth Amendment 503 F.2d at 254 Both the Belle Terre ordinance and the Los Altos Hills regulation had the purpose and effect of permanently restricting growth; nonetheless, the court in each case upheld the particular law before it on the ground that the regulation served a legitimate governmental interest falling within the concept of the public welfare: the preservation of quiet family neighborhoods (Belle Terre) and the preservation of a rural environment (Los Altos Hills) Even less restrictive or exclusionary than the above zoning ordinances is the Petaluma Plan which, unlike those ordinances, does not freeze the population at present or near-present levels Further, unlike the Los Altos Hills ordinance and the various zoning regulations struck down by state courts in recent years, the Petaluma Plan does not have the undesirable effect of walling out any particular income class nor any racial minority group.16 13 The plaintiffs in Belle Terre claimed inter alia that the ordinance interfered with a person's right to travel and right to migrate to and settle within a state The Supreme Court held that since the ordinance was not aimed at transients, there was no infringement of anyone's right to travel 416 U.S at 7, 94 S.Ct 1536 Although due to appellees' lack of standing we not reach today the right to travel issue, we note that the Petaluma plan is not aimed at transients, nor does it penalize those who have recently exercised their right to travel See CEEED v California Coastal Zone Conservation Comm'n, 43 Cal.App.3d 306, 118 Cal.Rptr 315, 332-34 (1974); cf Dunn v Blumstein, 405 U.S 330, 342, 92 S.Ct 995, 31 L.Ed.2d 274 (1972) 16 Although appellees have attempted to align their business interest in attacking the Plan with legitimate housing needs of the urban poor and racial minorities, the Association has not alleged nor can it allege, based on the record in this case, that the Plan has the purpose and effect of excluding poor persons and racial minorities Cf Board of County Supervisors of Fairfax County v Carper, 200 Va 653, 107 S.E.2d 390 (1959) Contrary to the picture painted by appellees, the Petaluma Plan is "inclusionary" to the extent that it offers new opportunities, previously unavailable, to minorities and low and moderate-income persons Under the pre-Plan system single family, middle-income housing dominated the Petaluma market, and as a result low and moderate income persons Chapter SUPPLY AND SYSTEMIC INTERACTIONS 287 Although we assume that some persons desirous of living in Petaluma will be excluded under the housing permit limitation and that, thus, the Plan may frustrate some legitimate regional housing needs, the Plan is not arbitrary or unreasonable We agree with appellees that unlike the situation in the past most municipalities today are neither isolated nor wholly independent from neighboring municipalities and that, consequently, unilateral land use decisions by one local entity affect the needs and resources of an entire region See, e.g., Golden v Planning Board of Town of Ramapo, 30 N.Y.2d 359, 334 N.Y.S.2d 138, 285 N.E.2d 291, appeal dismissed, 409 U.S 1003, 93 S.Ct 436, 34 L.Ed.2d 294 (1972); National Land & Investment Co v Kohn, 419 Pa 504, 215 A.2d 597 (1965); Note, Phased Zoning: Regulation of the Tempo and Sequence of Land Development, 26 Stan.L Rev 585, 605 (1974) It does not necessarily follow, however, that the due process rights of builders and landowners are violated merely because a local entity exercises in its own self-interest the police power lawfully delegated to it by the state See Belle Terre, supra; Los Altos Hills, supra If the present system of