UNIVERSITY OF TORONTO AT SCARBOROUGH

MGEC37H
Review Questions

Fall 2014
M. Krashinsky

Two of the following questions (each worth 30 marks) will appear on the final exam. There will be no choice. The
exam will also include 40 marks worth of problems and/or short questions (the review questions will be useful for
those, as will the exercises we discussed in class). You are encouraged to work together before the exam. I will
answer general questions but will not provide specific answers to the questions below.
1. Explain Coase's basic argument about property rights, economic efficiency, and transaction costs. Illustrate
Coases argument from the facts from the first three cases Coase uses to explain his argument - Sturges v. Bridgmen
(the confectioner and the doctor), Cooke v. Forbes (the ammonia manufacturer and the weaver), and Bryant v.
Lefever (the house builder who interfered with his neighbours chimney). Why do the courts spend so much effort in
determining property rights when Coase seems to be suggesting that these rights do not "matter"? Use Coase's
arguments to explain the disagreement between McKean and Calabresi & Bass over product liability. Finally, one
possible transaction cost is the effort that parties to a transaction have to devote to acquiring information about the
value of that transaction. Should we require both parties to disclose all facts that might be useful to the other party in
the bargaining process when a contract is being negotiated or when property is being purchased?
2. Explain why information can be viewed as a public good, and use this idea to explain the difficulties in trying to
protect new ideas using property law. Use the public good aspect of information to comment on some of the
compromises inherent in patent law, and to comment illustrate the issues involved in granting patents for drugs that
address serious illnesses (for example, drugs used to fight AIDS). Why do we need to grant patents for new drugs,
and why do those patents themselves pose problems? Explain what Demsetz writes about the evolution of property
rights, and apply this to the changes that occur over time to patent law. Different countries have different approaches
to patent law (for example, differences on what can be patented, and differences in the length of time before patents
expire). What do these differences tell us about the efficiency of patent law?
3. Explain the doctrine of impossibility and use it to explain the decision by the courts on whether or not to assess
damages in breach of contract cases. Why is the proper use of this doctrine economically efficient? Comment
specifically on the Westinghouse Uranium case and on the following three cases discussed in the Posner and
Rosenfield reading - Hein v. Fox (the driller who was prevented by rock from digging a well), Phelps v. School
District (the teachers and the flu epidemic), and Transatlantic v. United States (the shipper unable to ship wheat
because of the closing of the Suez Canal). Explain the differing decisions about impossibility in contracts for the
supply of agricultural products (where impossibility is typically not granted when the supplier is a wholesaler or
large dealer, but generally is granted when the supplier is an individual farmer). Is impossibility usually accepted as
a defence in breach of contract cases? Why or why not?
4. Impossibility and unconscionability are two different defences used by people who want to cancel contracts
without having to pay damages. Compare and contrast these two defences (that is, in what ways are they similar, and
in what ways are they different). Choose cases from each defence that illustrate your arguments. In each case,
explain why successful use of these defences in too many contracts will damage the ability of people to sign useful
contracts and ultimately hurt the very people who might use such defences.
5. Comment on the efficiency of the following four possible liability rules in tort cases: strict liability, no liability,
negligence, and strict liability with a defense of contributory negligence. The negligence rule seems to set a standard
only for the injurer, yet efficiency requires that both parties try to prevent accidents. Explain this seeming paradox.
Explain the Hand Rule for negligence and why it is efficient. When would strict liability be more efficient than a
negligence standard?

6. The general rule in place in tort law in the past was the negligence with contributory negligence rule. Explain this
rule clearly, indicating exactly when damages will be paid and when they will not. Show that the rule leads to
efficient conduct by both parties. Given that, how can you explain the general evolution in the past 20 years towards
a comparative (or relative) negligence rule? Also, how can we explain the evolution of no-fault automobile
insurance and workers compensation schemes that seem to remove issues of negligence out of much of the personal
injury area?
7. Analyze the effect of making manufacturers strictly liable for defects in their products. Will consumers always be
made better off by such legislation? Summarize the debate between McKean and Calabresi & Bass on this issue.
Relate this discussion to the text's discussion of the evolution of product liability law towards a strict product
liability standard. Compare strict liability with contributory negligence and strict liability as possible rules for
use under product liability, and explain situations under which each might be efficient. Relate this entire discussion
to the reluctance of some drug companies to provide vaccines.
8. In breach of contract cases, defendants will sometimes use a defence of impossibility. In tort cases, defendants
will sometimes argue in their defence that they were not negligent. Explain how these two defences are analogous.
Given this relationship, why is it that the defence of impossibility is rarely successful, while the defence of no
negligence is more common? What is the economic function of damages in contract cases and in tort cases?
Compare these functions.
9. Tort law deals with cases in which one party (the injurer) is responsible for harm suffered by another party (the
victim). In effect, one might argue that the injurer has interfered with the property rights of the victim. Why do we
need a separate set of tort laws? That is, why do we not simply use property rules to protect property rights, and
require injurers and victims to negotiate efficient resolutions of accident claims under property law? Relate your
answer to the explanations offered by Calabresi and Melamed about property rules and liability rules (that is,
describe Calabresi and Melameds explanation for when to use property rules and when to use liability rules, and
relate it to your answer).
10. While it is always in the interests of an individual plaintiff to win a law suit after a contract has been signed, it
may not always be in the interests of the same people to have the same types of lawsuits settled in that manner before
contracts are signed. Comment on this quote, applying it to impossibility, unconscionability, and product liability.
In each case, explain why court decisions that favour plaintiffs too much will in the long run work against the
interests of those parties.