Issues in Law and Economics

Issues in Law and Economics

by Harold Winter

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Overview

Is file-sharing destroying the music industry? Should the courts encourage breach of contract? Does the threat of malpractice lawsuits cause doctors to provide too much medical care? Do judges discriminate when sentencing? With Issues in Law and Economics, Harold Winter takes readers through these and other recent and controversial questions. In an accessible and engaging manner, Winter shows these legal issues can be reexamined through the use of economic analysis. Using real-world cases to highlight issues, Winter offers step-by-step analysis, guiding readers through the identification of the trade-offs involved in each issue and assessing the economic evidence from scholarly research before exploring how this research may be used to guide policy recommendations. The book is divided into four sections, covering the basic practice areas of property, contracts, torts, and crime, with a fifth section devoted to a concise introduction to the topic of behavioral law and economics. Each chapter concludes with a series of thought-provoking discussion questions that provide readers the opportunity to further explore important ideas and concepts.
 

Product Details

ISBN-13: 9780226249766
Publisher: University of Chicago Press
Publication date: 01/27/2017
Sold by: Barnes & Noble
Format: NOOK Book
Pages: 240
File size: 869 KB

About the Author

Harold Winter is professor of economics at Ohio University. He is the author of several books, including Trade-Offs: An Introduction to Economic Reasoning and Social Issues, also published by the University of Chicago Press.
 

Read an Excerpt

Issues in Law and Economics


By Harold Winter

The University of Chicago Press

Copyright © 2017 The University of Chicago
All rights reserved.
ISBN: 978-0-226-24976-6



CHAPTER 1

Should Body Parts Be Salable?

Moore v. The Regents of the University of California (1990) and the Market for Human Tissue


Facts

In 1976, John Moore was diagnosed with hairy cell leukemia, a very rare form of cancer. He was referred to Dr. David Golde, a physician practicing at the Medical Center of the University of California, Los Angeles (UCLA). Golde recommended that Moore's enlarged spleen be removed, and Moore agreed and signed a consent form. Prior to the surgery, Golde arranged to use portions of Moore's spleen to conduct research.

The operation was successful, for both Moore and Golde. As Moore continued to recover, Golde continued to conduct research with Moore's cells. Furthermore, Golde insisted on Moore continuing to travel from his home in Seattle to UCLA to withdraw samples of blood, skin, bone marrow, and other material. As Moore became reluctant to continue making the trip, Golde offered to cover his expenses, and his generosity was amply rewarded. With Moore's cells, Golde's research eventually led to the commercial development of a cell line, and products derived from it, that had a market value estimated to be approximately $3 billion. Moore eventually became suspicious of Golde's behavior, and especially of his insistence on having Moore sign additional consent forms. Moore hired a lawyer, discovered the phenomenal market value of products derived from his cells, and filed a lawsuit against Golde and UCLA in an attempt to claim part of that value.


Court's Decision

The main issue the court faced was to determine who should be given the property right to the cells — Moore or Golde. The first appeals court assigned the property right to Moore and offered the following explanation:

We are told that if plaintiff is permitted to have decision making authority and a financial interest in the cell-line, he would then have the unlimited power to inhibit medical research that could potentially benefit humanity. He could conceivably go from institution to institution seeking the highest bid, and if dissatisfied, would claim the right simply to prohibit the research entirely. We conclude that, if informed, a patient might refuse to participate in a research program. We would give the patient that right. As to defendant's concern that a patient might seek the greatest economic gain for his participation, this argument is unpersuasive because it fails to explain why defendants, who patented plaintiff's cell-line and are benefiting financially from it, are any more to be trusted with these momentous decisions than the person whose cells are being used. ... If this science has become science for profit, then we fail to see any justification for excluding the patient from participation in the profits.


Thanks to the court's decision, Moore became a very wealthy man, but only on paper and only for a short time.

In the second appeal, the California Supreme Court reversed the previous court's ruling. They reasoned that giving the patient the property right over important research materials would make it more costly to obtain the materials and thus hinder such research:

The extension of conversion law into this area will hinder research by restricting access to necessary raw materials. Thousands of human cell lines already exist in tissue repositories, such as the American Type Culture Collection and those operated by the National Institutes of Health and the American Cancer Society. These repositories respond to tens of thousands of requests for samples annually. Since the patent office requires the holders of patents on cell lines to make samples available to anyone, many patent holders place their cell lines in repositories to avoid the administrative burden of responding to requests. At present, human cell lines are routinely copied and distributed to other researchers for experimental purposes, usually free of charge. This exchange of scientific materials, which is still relatively free and efficient, will surely be compromised if each cell sample becomes the potential subject matter of a lawsuit.