delegated zoning power does not effectively serve the state interest in furthering the general welfare of the region or entire state, it is the state legislature’s and not the federal courts’ role to intervene and adjust the system As stated supra, the federal court is not a super zoning board and should not be called on to mark the point at which legitimate local interests in promoting the welfare of the community are outweighed by legitimate regional interests See Note, supra, at 608-11 We conclude therefore that under Belle Terre and Los Altos Hills the concept of the public welfare is sufficiently broad to uphold Petaluma’s desire to preserve its small town character, its open spaces and low density of population, and to grow at an orderly and deliberate pace Commerce Clause The district court found that housing in Petaluma and the surrounding areas is produced substantially through goods and services in interstate commerce and that curtailment of residential growth in Petaluma will cause serious dislocation to commerce 375 F.Supp at 577, 579 Our ruling today, however, that the Petaluma Plan represents a reasonable and legitimate exercise of the police power obviates the necessity of remanding the case for consideration of appellees’ claim that the Plan unreasonably burdens interstate commerce It is well settled that a state regulation validly based on the police power does not impermissibly burden interstate commerce where the regulation neither discriminates against interstate commerce nor operates to disrupt its required uniformity Huron Cement Co v Detroit, 362 U.S 440, 448, 80 S.Ct 813, L.Ed.2d 852 (1960) As stated by the Supreme Court almost 25 years ago: “When there is a reasonable basis for legislation to protect the social, as distinguished from the economic, welfare of a community, it is not for this Court because of the Commerce Clause to deny the exercise locally of the sovereign power of the [state].” Breard v Alexandria, 341 U.S 622, 640, 71 S.Ct 920, 931, 95 L.Ed 1233 (1951) It is wholly beyond a court’s limited authority under the Commerce Clause to review state legislation by were unable to secure housing in the area The Plan radically changes the previous building pattern and requires that housing permits be evenly divided between single-family and multi-family units and that approximately eight to twelve per cent of the units be constructed specifically for low and moderate income persons In stark contrast, each of the exclusionary zoning regulations invalidated by state courts in recent years impeded the ability of low and moderate income persons to purchase or rent housing in the locality See, e.g., Southern Burlington County NAACP v Township of Mount Laurel, 67 N.J 151, 336 A.2d 713 (Mar 24, 1975) (zoned exclusively for singlefamily, detached dwellings and multifamily dwellings designed for middle and upper income persons); Oakwood at Madison, Inc v Township of Madison, 117 N.J.Super 11, 283 A.2d 353 (1971) (minimum one or two acre requirement and severe limitation on multi-family units); Appeal of Kit-Mar Builders, Inc., 439 Pa 466, 268 A.2d 765 (1970) (two to three acre minimum lot size); Appeal of Girsh, 437 Pa 237, 263 A.2d 395 (1970) (prohibition of apartment buildings); National Land & Investment Co v Kohn, 419 Pa 504, 215 A.2d 597 (1965) (four acre minimum lot); Board of County Supervisors of Fairfax County v Carper, 200 Va 653, 107 S.E.2d 390 (1959) (rezoning to minimum two acre lots with the effect of keeping poor in another section of municipality) 288 Table of Contents balancing reasonable social welfare legislation against its incidental burden on commerce Brotherhood