Econ 360
Answers to Selected Questions
Problem Set 3

1.    Post-verdict bargaining.
a)  Defendant will make an offer of $20,000, which is equal to the expected value of the judgment [= (.5)(30,000)+(.5)(10,000)].
b)  A low harm plaintiff will accept the offer since going to trial will only result in $5000 (= $10,000-$5000).  A high harm plaintiff will reject the offer since going to trial will lead to $25,000 (= $30,000-$5000).
c)  For you to ponder.

2.  We did this one in class.

3.  We did this one for homework.

4.  Suits that involve large aggregate damages, but small individual harms, are unlikely to be pursued on an individual basis.  Thus, class action suits, by aggregating individual claims, can overcome the individual incentive not to file such claims.

5.  For your deep thought.

6.  There are at least two types of additional costs that impose a welfare loss on society.  The precautionary costs induced by the threat of crime is one.  The other is the opportunity cost of the criminal's behavior--instead of engaging in merely redistributive activities, the criminal could be engaged in socially productive activities.

7. Rational crime.
a) Additional resources would cause a outward parallel shift in the isocost line, thereby allowing for more deterrence (reaching a higher isodeterrence line).
b) This would shift the isocost line inward, thereby lower the level of deterrence.
c) This would cause the isocost line to pivot inward along the severity axis and cause the optimal deterrence to fall.

8. Viewed purely from the perspective of efficiency, one could argue that indirect harms to society are greater when the President is murdered than when the average person is murdered. This results from the potential for considerably greater social disruption in the former case than would likely be associated with the latter. While it may be true that marginal social costs are uniformly higher in the former case as well, it is probably nonetheless true that marginal social benefits are considerably greater.

9. The important point to focus on here is the deterrent effect and its impact on the incentives faced by future potential criminals. The potential benefits from apprehending and punishing criminals in the current period include not only the increased security for people now but the potential future benefits of reductions in crime and corresponding reductions in the costs associated with apprehension, conviction and punishment of criminals in the future. The assumption is that, when society makes clear the potential costs if someone is convicted of a particular crime, rational people may be less likely to commit such crimes in the future. In addition, to the extent, that an individual is in jail, he is not committing additional crime that imposes additional costs on society in the current period.

10. Is zero crime optimal from society's point-of-view? Why or why not?

11. Prostitution.
a) Externalities for one. Can you think of two types of externalities associated with prostitution?
b) Answers can vary but all should involve discussions of the relevant social costs that are trying to be minimized.

12. Rutgers library.
a) The original borrower will suffer foregone benefit of the book. Also, if returning the book on a later day would be more convenient, the original borrower will incur excessive costs to return the book.
b) If a original borrower forgets to return the book until $50 of fines have accrued, the patron has no incentive to return it until he or she needs a transcript. Rutger's policy lacks marginal deterrence once a fine of $50 has accrued.
c) Total social cost of punishments is the cost to offenders plus the cost or minus the gain to others. Fines produce a gain to the library that equals the cost to offenders, aside from collection costs, and so the social cost of fines is about zero, as befits a transfer payment. Holding a transcript is administratively more expensive for Rutgers. When a transcript is held, the original borrower suffers, Rutgers incurs an administrative expense and receives no benefit. Therefore, a fine is probably more efficient than the holding of transcripts.

13.  We did this one for homework.

14.  Deterrence can be achieved through hiring more police or expanding incarceration (either building more prisons or imposing longer sentences).  Deterrence, however, is costly. Suppose that a community has a fixed budget in which to allocate among Incarceration and Police.  An isocost line shows all combinations of  Incarcerate and Police that cost a fixed amount of money.  Thus, the linear line connecting Incarcerate = 20 and Police = 10 represents the isocost line for a budget of $100,000.  The convex isodeterrence lines show all combinations of Incarcerate and Police that yield a given crime rate (deterrence level).  Isodeterrence lines further from the origin represent greater deterrence (lower crime rates).  Given the initial isocost line noted above, the optimal deterrence policy would require Incarcerate = 14 and Police = 3.  To achieve a greater level of deterrence would require either more resources (involving an outward shift of the isocost line) or a lower cost of incarceration or police (or both).

15. Marijuana legalization.
a) Against: If we assume that supply is relatively inelastic and demand is relatively elastic, efforts to reduce the supply of drugs will cause the per unit price to increase and the equilibrium quantity to decrease by a significant amount. Because we are assuming that demand is price elastic, as price rises, the net effect will be a reduction in the amount of money spent on illegal drugs and, assuming that drug use and crime are positively correlated, less crime. Assuming that drug use also results in negative externalities, including reduced worker productivity and a reduction in social well being, these external costs would also decrease.

For: Alternatively, if we assume that supply is relatively elastic and demand is relatively price inelastic, a reduction in efforts to reduce the supply of drugs will cause the per unit price to decrease and the equilibrium quantity to increase by a relatively small amount as supply increases. Because we have ass u med that demand is price inelastic, as price falls, the net effect will be a reduction in the amount of money spent on illegal drugs and, assuming that drug use and crime are positively correlated, less crime. However, assuming that drug use also results in negative externalities, including reduced worker productivity and a reduction in social well being, these external costs would increase (because the amount of drug abuse has increased).

b) There seems to be no end to the number of people who are willing to engage in the supply of illegal drugs. This suggests that supply is relatively elastic. In addition, drug abuse has remained fairly constant, in part because such drugs are addictive. Thus, at least for a portion of the population, demand is relatively price inelastic. This suggests that the argument in favor of legalization is more credible.

c) While the answer would appear to be relatively straight forward, there are two complications. First, external costs could increase, offsetting the other benefits of legalization. In addition, there is the question of the possible effect on non-addicts who might get hooked when they experiment with the non-legal drugs. I will be looking for consistency and completeness in your answers.