Moore was ultimately denied the property right over his cells. In a manner of speaking, the court ruled that Moore did not own his spleen.


Economic Analysis

Because the cells had already been developed into a commercial product line, the impact of the court's decision on the litigants would primarily be distributional: would the court allow Moore to share in the revenue generated by the spleen? But for similar future cases, the court's decision could affect the allocation of resources; that is, would the cells end up being used for medical research? So to analyze this case, let's put it into a slightly different perspective.

Let's say you have a diseased spleen and need to have it removed to save your life. Your doctor informs you that it is possible that your spleen may yield some material that can be used to develop pharmaceutical products worth a tremendous amount of money. If you are given the property right over the spleen, the doctor cannot use the spleen without your consent. If the doctor is given the property right over the spleen, you have no say in how it is used once it is removed. Of course, you have the right to refuse medical treatment, but let's assume you prefer not to die. So, with or without the property right, you have your spleen removed. Before any medical treatment is given, the court must assign the property right. What should it do?

Although there are many issues raised by this case — legal, ethical, moral, and so on — in property right cases a standard economic objective is to see that resources are moved to their highest-valued use. Ownership determines the value of a resource, and the higher the value the greater the social welfare. So, if the court is interested in pursuing this objective, the case boils down to a simple question: where is the spleen more highly valued, with the doctor or with the patient? While the lower court assigned the right to the patient, and the higher court assigned the right to the doctor, economic analysis offers a unique perspective in this case — both decisions are correct. How can this be?

What happens if the court awards the property right to the doctor? The doctor removes the spleen and keeps it for research purposes. The cells can be used to develop as many pharmaceutical products as possible, and the patient gets no financial compensation. What happens if the court awards the property right to the patient? The doctor removes the spleen and keeps it for research purposes. The cells can be used to develop as many pharmaceutical products as possible, and the patient becomes extremely wealthy.

But haven't we missed something? If the patient is given the property right over the cells, how does the doctor end up with them? To answer that question, all you have to do is answer this one: how long would it take you to sell your already-removed diseased spleen to the doctor, possibly for millions of dollars? Your answer to that question explains how the doctor ends up with the spleen.

An economist would predict that the spleen will end up being used for medical research because there are gains from trade that exist for that purpose. Whenever there is a consensual market transaction between two parties, gains from trade means that both parties must benefit. Imagine you have a car to sell, and you are willing to sell it as long as you get a minimum of $2,500. Anything less than that and you prefer to keep the car. A potential buyer shows up and begins negotiating with you. She values the car at $2,000, and that represents her maximum willingness to pay for your car. The two of you could negotiate for hours, but there are no gains from trade for you to sell the car to her. You need $500 more than she is willing to pay at a maximum.

Another buyer shows up to negotiate with you. He values the car at $3,500. If the two of you negotiate, eventually you will find a price between $2,500 and $3,500 that will have you sell the car to him. Let's say that price is $2,800. You sell the car and make $300 more than you need at a minimum, and he buys the car and pays $700 less than his maximum. You both gain from the sale, the total gains are $1,000, and the car ends up in a higher-valued use. It is important to note that regardless of what price the buyer pays for the car, when he takes ownership the value of the car increases from $2,500 to $3,500. Value has a subjective component, and this is why one specific object, such as a car, can increase in value when it changes ownership.

The great thing about this process is that you and the seller do not have to know anything about what the other is willing to accept, or willing to pay, for the car. You know how much you need at a minimum, and the buyer knows how much he will pay at a maximum. If those two values properly overlap, and negotiation can take place, trade will occur that is mutually beneficial. When gains from trade are exploited, resources are allocated efficiently.

The real issue in Moore is not where the spleen ends up. Whether the property right is given to the doctor or the patient, the gains from trade are so enormous that the doctor will end up with the spleen. We are talking about a market value in the billions of dollars. Unless the patient with the property right has a serious problem with allowing his removed diseased spleen to be used for medical research (and make no mistake, it must be a very serious problem), the lure of huge financial gains will have him gladly sell his spleen. The real issue seems to be distributional. Should the doctor have to pay for the spleen so that the patient is financially compensated? If the only objective is to move the resource to its highest-valued use, it doesn't matter if the doctor has to pay for it. The same financial lure that has the patient gladly sell his spleen, has the doctor gladly buy it.