of Locomotive Firemen & Enginemen v Chicago, Rock Island & Pacific Railroad Co., 393 U.S 129, 136, 89 S.Ct 323, 21 L.Ed.2d 289 (1968) Consequently, since the local regulation here is rationally related to the social and environmental welfare of the community and does not discriminate against interstate commerce or operate to disrupt its required uniformity, appellees’ claim that the Plan unreasonably burdens commerce must fail.18 Reversed QUESTIONS Allegedly, the Petaluma Plan was not directed at size per se but, rather, “haphazard” development Assuming that this is true, the model in Exhibit 6.6 does not directly apply To what extent can an analogy with the model be drawn? The development cases such as Petaluma may be viewed as a question of who “owns” development rights, earlycomers or latecomers What is your sense of how the courts seem to be answering this question? Suppose that the latecomers are held to own a certain type of development right, and that right is protected from uncompensated expropriation by the earlycomers Is there any way in which the earlycomers can keep that right from being exercised? 18 Our decision today conforms with others which have upheld reasonable state environmental legislation despite some burden incidentally placed on interstate commerce See, e.g., Huron Cement Co v Detroit, supra (air pollution statute); Proctor & Gamble Co v City of Chicago, 509 F.2d 69 (7th Cir.), cert denied, 421 U.S 978, 95 S.Ct 1980, 44 L.Ed 2d 470 (1975) (ban on phosphate detergents); American Can Co v Oregon Liquor Control Commission, 15 Or.App 618, 517 P.2d 691 (1973) (ban on non-returnable beverage containers) Chapter $ SUPPLY AND SYSTEMIC INTERACTIONS 289 32 30 Original Costs $4 Added 28 26 24 22 20 18 16 14 12 10 0 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Quantity Exhibit 6.2a: Correctly Graphed Cost Curves Movement of Short-run 24 23 22 21 20 19 18 17 16 15 14 13 12 11 10 3000 Supply as Firms Exit After $4 Cost Increase O 4000 5000 l ina g i r pl up S n ru rto Sh 6000 7000 ve ur C y 8000 9000 10000 11000 12000 Exhibit 6.3a: Completed Graph of Demand and Shifting Supply Curves 13000 Table of Contents 291 CH 1: ANALYZING CHOICE UNDER ALTERNATIVE RULES ERROR! BOOKMARK NOT DEFINED A INTRODUCTORY CONSIDERATIONS ERROR! BOOKMARK NOT DEFINED B ELEMENTARY GAME THEORY ERROR! BOOKMARK NOT DEFINED THE PRISONER’S DILEMMA Error! Bookmark not defined THE STUDENT’S DILEMMA: UNIVERSITY v EAGER Error! Bookmark not defined THE PRISONER’S DILEMMA AS A MATRIX MODEL Error! Bookmark not defined Exhibit 1.1: PD Matrix Model Error! Bookmark not defined c THE “PRISONER’S DILEMMA” DEFINED Error! Bookmark not defined Exhibit 1.1: PD Matrix Model Error! Bookmark not defined a b ANOTHER IMPORTANT, CLOSELY RELATED GAME: “CHICKEN” Error! Bookmark not defined OTHER USEFUL JARGON: “EXTERNALITIES” Error! Bookmark not defined ETHICAL AND OTHER EXTRALEGAL BEHAVIORAL REGULATIONS Error! Bookmark not defined EXTERNAL BENEFITS, EXCLUDABILITY AND “FREE RIDERS” Error! Bookmark not defined C THE LAW AND ECONOMICS OF PROPERTY RIGHTS ERROR! BOOKMARK NOT DEFINED ROAD MAINTENANCE PROBLEM Error! Bookmark not defined Exhibit 1.3 Benefits of Road Repair Levels Error! Bookmark not defined JOINTNESS AND EXCLUDABILITY AS ELEMENTS OF PROPERTY Error! Bookmark not defined CHICKEN vs PRISONER’S DILEMMA Error! Bookmark not defined Exhibit 1.4 Road Problem As A “Chicken” Game Error! Bookmark not defined Exhibit 1.5 Road Problem As A Prisoner’s Dilemma Error! Bookmark not defined GAMING ABOUT INFORMATION Error! Bookmark not defined UNTRUTHS CAN IMPROVE BUSINESS-SCHOOL GRADE; PEER PRESSURE CLASHES WITH ETHICS Error! Bookmark