THE NATURE OF THE ECONOMIC PROBLEM

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THE NATURE OF THE ECONOMIC PROBLEM

• Sosc 2330 Econ of Law
• September 15, 2008
• Session/Week 2

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INTRODUCTION

• I like to meet youI paid 200 for getting your
  name
• Economic behaviour, return for investment?
• Should the law prohibit this practice?

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ECON IDEAS OF RATIONAL BEHAVIOR EXCHANGE
OFFER AN IMPORTANT FIRST RATIONALE FOR LAW
EXCHANGE RATIONAL BEHAVIOR
LAW
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OBJECTIVES

• Understand and assess the economic conditions and
  economic rationality that determine the economic
  environment of law
• Scarcity
• Market exchange
• Rational Behaviour
• Understand how the law may relate to the economic
  conditions and economic rationality
• Law reflects and regulates economic conditions
  and rational behavior
• Case Study Food examples. Steel and Morris
  v.McDonalds

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ECONOMIC PROBLEM

• Scarcity
• Limited resources constraint choices
• Market exchange
• Supply and demand, price mechanism
• Rational Behavior (economists view)
• Self-interest
• Maximize benefits

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RATIONAL BEHAVIOR

• Incremental Substitution subjective, imperfect,
  less of one for more of other)
• Cost given economy as rationing inadequate
  supplies and incremental substitution)
• Price transmits changing values associated with
  substitution
• Physical fallacy relocation of things in time
  and space affects value (e.g. middleman has
  knowledge, stores and re-sells at higher price)
• Marginal utility additional satisfaction/benefit/
  profit for additional unit, preference subjective

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RATIONAL BEHAVIOR

• Opportunity cost use of limited resources incurs
  cost of foregone alternatives (alternative
  marginal utility/benefits foregone)
• Diminishing Returns beyond some point, more
  inputs result in disadvantage e.g. the more you
  consume, the less satisfaction
• Marginalism focus on proportion e.g. health
  services but also recreation (marginal utility
  instead of total utility, how much of each option
  depending on required benefits of each)

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SOCIAL WELFARE happy consumers, jobs
CONSUMER Hungry? Income? Price? Or try
pizza? How many?
PROVIDER Demand? Costly supply? Profit? Or try
clothing industry? How much supply?
INVESTORS Stock price? Return? Long-term
profitability? Or try Vodafone? How much in
McDonalds?
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What problems may arise from an economy driven by
solely self-interest/econ. behaviour?
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(No Transcript)
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SCARCITY, MARKET EXCHANGE AND SOCIAL WELFARE
WITHOUT LAW
DECREASE IN SOCIAL WELFARE INEFFICIENT OUTCOME
NO TRADE OR UNFAIR TRADE
PRISONERS DILEMMA eg. Defective car
CONSUMER
CORPORATION
RATIONAL BEHAVIOR Substitution Marginal
Utility Diminishing Return Proportion Opportunity
Cost Supply/Demand Prices Self-Interest
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RATIONAL BEHAVIOR POLICY

• Self-interest alone leads to inefficient social
  outcomes Prisoners dilemma (if you buy and not
  pay, you sell but not deliver, trade is not
  possible and no job and wealth creation,
  free-riding, self-interest is collectively
  self-defeating assuming no law and external
  control)
• Self-Interest requires Legal and Moral
  Constraints to achieve social welfare
• Trade-offs cost and benefit analysis is basis
  for policy including legal intervention to
  maximize social welfare however defined-
  (Winter)

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LAWs ROLE RATIONAL BEHAVIOR

• Law often assumes rational behaviour on the
  part of consumers and corporations.
• Law thus facilitates the development of
  welfare-enhancing rational behaviour
• However, law also penalizes welfare-lessening
  rational behaviour.

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EXAMPLE

• Food Drug Act
• allow consumers make rational consumption
  decision by e.g. imposing on corporations the
  duty to disclose information. It also prohibits
  misleading advertising and commercialization of
  unsafe food

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PROBLEMATIZING THE RELATION BETWEEN RATIONAL
BEHAVIOR AND LAW

• Does the economic idea of rational behaviour
  account for all kinds of market behaviour?

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Steel and Morris v.McDonalds (1990-2005)

• McDollars, McGreedy, McCancer, McMurder,
  McDisease ...
• Lack of government aid to consumers to prove the
  accuracy of their criticism against a corporation
  is a violation of their freedom of expression

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Steel and Morris v.McDonalds (1990-2005)

• http//www.youtube.com/watch?vLyGK5j_EcmE
• http//www.youtube.com/watch?voqnNpEzYJ-Qfeature
  related

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Does the behavior of Steel and Morris conform to
rational behavior?

• Incremental Substitution? Marginal Utility?
  Self-interest?

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Some Problems with Marginal Utility and
Cost-Benefit Analysis

• Marginal utility collides with ethical commitment
• MU is subjective and varies across individuals
  and societies
• MU depends on e.g. existing income and wealth
  distribution e.g. if poor, MU does not apply or
  differs as opposed to rich
• Law also responds to such concerns

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Steel and Morris v.McDonalds THE COURTs
DECISION

• Legal Protection of Corporate Image
• anti-defamation rights,
• Law conforms with nature of economy and rational
  behavior (e.g. law is responsive to marginal
  utility, problems of prisoners dilemma and need
  to increase social welfare)
• Legal Protection of Free Expression and Democracy
• However, the law does not fully conform with
  economic rationality and takes into account other
  non-economic values e.g. consumers freedom of
  expression

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PROBLEMS re SCARCITY, MARKET EXCHANGE AND SOCIAL
WELFARE WITH LAW
INCREASE IN SOCIAL WELFARE EFFICIENT OUTCOME
FAIR TRADE
LAW
PRISONERS DILEMMA eg. Defective car
CONSUMER
CORPORATION
RATIONAL BEHAVIOR Substitution Marginal
Utility Diminishing Return Proportion Opportunity
Cost Supply/Demand Prices Self-Interest
Ability to Pay Wealth Distribution Irrational
Calculation Cognition Production Cost Ethical
Commitment
LAW
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CONCLUSION

• Scarcity, Market Exchange and Rational Behavior
  characterize the modern economy. This in turn
  offers a rationale for laws role
• The law is responsive to the nature of the
  economic problem, but it also pursues other
  non-economic values
• Next further on the economy market failures
  also provide rationale for laws role