There is one other point that is important to keep in mind when considering property right cases. Although it seems obvious in Moore that the highest-valued use of the cells is for medical research, in general it doesn't matter if the court knows this or not. As long as the parties are expected to negotiate, the key economic point is that it doesn't matter who gets the property right — as long as a property right is assigned, the cells will end up in their highest-valued use. This basic result is attributed to Nobel Laureate Ronald Coase (1960), and it is often referred to as the Coase Theorem. Simply stated, having well-defined property rights is the key to resolving property right issues, as long as the parties can transact. But what if the parties cannot transact, as in the case where a legal market does not exist?

As controversial as it appears to be to consider allowing a diseased spleen to be sold, how would you feel about allowing a healthy organ to be surgically removed and then sold? It is a fact that a person can live a fairly normal life with just one kidney. It is also a fact that the current system of supplying kidneys for transplant by donation only has led to a severe shortage of kidneys available for transplant. On their website, the National Kidney Foundation reports that as of 2014, more than 96,000 people in the United States are on a kidney transplant waiting list, yet fewer than 17,000 receive one each year. Approximately 13 people die each day waiting for a kidney. So why not allow someone with two kidneys to sell one to someone who requires a kidney transplant? Establishing a market for kidneys is an idea that is often championed by economists. Would the existence of gains from trade in the buying and selling of kidneys help alleviate the shortage?

It may be difficult to determine exactly how much a person in need of a kidney would be willing to pay for one, but determining the minimum (or competitive) price a kidney would sell for if such a market developed is more feasible, as demonstrated by one economic study (Becker and Elias 2007). To calculate the price of a kidney, the study assumes that there would be many potential sellers and that no individual seller would be able to set a price much higher than anyone else. The price must, at a minimum, cover the cost of supplying a kidney, and the study considers three main components of this cost: the risk of dying, the lost time during the recovery period, and the reduced quality of life. The next goal is to place a monetary-equivalence value on each of these components.

Without going into detail as to how the study comes up with these figures, it first determines that the risk of dying during a kidney transplant is approximately one in a thousand. Using a value (in 2005 dollars) of $5 million for a value-of-life estimate, the average (or expected) loss of life equals 1/1,000 (or 0.001) multiplied by $5 million, or $5,000. Second, the cost to an average person of a four-week postsurgery recovery period in terms of forgone earnings is determined to be $2,700. The last step is to place a monetary value on the reduced quality of life one may experience after having one kidney removed. For some, this may be quite low as you can typically lead a normal life with one kidney. But to the extent that you are physically active, and there is evidence that kidney donors may experience high blood pressure, there is likely to be some reduction in quality of life. The study determines this value to be $7,500. Putting all three values together, the total monetary cost to donors who give up a kidney is $15,200, suggesting that this would be close to the market-clearing price if a market for selling kidneys were to be established. (The study also allows for various assumptions on the figures used to calculate the price, and finds a likely range of prices as low as $7,600 and as high as $27,700.)

Regardless of what the price would be if a market for kidneys developed, there is no doubt that there would be an instant outcry concerning the morality of such a market. Unlike the kidney shortage, there is no shortage of examples of such outcries. Here is a representative one, written by ethics professor Katrina Bramstedt, concerning some of the consequences of allowing a market for kidneys:

Patients consequently survive not due to the altruism of their fellow man — the long-time premise of organ donation — but because of their personal wealth. At the same time, a cohort of humanity is wiped out because they can't afford the price of life. The sellers, too, are likely the poor. After a kidney, what do they sell next? Any system of organ selling makes the poor the clinical treasure trove of the rich. Values and ethics can and do underpin society and medical practice so health care structures that operate purely on economics — letting the wealthiest patients win at the literal expense of the poor — are inappropriate. (New York Times [online], August 21, 2014)


It is hard to imagine a better example of a perspective that is at odds with an economic one.

The most common line of attack against establishing a market for kidneys concerns how it will affect the poor. One argument is that the additional cost of the kidney would be a substantial financial burden on this group of people, making it more difficult (relative to the wealthy) for them to acquire a kidney. Or, as the above quote more colorfully states: "a cohort of humanity is wiped out because they can't afford the price of life." The problem with this argument is that it is substantially weakened when considered in the proper perspective.