not defined “CHICKEN” IN ACTION: LAND ASSEMBLY Error! Bookmark not defined HOMEOWNER BICKERING ENDS $100,000 OFFER FOR HOUSES Error! Bookmark not defined WHAT GENERALIZATIONS CAN BE MADE? Error! Bookmark not defined 292 Table of Contents D TRANSFERABILITY AS AN ELEMENT OF PROPERTY ERROR! BOOKMARK NOT DEFINED ASSIGNABILITY OF CAUSES OF ACTION Error! Bookmark not defined THE CASE OF NIKE v LOBEL Error! Bookmark not defined d e OTHER KINDS OF PROPERTY RIGHTS IN LEGAL PROCESS Error! Bookmark not defined Mutuality of Estoppel Error! Bookmark not defined Discovery of Computerized Litigation Files Error! Bookmark not defined BROADCAST MUSIC, INC v MOOR-LAW, INC Error! Bookmark not defined COASE AND COSTS, “OPPORTUNITY” AND OTHERWISE Error! Bookmark not defined Allocation of Rights in the Small-Number Context Error! Bookmark not defined FONTAINEBLEAU HOTEL CORP v FORTY-FIVE TWENTY-FIVE, INC Error! Bookmark not defined b Applicability of the Coase Theorem Error! Bookmark not defined c Cases Involving Transactions-Cost Problems Error! Bookmark not defined BOOMER v ATLANTIC CEMENT CO Error! Bookmark not defined Bomber v Particular Gypsum Co Error! Bookmark not defined J WEINGARTEN, INC v NORTHGATE MALL, INC Error! Bookmark not defined SPUR INDUSTRIES, INC v DEL E WEBB DEVELOPMENT CO Error! Bookmark not defined SPRECHER v ADAMSON COMPANIES et al Error! Bookmark not defined a CH 2: RIVALROUS AND RISKY DECISIONS ERROR! BOOKMARK NOT DEFINED A BEHAVIOR INVOLVING UNCERTAINTY ERROR! BOOKMARK NOT DEFINED PROSPECTS AND CERTAINTY EQUIVALENTS Error! Bookmark not defined EXPECTED VALUES Error! Bookmark not defined Exhibit 2.1 Computing Expected Values Error! Bookmark not defined RISK PREFERENCE Error! Bookmark not defined Exhibit 2.2 Money and Utility Error! Bookmark not defined B APPLICATIONS ERROR! BOOKMARK NOT DEFINED LAW OF THE LEANING TREE Error! Bookmark not defined THE CASE OF MRS CRISPY’S CHICKEN Error! Bookmark not defined EX ANTE ANALYSIS OF PUNISHMENTS Error! Bookmark not defined IN RE JOHN LYNCH Error! Bookmark not defined RICHARDS v ALLSTATE INSURANCE CO Error! Bookmark not defined CRAIG v BOREN Error! Bookmark not defined THE HUNTING OF A TAKEOVER Error! Bookmark not defined a AGENT-PRINCIPAL CONFLICTS OF INTEREST Error! Bookmark not defined Using Agents To Sell Real Estate Error! Bookmark not defined Exhibit 2.3 - Real Estate Market Information Error! Bookmark not defined Table of Contents b 293 Agent-Principal Conflicts in Legal Contracts Error! Bookmark not defined HEINZMAN v FINE, FINE, LEGUM & FINE Error! Bookmark not defined “CURVE” MODELS: MARGINAL AND TOTAL EFFECTS Error! Bookmark not defined Exhibit 2.4 – Marginal Effect As Slope of Total Curve Error! Bookmark not defined Exhibit 2.5 - Area Under A Marginal Curve Error! Bookmark not defined ATTORNEY- CLIENT RELATIONSHIPS Error! Bookmark not defined SHOULD SUBROGEES KEEP “EXCESS” RECOVERIES? Error! Bookmark not defined C LEAST-COST RISK BEARING ERROR! BOOKMARK NOT DEFINED WHAT IS “LEAST-COST” RISK BEARING? Error! Bookmark not defined Exhibit 2.6 – Binomial Distribution Error! Bookmark not defined SOURCES OF LEAST COST RISK-BEARING Error! Bookmark not defined Exhibit 2.7 – Pool of Shared $1 Risks with 40% Probability Error! Bookmark not defined Exhibit 2.8 – Pool of 10 Shared $1 Risks with 40% Probability Error! Bookmark not defined Exhibit 2.9 – Pool of 20 Shared $1 Risks with 40% Probability Error! Bookmark not defined PORTFOLIO ANALYSIS AND THE PRUDENCE STANDARD Error! Bookmark not defined D OPTIMAL INSURANCE AND RISK ADJUSTMENT ERROR! BOOKMARK NOT DEFINED “INSURANCE” AGAINST CONTRACT BREACH Error! Bookmark not defined Exhibit 2.10 (top panel) and