Spring
2005
Economics
1471
Vocabulary
List: Definitions
NOTE: Individuals can be classified as belonging to one of three groups: Marginal consumers who are right on the borderline between buying and not buying; Inframarginal consumers who are well above this borderline; and Submarginal consumers who are well below this borderline. Only marginal consumers will respond to a change in price; other consumers will remain unaffected by any such price change.
*04.
DESIGNED ORDER: An order that is created by third parties to regulate
the
interactions of other parties. This regulation takes the form of
particular rules which
are designed to favor some
well-organized parties at the expense of other unorganized parties.
Such rules must be
imposed because they are not mutually beneficial. Over time, the
winners tend to invest
resources in
maintaining the status quo while the losers
tend to invest resources in
either circumventing the rules or
becoming organized to lobby for a change in the rules that is more
favorable to
them. As a result, these rules do not
evolve incrementally
over time but change in highly
unpredictable ways, producing short-run stability but long-run
instability in the way that rules
change.
05. INCENTIVE
COMPATIBLE INSTITUTIONS: Institutions which induce individuals to bear
the full
costs of their actions while allowing them to reap the full benefits of
their
actions.
06. INCENTIVE
INCOMPATIBLE INSTITUTIONS: Institutions which do not induce individuals
to bear
the full costs of their actions or do not allow them to reap the full
benefits
of their actions.
07. COOPERATIVE
SURPLUS: Value created by moving a
resource to a more valuable use voluntarily.
08. THREAT
VALUES: The payoffs to the parties in
the non-cooperative solution. The latter occurs when the parties to a
potential
exchange do not trade with one another.
09. COASE
THEOREM: When transactions costs are
zero, an efficient use of resources results from private bargaining,
regardless
of the legal assignment of property rights.
08. COROLLARY
TO COASE THEOREM: When transactions
costs are high enough to prevent bargaining, the efficient use of
resources
will depend upon how property rights are assigned.
09. TRANSACTIONS
COSTS: The costs of completing a complex bargain, including search
costs,
bargaining costs, and enforcement costs (which include monitoring
costs).
10. LEGAL
REMEDY: Payment of compensatory damages by the defendant to the
plaintiff.
11. EQUITABLE
REMEDY: An order by the court to the defendant directing the defendant
to
perform an act or refrain from acting in a particular manner.
12. THE
STANDARD EFFICIENT REMEDY: Where there are obstacles to cooperation
(e.g., high
transactions costs), the more efficient remedy is the award of
compensatory
money damages (a liability rule). Where there are few obstacles to
cooperation
(e.g., low transactions costs) the more efficient remedy is the award
of an
injunction against the defendant’s interference with the plaintiff’s
property
(a property rule).
*13.
THE ENTREPRENEURIALLY EFFICIENT REMEDY: The more efficient
remedy is the
award of an injunction against the defendant’s interference with the
plaintiff’s property (a property rule) in all circumstances. Where
there are
few obstacles to cooperation because of low transactions costs, the
parties
themselves can bargain around the property rule if the court mistakenly
assigns
property rights to the wrong party. Where there are significant
obstacles to
cooperation because of high transactions costs, the parties cannot
bargain
around a mistaken assignment of property rights by the court. But
entrepreneurs
can discover new, profitable ways to lower transactions costs in these
cases,
thereby making it easy for the parties to bargain around a mistaken
property
assignment.
14. PUBLIC
GOOD: A good which is both non-rival (where one person’s consumption of
the
good does not interfere with any other person’s consumption of the same
good at
the same time) and nonexclusive (where the costs of exclusion are high
enough
to prevent a producer of the good from excluding non-payers).
15. PRIVATE
GOOD: A good which is both rival (where my consumption of the good
prevents
others from consuming the same good at the same time) and exclusive
(where
owners of the good can exclude non-payers at a reasonable cost).
16. FUGITIVE
PROPERTY: Assets that move about and have no definite boundaries.
