Economics 463-590

Law and Economics

term:Spring 2014
instructor:Dan Graham
office:242 Social Sciences
office hours:4:20pm - 5pm on Tuesdays and Thursdays when a class meeting is scheduled. Please email for appointments for other times.
text:David Friedman, Law's Order, Princeton University Press, 2000, ISBN: 0-691-01016-1
requirements:Daily homework assigments, class participation, term paper, midterm and cumulative final exam.
approach:Problem based learning
course web site:

Law and Economics

Take the fundamental question, "What constitutes the law?" You will find some text writers telling you that it is something different from what is decided by the courts of Massachusetts or England, that it is a system of reason, that it is a deduction from principles of ethics or admitted axioms or what not, which may or may not coincide with the decisions. But if we take the view of our friend the bad man we shall find that he does not care two straws for the axioms or deductions, but that he does want to know what the Massachusetts or English courts are likely to do. I am much of his mind. The prophecies of what the courts will do in fact, and nothing more pretentious, are what I mean by the law.

—Oliver Wendell Holmes, The Path of the Law, pp. 459-60

It will be a fundamental premise in this course that such prophecies are not only possible but also that they entail efficient outcomes. Law defines the rules of a game, the equilibrium of which is the predicted outcome. Why the law specifies a particular set of rules is then best understood in terms of the efficiency of the outcome relative to the myriad of other possible rules.

Problem Based Learning

I hear, I forget.

I see, I remember.

I do, I understand.

—Chinese Proverb

This process of "learning by doing" recommended by the proverb has come to be called problem based learning or PBL. It dates back to the early 1970's when it was developed for the Medical School at McMaster University in Hamilton, Ontario. It was then adopted as the organizing principle for the University of Limburg in Maastricht, The Netherlands, and has subsequently been used in a variety of forms in countless other professional, undergraduate and secondary schools. The central premise is that problems are intended not to test understanding but to assist in the development of the understanding itself.

Learning by doing problems is the focal point of this course.


Each class period will be devoted to a discussion of the assigned problems from the class web site lead by randomly selected students.

You are strongly encouraged to work in groups. Groups of no more than three students can submit a single homework assignment which includes, of course, a list of those submitting. To be listed, a student must have actively participated in the solution of each of the assigned problems. Group membership can change from assignment to assignment.

You may wait until the end of the class session to turn in your written answers so that you will have access to them during the discussion. You should not, however, add notes to your written answers or modify them during the class session.

You may, on at most two occasions during the course, request an exemption from being selected to present by emailing me at least two hours before the beginning of class. You need not state a reason when submitting such a request.


Class sessions will be devoted to discussion of the on-line problems and readings in Friedman. I will randomly call upon students to answer questions and/or contribute to the class discussion.

I try to be the last person to leave the classroom. Please hang around after class if you have anything you would like to discuss.


The requirement for the paper is to identify an interesting aspect of the law and then use Economic analysis to explain it. The paper should have three parts:

  1. A motivating question. What specific aspect of the law is at issue? What makes it interesting? The question must, of course, be tractable and this generally means narrow and sharply focused.
  2. An Economic model in which the question can be resolved. Such a model is simplified version of the world made up of assumptions with the goal of capturing the most important aspects of the issue to be explained.
  3. A compelling resolution of the motivating question within the context of the model. Any reasonably intelligent person armed with your question and model should be able to deduce your answer.

The paper should be no more than three double spaced pages. Other things equal, shorter is better than longer.

The finished product should be one that could easily be converted into a homework problem with your answer as the correct solution. Property problem 4 (Riparian versus Prior Appropriation) and Contracts problems 2 (the foreseeability doctrine) and 3 (reliance, expectation and liquidated damages) are good examples.

The primary purpose of the paper requirement is to encourage you to look at the world of law as an Economist with the question "Why?" firmly in mind. Friedman is an excellent source of such questions.

As with homework, you are strongly encouraged to work together and share ideas. Team submissions, however, are not allowed. You must individually submit original analyses. This does not, however, preclude two or more people addressing the same question in different ways.

Please don’t hesitate to discuss your ideas with me - it’s one of my favorite activities.


Mathematica is a symbolics software program that bears much the same relationship to calculus and algebra that a calculator does to arithmetic.

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Homework:Based on your homework assignments after dropping the two lowest grades.
Exams:Numerical grades for both the midterm and final will be obtained by "curving" the raw scores.
Course Grade:
30%: Your homework / class participation grade.
20%: Your puzzle grade.
20%: The better of your midterm and final examination grades.
30%: Your final examination grade.

All averages will be computed numerically and then converted to letter grades with an A+ for 97% or better, an A for 93%-97%, an A- for 90%-93% and so forth.

Academic Integrity

You are strongly encouraged to form study groups and to work together on the homework assignments and puzzles by discussing ideas and approaches. Please refrain, however, from merely sharing answers.

If you benefitted from conversations with someone in preparing a written assignment, it is customary to mention this in the paper or online submission. It is necessary to cite any written sources that you used including materials obtained electronically.

Examinations are closed book - you are allowed neither to seek assistance from nor provide assistance to anyone else during the examination, nor to consult any written materials other than the examination itself. The use of a calculator is permitted.