Exhibit 2.11 (bottom panel) Error! Bookmark not defined AFTER-THE-FACT INDEMNIFICATION: REALLY INSURANCE? Error! Bookmark not defined “RISK DISTRIBUTION” INSURANCE AGAINST HARMFUL EVENTS Error! Bookmark not defined NATIONAL STEEL SERVICE CENTER v GIBBONS Error! Bookmark not defined E JUSTICE AND FAIRNESS ERROR! BOOKMARK NOT DEFINED A Contractarian Theory of Justice as Fairness Error! Bookmark not defined Exhibit 2.12 – Social Choice Matrix Error! Bookmark not defined Exhibit 2.13 – Maxi-Min Social Choice Matrix Error! Bookmark not defined FAIR DIVISION SCHEMES: DIVIDE AND CHOOSE Error! Bookmark not defined EQUITABLE DISTRIBUTION OF VOTING POWER Error! Bookmark not defined Pivotal-Voter Measure of Political Power Error! Bookmark not defined Exhibit 2.14: Power of a Voter Via Representation Error! Bookmark not defined b An Equilibrium-Displacement Measure of Voter Power Error! Bookmark not defined Exhibit 2.15: Potential Displacement Via Single Voter Error! Bookmark not defined Exhibit 2.16: Electoral College Power Under Alternative Theories Error! Bookmark not defined a EFFICIENCY ASPECTS OF FAIRNESS Error! Bookmark not defined 294 Table of Contents STATE OF IOWA v HENRY PARRISH Error! Bookmark not defined “PATERNALISM” IN THE LAW Error! Bookmark not defined CH 3: INTERTEMPORAL COSTS AND BENEFITS ERROR! BOOKMARK NOT DEFINED A INTEREST RATES AND “PRESENT VALUES” ERROR! BOOKMARK NOT DEFINED Exhibit 3.1: (1+r)n Compound Interest Growth Factors Error! Bookmark not defined Exhibit 3.2: 1/(1+r)n Discount Factors Error! Bookmark not defined B VALUING THE BENEFITS OF INTERESTS IN LAND ERROR! BOOKMARK NOT DEFINED DETERMINING THE VALUE OF A LEASEHOLD Error! Bookmark not defined VALUING A PROPERTY ENCUMBERED BY A LEASE Error! Bookmark not defined C INTEREST ON DAMAGES AND PENALTIES ERROR! BOOKMARK NOT DEFINED PREJUDGMENT INTEREST ON DAMAGES Error! Bookmark not defined BUSIK v LEVINE Error! Bookmark not defined “BACK DOOR” PREJUDGMENT INTEREST? Error! Bookmark not defined UNITED TELECOMMUNICATIONS, INC v AMERICAN Error! Bookmark not defined TELEVISION AND COMMUNICATIONS CORP Error! Bookmark not defined PREJUDGMENT INTEREST ON PENALTIES Error! Bookmark not defined D EVALUATING LOST FUTURE INCOME AS DAMAGES ERROR! BOOKMARK NOT DEFINED Exhibit 3.3: Lost Income Damages, Assumption Set #1 Error! Bookmark not defined Exhibit 3.4: Lost Income Damages, Assumption Set #2 Error! Bookmark not defined BEAULIEU v ELLIOTT Error! Bookmark not defined DOCA v MARINA MERCANTE NICARAGUENSE, S.A Error! Bookmark not defined E COMBINED UNCERTAINTY AND DISCOUNTING ERROR! BOOKMARK NOT DEFINED Introductory Considerations Error! Bookmark not defined Tintd Hypothetical Error! Bookmark not defined Exhibit 3.5: Tintds’ Probability of Survival to Various Birthdays Error! Bookmark not defined b Annuity Hypothetical Error! Bookmark not defined c Life Tenancy and Remainder Rights Error! Bookmark not defined a AVERAGE vs actuarily expected LIFE earnings Error! Bookmark not defined Table of Contents 295 Exhibit 3.6: Average Lifespan vs Actuarial Calculations Error! Bookmark not defined RISK SELECTION AND RISK COMPENSATION Error! Bookmark not defined Exhibit 3.7: Analysis of Rentals Error! Bookmark not defined DEFAULT COST UNDER “BACKDOOR” INTEREST SCHEMES Error! Bookmark not defined Exhibit 3.8: The “Time Price” Interest Subterfuge Error! Bookmark not defined F TAX TREATMENT OF TORT DAMAGES ERROR! BOOKMARK NOT DEFINED DeLUCCA v UNITED STATES Error! Bookmark not defined G FAIRNESS IN EMPLOYEE BENEFITS ERROR! BOOKMARK NOT DEFINED Contributions to Pension Plans Error! Bookmark not defined LOS ANGELES DEPT OF WATER AND POWER v MANHART Error! Bookmark