Let's assume that the price of a kidney is around $15,000. Certainly, this amount on its own can be constraining, but it is only part of the cost of a kidney transplant. At the time the study estimated that price, the estimated cost of a kidney transplant operation (in 2005 dollars) was $160,000, not including the price of the kidney. This makes the total cost of a kidney transplant $175,000 under a market system, but only $160,000 under a donation system. What impact does the additional cost have on the type of people who can get kidney transplants?

For individuals who cannot afford the $160,000 (or, equivalently, do not have adequate insurance coverage), adding another $15,000 on top of that is irrelevant — they still can't afford a transplant. For those individuals who can afford the $175,000 total cost of the operation, the additional price for the kidney is also irrelevant — they still can afford a transplant. This leaves us with one last group: those who can afford the cost of the surgery, but not the additional cost of the kidney. These individuals are now excluded from getting a transplant only because of having to purchase the kidney. How do we evaluate the importance of this group?

This gap between $160,000 and $175,000 is unlikely to affect many people, but even if it does, what is the alternative? Everyone who cannot get a kidney through the current system will not be able to get a kidney if none are for sale. So even if there are individuals who are forever priced out of the kidney transplant market, how many more individuals will get kidneys due to the expected increase in supply? Ultimately, isn't this the most important point?

Furthermore, if you are worried about the poor having to pay $15,000 for a kidney, you should be even more worried about the cost of dialysis for many of those who remain on the waiting list. Just the monetary cost of dialysis is at least $75,000 per year, not even counting all the reduced quality-of-life costs a dialysis patient is subject to. Whoever is bearing the financial burden for those not able to get a kidney under the current system, will likely be thrilled with the potential to simply buy a kidney and have a transplant operation performed.


(Continues...)

Excerpted from Issues in Law and Economics by Harold Winter. Copyright © 2017 The University of Chicago. Excerpted by permission of The University of Chicago Press.
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Table of Contents

Preface
Acknowledgments
Introduction Applying Economic Reasoning to the Law
Part I. Property
Chapter 1. Should Body Parts Be Salable? Moore v. The Regents of the University of California (1990) and the Market for Human Tissue
Chapter 2. Can Anyone Own the Sunlight? Fontainebleau Hotel Corp. v. Forty-Five Twenty-Five, Inc. (1959) and the Assignment and Protection of Property Rights
Chapter 3. Should Eminent Domain Power Be Available to Private Companies? Poletown Neighborhood Council v. City of Detroit (1981) and the Economics of Takings
Chapter 4. Will File Sharing Ruin the Music Industry? A&M Records v. Napster (2001) and the Economics of Copyright Protection
Part II. Contracts
Chapter 5. Should the Courts Encourage Contractual Breach? Acme Mills & Elevator Co. v. J.C. Johnson (1911) and the Economics of Breaking Promises
Chapter 6. Should the Courts Void a Contractual Clause They Deem Unfair? Williams v. Walker Thomas Furniture Co. (1965) and the Paradox of Stipulated Damages
Part III. Torts
Chapter 7. Should Tort Liability Be Governed by Fault or No-Fault Rules? Indiana Harbor Belt Railroad v. American Cyanamid (1990) and the Economics of the Great Debate in Tort Law
Chapter 8. Should Firms Be Held Liable for Product Defects? Voss v. Black and Decker (1983) and the Economics of Product Liability
Chapter 9. Does Malpractice Liability Induce Physicians to Provide Too Much Health Care? Helling v. Carey (1974) and the Economics of Medical Malpractice Law
Part IV. Crime and Punishment
Chapter 10. Are Criminals Rational? Gary Becker and the Dawn of Rational Crime Analysis (1968)
Chapter 11. Does Prison Reduce Crime through Deterrence or Incapacitation? Ewing v. California (2003) and the Economics of the Three-Strikes Law
Chapter 12. Is Racial Profiling a Nondiscriminatory Policing Strategy? Anderson v. Cornejo (2004) and the Economics of Police Search Procedures
Chapter 13. Do Judges Discriminate When Sentencing? The Sentencing Reform Act and Federal Sentencing Guidelines (1984)
Part V. Behavioral Law and Economics
Chapter 14. How Does Behavioral Economics Contribute to the Economic Analysis of Law? A Brief Introduction to the Marriage of Economics and Psychology
Index

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