17. RULE
OF FIRST POSSESSION: Ownership is established by the person who first
possesses
an asset.
18. RULE
OF TIED OWNERSHIP: Fugitive resources are owned by those persons who
own the
settled property on which (or under which) these resources come to rest.
19. OPEN
ACCESS RESOURCES: Unowned resources which
are thereby
nonexclusive and nontransferable.
20. INALIENABILITY:
The prohibition on conveying something to another person by sale or
gift.
Morality or legal rules are usually the source of the prohibition.
21. TAKINGS:
According to the Fifth Amendment of the Constitution, the government
can only
legitimately acquire private property when it is taken for a public use
and the
owner is compensated. In general, government should only take
private
property with compensation to provide a public good when transactions
costs
preclude purchasing the property.
22. HOLDOUTS:
In large projects with many property owners, some owners may
strategically
refuse to sell to the government hoping to get a higher price. Refusal
to sell
thereby blocks the completion of the project and renders it useless.
The taking
power of government overcomes this problem.
23. REGULATORY
TAKINGS: Any regulation of private property which restricts the use of
that
property without taking title. Such an action reduces the value of that
property to the owner and constitutes a regulatory taking.
24. BARGAIN
PRINCIPLE: A promise is legally enforceable if it is given as part of a
bargain; otherwise a promise is unenforceable.
25. CONSIDERATION:
What the promisee gives the promisor
to induce the promise.
26. EXPECTATION
DAMAGES: These damages restore promisees
to the
position that they would have enjoyed had the promise been kept.
27. PERFECT
CONTRACT: This is a contract which is complete. By complete, we mean
that all
contingencies have been anticipated, all risks have been efficiently
allocated
between the two parties, and all relevant information has been
communicated.
Such a contract is also efficient.
they had filled the gaps in the contract by negotiation.
29. REPEATED
GAME: A game in which the two players play the game an indefinite
number of
times. The players evolve a tit-for-tat strategy which induces them to
cooperate only as long as both parties agree that the relationship will
continue in future rounds.
30. END-GAME
PROBLEM: When the parties in a repeated game see that the relationship
will end
at some point in the near future, the tit-for-tat strategy adopted to
induce
cooperation loses its ability to punish defection and causes the
relationship
to disintegrate.
31. TENTATIVE
COMMITMENTS: These are relationships which are open-ended in the sense
that
they will continue contingent on: (1) Changed circumstances or (2)
Opportunistic behavior by either party causes exit by the other.
32. ECONOMIC
RULE FOR DURESS: A promise extracted as the price to cooperate in
creating
value is enforceable, and a promise extracted by a threat to destroy
value is
unenforceable.
33. PRODUCTIVE
INFORMATION: Information which can be used to produce more wealth.
34. REDISTRIBUTIVE
INFORMATION: Information that can be used to create a bargaining
advantage to
redistribute wealth in favor of the informed party.
35. DESTRUCTIVE
INFORMATION (SAFETY INFORMATION): Information whose absence increases
the
probability and magnitude of accidents and hence the destruction of
wealth.
(FIRST EXAM)
-----------------------------------------------------------------
36. TORTS
AS EXTERNALITIES: Harms that occur outside of contractual agreements
between
specific parties.
37. PERFECT
COMPENSATION: A sum of money sufficient to make the victims of injuries
equally
well off with the money and the injuries as they would have been
without the
money and the injuries.
38. DUTY
OF REASONABLE CARE: The care that a reasonable person would have taken
under
the circumstances. This is a standard of care against which actual
conduct is
measured.
39. SOCIAL
COST OF ACCIDENTS: Equals the sum of the costs of precaution and costs
of
expected harm.
40. BILATERAL
PRECAUTION: The case where both the injurer and the victim can take
precaution.
41. STRICT
LIABILITY RULE: A rule which imposes liability on the injurer
regardless of his
level of care or precaution.
42. (SIMPLE)
NEGLIGENCE RULE: A rule which imposes a legal standard of care with
which
injurers must comply in order to avoid liability.
