Law and Economics

1 𝑷𝒓𝒐𝒃𝒍𝒆𝒎 𝑺𝒆𝒕 3

What are the criteria for a perfectly competitive market? How do these matter with respect to conditions that invalid a contract?

You are perusing a local tag sale, and see an interesting looking vase. Suppose there is a .2 chance that it might be a Ming Dynasty vase worth $5,000, and otherwise it’s only worth $50.

After you purchase the vase, you discover that it is a Ming dynasty era vase. If the contract is enforced (meaning you keep the vase), what will be the buyer’s and seller’s profit? If the contract is not enforced (meaning you have to give back a Ming dynasty vase), what will be the buyer and seller’s profit? Explain any difference in total social welfare.

Suppose now that you snap pictures of the vase, pay a service $100 dollars to analyze them, and know for sure whether it is a Ming Dynasty vase before purchase. What will be the buyer’s and seller’s profit if the contract is enforced? What will be the buyer and seller’s profit if the contract is not enforced? Explain any difference in total social welfare.

Now suppose the vase is assumed to be nothing special, and if you buy it you will move it from their attic to yours, unless you invest the $100 in the analyst service. What will be the buyer’s and seller’s profit if the contract is enforced? What will be the buyer and seller’s profit if the contract is not enforced? Explain any difference in total social welfare.

(3) A buyer makes a contract to purchase a parcel of land for residential use for $10,000. In the process of preparing for development, however, the buyer discovers a mineral deposit worth $500,000. The seller learns about the discovery and sues to invalidate the contract, claiming a mistake.

Is the discovery of the mineral deposit socially valuable?

Did the buyer discover the information deliberately or casually?

Will a decision by the court to invalidate the contract affect the discovery of valuable mineral deposits in the future? Now suppose that prior to making the contract, the

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