Contract, Tort and Property: Economic Analysis
This domain tests whether you can apply efficiency reasoning to the core private-law remedies and identify which margin of behaviour each remedy actually regulates.
Contract
Contract law supplies default rules that save transaction costs and mandatory rules that police failures of consent or third-party effects. Efficient breach occurs when performance costs exceed the promisee's loss, and expectation damages implement it by making the promisee indifferent. Reliance damages under-compensate and thus encourage breach; restitution prevents gains from breach. Foreseeability limits recovery (Hadley v Baxendale) so that promisors are not insurers of unusual losses. Penalty clauses are refused in many systems because they deter efficient breach; liquidated damages clauses are enforced where they approximate loss. Disclosure duties address asymmetric information where the informed party's silence is socially costly.
Tort
The Hand formula decides negligence as B < P × L: burden of precaution against expected loss. Care levels respond to the liability rule; activity levels respond more to strict liability. Joint and several liability solves insolvency problems but may dilute marginal deterrence; contributory and comparative negligence allocate the residual loss. Insurance creates moral hazard, and judgment-proof defendants systematically under-deter.
Property
Property is a bundle of relations among persons, not a thing. Calabresi and Melamed apply here directly: injunctions (property rule) protect subjective value but invite holdout; damages (liability rule) allow efficient taking but risk under-compensation. Numerus clausus (limited numerus of real rights) reduces information costs for third parties. Commons problems arise from non-excludability; anticommons from too many exclusion rights; Ostrom shows local collective governance can solve the first without privatisation.
Worked example
A factory can install a filter costing 50. Accident probability falls from 0.10 to 0.02, and harm is 1000. Expected loss without care is 100; with care it is 20 plus 50, total 70. Because B=50 < P×L = 80, the efficient standard is the filter, and a negligent factory that omits it is liable. If the harm instead were 400, P×L = 32 < 50, so no filter is efficient and holding the factory liable for the residual harm would over-invest in care.
Traps
Do not confuse expectation and reliance measures. Do not forget mitigation. Do not import proximate cause into a factual-causation question. Do not assume injunctions are always efficient - holdout may block valuable transfers. Do not evaluate breach without asking whether the promisee's loss was foreseeable.