1 Agenda for 8th Class Economic Analysis Assignment for Next Class –## –Writing Assignment / Questions to think about Pp. 203ff Qs 1-3 Pp. 221ff Q 4 –In Answering this question, ignore the references to Ulane & Zuni Were there externalities in Union Pacific v Jones? –If so, what rule would cause the railroad to internalize those externalities? –From an economic point of view, what would the best legal rule be regarding the duty to rescue?

2 Economic Analysis Use of economics, mostly micro-economics (price theory and game theory) to understand, evaluate and improve law Sophisticated form of cost-benefit analysis, where costs & benefits may not be ordinarily monetized –Benefits include clean air, health, home cooked food. Anything that would “pay” for in money or time. –Costs include personal injury, lost time, discomfort Economic analysis is NOT –Analysis of impact of legal rules on GDP b/c GDP does not take into account pollution, crime, or other non- traded goods that people care about –Analysis in terms of effects on federal budget b/c need to take into account benefits as well as costs of government programs –Analysis of monetary costs of tort system b/c must take into account injuries and other harm deterred by threat of tort sanctions b/c money paid by defendants to plaintiffs is transfer, not cost (see later slides)

3 Ex Ante v. Ex Post Economic analysis is mostly concerned with ex ante perspective, not ex post Ex post– who pays damages and who receives them Ex ante– effect liability has on potential defendants’ actions In tort, primary issue is not who bears losses, but what rule would give potential injurers the best incentives to take efficient precautions which would avoid accidents In contract, the primary issue is what rule gives contracting parties the best incentives to make efficient investments and perform contracts (when it’s efficient to do so) Also concerned with potential plaintiffs’ actions –They can often take precautions to avoid accidents as well –They may be able to mitigate damages –They may have information which potential defendants need

4 Distinction Between Cost and Transfer Fundamental distinction between costs and transfers Transfers. –Payment of money from defendant to plaintiff –Payment of money by government not in return for goods or servics, e.g. social security, “welfare” –No net social gain (or loss) [simplification] –Gain to recipient offset almost exactly by loss to payee Private costs and benefits, but no social cost or benefit –Of course, transfers have some cost Plaintiff and lawyer time required to win lawsuit Taxes impose costs – IRS agents, taxpayer time, tax preparer time, distortion of work/leisure and market/non-market work decisions But we will often ignore those “second order” costs Costs –Use of scarce resources Payments made in exchange for goods and services, b/c recipient must use scarce resources (time, materials, capital) to produce good or services –Anything people would pay to avoid Time, annoyance, discomfort

5 Questions on Cost-Benefit Analysis 1. What is a non-legal situation in which you recently used cost-benefit analysis? 2. Was there a recent non-legal decision in which you did not use cost- benefit analysis? If so, why not? Is it possible that you were implicitly using cost-benefit analysis, even if you did not realize you were doing so? Are there non-legal decision for which cost-benefit analysis is not helpful? Whether to spend your vacation lounging on the beach or hiking in the mountains? Whom to date or marry? 3. Use cost-benefit analysis to analyze United States v. Smith. What are the costs of imposing longer sentences on those who exchange guns for drugs? What are the benefits?

6 Questions on Cost-Benefit Analysis 4. Use cost benefit analysis to analyze the issue in the Boyd-Liggett-Crigger line of cases. What are the benefits of imposing liability on manufacturers for the harm caused by defective products? What are the costs? Boyd, Liggett, and Crigger were decided in the early 20th century, before the rise of the regulatory state. There are now a wide variety of federal and state agencies which regulate product safety. For example, the Food and Drug Administration (FDA) regulates the safety of food and medicine, the National Highway Traffic Safety Administration (NHTSA) regulates automobile safety, and the Consumer Product Safety Commission (CPSC) regulates other consumer products. Do the activities of these agencies increase or decrease the benefit of product liability law?

7 Questions on Cost Benefit Analysis 5. Construct a cost-benefit chart for negligence similar to the one above for contract remedies. Compare the Hand formula for negligence to either (a) strict liability or (b) no liability, or both. In this comparison consider a precaution that would cost $9000 but that would avert accident costs of $1 million. An accident of that magnitude would occur with 1% probability if the precaution were not taken, but would occur with 0% probability of the precaution were taken. The precaution relates to an activity which generates $1 million in profit for the defendant. In putting numbers in the chart, remember to make a reasonable assumption about whether the defendant will take the precaution, and that that assumption may differ depending on the legal rule. That is, it is possible that the defendant would take (or not take) the precaution if the rule were negligence according to the Hand Formula, but not take (or take) the precaution if the rule were strict liability.

8 Valuing Nonmonetary Costs & Benefits How much is park worth? –Might as question if conducting cost benefit analysis to determine whether park should be build whether park should be sold to alleviate budget deficit 2 methods –Surveys If park not yet built, usually ask willingness to pay (WTP) –Ask people “who much would you be willing to contribute to have a park built at…” If park already built, usually ask willingness to accept (WTA) –How much would you have to be paid in order to consent to the demolition of the park at …. –Assess behavior How much more expensive are houses near park, controlling for other factors How much do home values go up when park is built nearby How much do home values go down when park is demolished

9 Questions on Valuation 1) Are you repulsed by the idea that economists put a monetary value on life? If so, why? 2) Is $9 million more or less than you would have guessed for the value of life? 3) How would one ascertain the monetary value of clean air? Note that such a valuation would be very useful in setting environmental policy, because cleaner air costs more money. If clean air has a high monetary value, then it would be sensible to require consumers to buy cars with expensive pollution control equipment and to require electric utilities to switch from coal to natural gas, even though doing so is likely to increase consumers’ electrical bills.

10 Entergy v Riverkeeper Clean Water Act, 28 U.S.C. § 1326(b), requires the Environmental Protection Agency (EPA) to promulgate regulations so that “the location, design, construction, and capacity of cooling water intake structures reflect the best technology available for minimizing adverse environment impact.“ In writing those regulations, the EPA used cost-benefit analysis and decided that, while new power plants would have to use "closed-cycle cooling systems" which kill no fish, existing power plants could employ less costly technologies that reduced "aquatic organism" mortality by 80 to 95%, but did not eliminate such mortality entirely. Environmental groups challenged those regulations, arguing that the "best technology available" statutory language forbade the use of cost-benefit analysis. Souter: “does it make any sense in these circumstances to think that you really can do a cost-benefit analysis?” Joseffer (EPA lawyer): “I think the most irrational thing would be to just throw up one's hands and say that we are going to impose standards whether or not they do harm more harm than good, whether or not they make any sense.”

11 Questions on Entergy 1) As in Zuni, the statutory interpretation issue here is filtered through the Chevron doctrine, which states that when an agency (such as the EPA) must interpret an ambiguous statute in order to write regulations or bring enforcement actions, the agency interpretation should be given deference. That is, a court should accept the agency’s interpretation, as long as it is a permissible construction of the statute, even if the court thinks another interpretation would be better. Is 28 U.S.C. § 1326(b) ambiguous? Is the EPA’s interpretation reasonable? 2) If you were a lawyer for the EPA, what kind of regulations would you have written to implement 28 U.S.C. § 1326(b)? Would you have used cost- benefit analysis? 3) How do you think the EPA determines the benefit of reducing aquatic organism mortality? Or, in Justice Souter's words, what is the value of a plankton?