not defined CONSTRUING THE AGE DISCRIMINATION IN EMPLOYMENT ACT Error! Bookmark not defined CH 4: MAPPINGS AND “DEMAND” DECISIONS ERROR! BOOKMARK NOT DEFINED A TOPOGRAPHICAL MAP READING ERROR! BOOKMARK NOT DEFINED Decisions Based on Spatial Locations Error! Bookmark not defined Exhibit 4.1 – Topographic Map Showing Relevant Features Error! Bookmark not defined INDIFFERENCE CURVE MODELS AND MARKET DECISIONS Error! Bookmark not defined Exhibit 4.2: Economic Topography and Constraints Error! Bookmark not defined B GROUP DECISIONS UNDER MAJORITY RULE ERROR! BOOKMARK NOT DEFINED “Rational” Group Preferences Error! Bookmark not defined MODELING OF VOTING DECISIONS Error! Bookmark not defined Topographic Model of 3-Person Majority Rule Decisions Error! Bookmark not defined Exhibit 4.3 – Topographic Map of Budgetary Decisionmaking Error! Bookmark not defined b A MATRIX MODEL OF VOTE TRADING Error! Bookmark not defined Exhibit 4.4 – Voters’ Benefit Changes For Measures A & B Error! Bookmark not defined a C DECISIONMAKING IN THE COURTS ERROR! BOOKMARK NOT DEFINED STATE OF MISSOURI v BARTON Error! Bookmark not defined HARRIS v RIVERA Error! Bookmark not defined D EDGEWORTH BOX ANALYSIS OF CONTRACTS ERROR! BOOKMARK NOT DEFINED 296 Table of Contents CONTRACTUAL REALLOCATION THROUGH “EFFICIENT BREACH” Error! Bookmark not defined Exhibit 4.5 – Indifference Curve Model of Efficient Breach Error! Bookmark not defined E CONSUMER CHOICE: MODELING PROMISSORY RELIANCE ERROR! BOOKMARK NOT DEFINED Exhibit 4.6 – Intertemporal Model of Promissory Reliance Error! Bookmark not defined F PERMISSIBLE AND IMPERMISSIBLE EFFECTS OF GOVERNMENT GRANTS ERROR! BOOKMARK NOT DEFINED MATHEWS et al v MASSELL Error! Bookmark not defined TILTON v RICHARDSON Error! Bookmark not defined Hypothetical: Christian Friars Wine Sales to Military Error! Bookmark not defined G BRIBES VERSUS THREATS ERROR! BOOKMARK NOT DEFINED UNITED STATES v BUTLER Error! Bookmark not defined STEWARD MACHINE CO v DAVIS Error! Bookmark not defined CARROTS vs STICKS Error! Bookmark not defined H MEASURING RESPONSIVENESS: ELASTICITIES ERROR! BOOKMARK NOT DEFINED HARRIS v McRAE Error! Bookmark not defined UNITED STATES v E I DU PONT DE NEMOURS & CO Error! Bookmark not defined LEGAL APPLICATIONS FROM DEMAND THEORY Error! Bookmark not defined CH 5: CHANNELING BEHAVIOR VIA LEGAL INCENTIVES ERROR! BOOKMARK NOT DEFINED A TORT LIABILITY MODELS ERROR! BOOKMARK NOT DEFINED THE LEARNED HAND RULE: A MARGINAL COST-BENEFIT FORMULATION Error! Bookmark not defined Exhibit 5.1 – Marginal Cost and Marginal Benefit of Precautions Error! Bookmark not defined THE HYPOTHETICAL MODEL UNDERLYING THE DIAGRAMS Error! Bookmark not defined Exhibit 5.2: Effect of Recognizing Only 75% of Actual Harm Error! Bookmark not defined a ERRORS IN THE APPLICATION OF TORT LAW Error! Bookmark not defined Incorrect Assessment Of Damages Error! Bookmark not defined Mistakes In Applying The Liability Standard Error! Bookmark not defined Exhibit 5.3: Probability of Jury Requiring Care Level Error! Bookmark not defined Exhibit 5.4: Behavior Effects of Errors Regarding Care Standard Error! Bookmark not defined B MULTI-PARTY HARM PRODUCTION FUNCTIONS ERROR! BOOKMARK NOT DEFINED Table of Contents 297 Precautions That Minimize Net Social Cost of Accidents Error! Bookmark not defined Exhibit 5.5 – Multiparty Social Cost Function #1 Error! Bookmark not defined Comparative Negligence Error! Bookmark not defined Exhibit 5.6 – Multiparty Social Cost Function #2 Error! Bookmark not defined BENTZLER v BRAUN Error! Bookmark not defined VICTOR SCHWARTZ, COMPARATIVE NEGLIGENCE, p 297 Error! Bookmark not defined STATE v