43. STRICT
LIABILITY WITH A DEFENSE OF CONTRIBUTORY NEGLIGENCE: The cost of an
accident is
assigned to the injurer regardless of his level of precaution, unless
the
victim has not observed the legal standard of care.
44. NO
FAULT RULE: Parties to the accident bear their own costs of accidental
harms.
45. RISK
AVERSION: Arises when someone prefers a certain prospect of money
income to the
uncertain prospect of an equal expected monetary value (its utility is
higher
than the expected utility of an uncertain prospect
of
equal expected monetary value).
46. RISK
NEUTRALITY: Arises when someone is indifferent between a certain
prospect of
income and an uncertain prospect of equal expected monetary value. Implies a constant marginal utility of income.
47. MORAL
HAZARD: Arises when the behavior of an insured party changes after the
purchase
of insurance so that the probability of loss or the size of the loss
increases.
*48. ADVERSE
SELECTION: Arises because of the high cost to insurers of accurately
distinguishing between high- and low-risk insurees.
As a result, both types of insurees are
charged an
average premium for the group. Low-risk insurees
see
this premium as too expensive and drop out of the risk pool while
high-risk insurees think this premium is a
bargain and remain in the
risk pool. As a result the average level of risk rises in the risk pool
because
only the worst risks are willing to purchase the insurance.
49. MENS
REA: For an action to be considered criminal, a person must be shown to
have
intentionally perpetrated a harm on another
person. Literally, a guilty mind.
50. PERFECT
DISGORGEMENT: The sum of money that leaves the injurer indifferent
between the
injury with disgorgement and no injury.
51. RATIONAL
CRIME: This is committed by someone who carefully determines the means
to
achieve illegal ends without restraint of guilt or internalized
morality. (More
precisely, a rational crime occurs when someone carefully weighs the
costs and
benefits of committing a crime.)
52. GOAL
FOR CRIMINAL LAW: Criminal law should minimize the social cost of crime
which
equals the sum of the harm it causes and the costs of preventing it.
53. PRIVATE
DETERRENCE: An investment in crime prevention which benefits primarily
the
investor.
54. PUBLIC
DETERRENCE: An investment in crime prevention which benefits not only
the
investor but other similarly situated persons who have not invested in
crime
prevention.
55. REDISTRIBUTING
CRIME: When an investment in private deterrence by an investor deflects
criminal activity towards those who have not invested in private
deterrence.
56. DETERRENCE
HYPOTHESIS: An increase in expected punishment causes a significant
decrease in
crime.
*57. SOCIAL
BENEFITS OF IMPRISONMENT: Imprisonment generates four kinds of
benefits: (1)
Deterrence, (2) Retribution, (3) Rehabilitation, and (4)
Incapacitation. Be
able to explain each one.
(1)
Deterrence: The ability to reduce crime by increasing the expected
punishment.
(2)
Retribution: Punishment in proportion to the seriousness of the crime.
Adjustment of sentence length theoretically achieves this goal.
(3)
Rehabilitation: Changing criminals so they do not return to a life of
crime
after release from prison (recidivism). No longer used in prisons
because it
has shown such poor results.
(4)
Incapacitation: Confinement in prison prevents the criminal from
perpetrating
more crimes against innocent persons. Does incapacitation lower crime
rates?
58. SOCIAL
COSTS OF IMPRISONMENT: Includes the direct costs of the buildings and
personnel
needed to confine criminals and the opportunity costs of losing the
productivity of the imprisoned persons.
59. TYPE
I ERROR IN THE CRIMINAL JUSTICE SYSTEM: Punishing innocent persons or
false
positives. Note that lowering the likelihood of committing one error
means
increasing the likelihood of the other error.
60. TYPE
II ERROR IN THE CRIMINAL JUSTICE SYSTEM: Not punishing the guilty or a
false
negative. Note that lowering the likelihood of committing one error
means
increasing the likelihood of the other error.
_________________________________________________________________