KAATZ Error! Bookmark not defined C THE “LEVEL” OR QUANTITATIVE PROBLEM ERROR! BOOKMARK NOT DEFINED GREENLAWN NEIGHBORHOOD ASSOCIATION v FIRST Error! Bookmark not defined GUARANTY BANK Error! Bookmark not defined D TAKING COST-MINIMIZATION SERIOUSLY(?) ERROR! BOOKMARK NOT DEFINED The Case Of Innocente v Vinho Error! Bookmark not defined Drunks Won’t Let The Preacher Alone Error! Bookmark not defined E PROMISE-BREAKING ANALYZED AS A TORT ERROR! BOOKMARK NOT DEFINED Economically Optimal Damages For Broken Promises Error! Bookmark not defined Sec 90, Restatement Of Contracts Error! Bookmark not defined CENCO, INC v SEIDMAN & SEIDMAN Error! Bookmark not defined CH 6: SUPPLY AND SYSTEMIC INTERACTIONS ERROR! BOOKMARK NOT DEFINED A PRODUCTION COSTS AND CONTRACT BREACH ERROR! BOOKMARK NOT DEFINED Cost Conditions For A Firm Producing Standprods Error! Bookmark not defined Exhibit 6.1: Costs at Alternative Outputs Error! Bookmark not defined Cases About Damages for Breaches of Duty Error! Bookmark not defined JERICHO SASH AND DOOR CO v BUILDING ERECTORS, INC Error! Bookmark not defined NOBS CHEMICAL, U.S.A., INC v KOPPERS CO., INC Error! Bookmark not defined CURT’S TRUCKING CO v CITY OF ANCHORAGE Error! Bookmark not defined LUND v COMMONWEALTH Error! Bookmark not defined B ADJUSTMENT OF A COMPETITIVE INDUSTRY ERROR! BOOKMARK NOT DEFINED a A Simons Model of Competitive Equilibrium Error! Bookmark not defined Part I Initial Equilibrium State Error! Bookmark not defined 298 b c d e Table of Contents Exhibit 6.2: Graph of Firm’s Cost Curves Error! Bookmark not defined Exhibit 6.3: Short-run Equilibrium of Supply and Demand Error! Bookmark not defined Partial Displacement And Short-Run Equilibrium Adjustment Error! Bookmark not defined Exhibit 6.4: Costs to Firm Paying ASD Royalty Error! Bookmark not defined Progress Toward New Equilibrium Error! Bookmark not defined Additional Implications Error! Bookmark not defined A Simple Mathematical Model [Optional] Error! Bookmark not defined Exhibit 6.4b: Solutions of Market Model Error! Bookmark not defined Bankruptcy Laws And Fixed Costs Error! Bookmark not defined C INCIDENCE ANALYSIS: SHIFTING AND PASSING ON ERROR! BOOKMARK NOT DEFINED HANOVER SHOE, INC v UNITED SHOE MACHINERY CORP Error! Bookmark not defined ILLINOIS BRICK CO v ILLINOIS Error! Bookmark not defined D ANTICOMPETITIVE SUPPLY RESTRICTION ERROR! BOOKMARK NOT DEFINED Exhibit 6.5: Expansion versus Market Spoilage Error! Bookmark not defined CLARK v UNIVERSAL BUILDERS, INC Error! Bookmark not defined STATEMENT OF U.S DEPT OF TRANSPORTATION BEFORE THE INTERSTATE COMMERCE COMMISSION, WESTERN COAL INVESTIGATION-GUIDELINES FOR RAILROAD RATE STRUCTURE Error! Bookmark not defined GHEN v RICH Error! Bookmark not defined CONSTRUCTION INDUSTRY ASSOCIATION OF SONOMA COUNTY v CITY OF PETALUMA Error! Bookmark not defined Exhibit 6.2a: Correctly Graphed Cost Curves Error! Bookmark not defined Exhibit 6.3a: Completed Graph of Demand and Shifting Supply Curves Error! Bookmark not defined Table of Contents 299 300 Table of Contents ... Mutuality of Estoppel 27 27 ii Goetz, Law and Economics e Discovery of Computerized Litigation Files BROADCAST MUSIC, INC v MOOR -LAW, INC COASE AND COSTS, “OPPORTUNITY” AND OTHERWISE Allocation of Rights... of the facts of the case and the applicable law? See the application to the law of contract in Birmingham, “Legal and Moral Duty in Game Theory: Common Law Contract and Chinese Analogies,” 18... THE LAW 92 92 94 94 95 96 96 96 100 CH 3: INTERTEMPORAL COSTS AND BENEFITS 103 A INTEREST RATES AND “PRESENT VALUES” 103 Exhibit 3.1: (1+r)n Compound Interest Growth Factors 105 iv Goetz, Law and